Financial resilience in a crisis

The Covid-19 pandemic has dealt a heavy blow to charities around the world. With fundraising events cancelled and their volunteer workforce depleted, one in three non-profits surveyed globally by CFA America in mid-2020 feared for their very survival.

Coincidentally, just as Covid-19 hit Australian shores, two Melbourne-based accounting academics had started examining the role of accounting within a charity. This put senior lecturer Dr Paul Thambar and associate professor Ralph Kober, of the Department of Accounting, Monash University, in a unique position to observe their case study’s decision-making process from the onset of the crisis, and to witness first-hand the true benefit of accounting in ensuring a charity’s financial resilience.

In research believed to be the first of its kind, the authors say their results ‘show how the accounting practices of budgeting, forecasting and performance reporting – financial and non-financial – as well as “accounting talk”, form part of the anticipatory and coping capacities that provided the charity with the financial resilience to navigate the Covid-19 crisis’.

Their research focused on local food relief charity The One Box, which delivers bread, milk, fresh fruit and vegetables to disadvantaged families through schools and community centres around Australia. The charity was more financially vulnerable because its parent company, The Fruit Box Group – which provided over 90% of donations – was suffering a 70% loss in revenue due to widespread office closures.

Business mindset

What held that charity in good stead, though, was its business mindset.

‘The One Box had implemented robust accounting practices, such as planning controls in the form of long-range and action plans, cybernetic controls in the form of budgets and financial and non-financial measurement systems, and administrative controls in the form of meetings and policies and procedures,’ Thambar explains.

As opposed to food charities that ‘rescue’ surplus food from supermarkets, The One Box buys fresh food, leveraging the wholesale discounts enjoyed by its parent. Therefore, explains Kober, it was already attuned to the importance of budgeting, given that produce prices can vary greatly from week to week.

Reserve knowledge

Thanks to an accounting system already in place, the charity knew exactly how long its reserves would last.

‘Because The One Box had placed such importance on accounting practices beforehand, they didn’t have to develop these things from new when this unexpected event occurred,’ Kober says.

‘At the height of the crisis, they had the data that allowed management to make informed decisions – in this case, pivoting to alternative funding sources, such as external sponsorships and government grants.’

The takeaway for charities in general, the researchers say, is that having these systems in place in advance frees up organisational resources to get on with managing the crisis.

Becoming business-like

Thambar concedes that being seen as ‘business-like’ is not something that necessarily suits charities.

‘Traditionally, they like to see themselves as being different from the profit-focused organisations, but I think “business-like', in terms of being efficient and effective in how their business model is operated, is an important buffer when tough times come along.’

‘Charities are not measuring profit, but they still need to have those business processes sitting behind the outcomes that they’re trying to achieve,’ Kober adds.

Normalise processes

There was also a substantial amount of ‘accounting talk’ already embedded across the organisation, which the researchers credit with normalising the processes. Thus, there were no surprises when financial matters suddenly topped every meeting agenda.

‘When Covid-19 hit, The One Box already had the capacities in place which allowed it to cope with the vulnerabilities that the crisis had created,’ Thambar explains. ‘The charity’s pre-established accounting practices of budgeting, forecasting and performance reporting ­– both financial and non-financial – meant it was constantly aware of current performance and its financial situation, including how many weeks of operations current reserves could fund.’

Public scrutiny

Thambar points out that while these reserves assisted with financial resilience, they are often viewed negatively by the public, who may prefer charities to spend all donations in the current financial period.

A case in point is the flack several large charities copped following the catastrophic Australian bushfire summer of 2019/20. The Red Cross, in particular, was criticised for not spending generously donated relief funds quickly enough.

A government inquiry subsequently vindicated the charity’s fiscal response, noting that it ‘understood that affected communities would need support beyond immediate relief’. But the public scrutiny suggested that the notion of holding back cash didn’t pass the ‘pub test’ – Australian parlance for what the average person would consider to be fair and reasonable.

The Monash researchers take this as further evidence not only of the importance of charities having the structure in place to withstand financial shock, but being transparent in their use of funds and conveying that in a way the public can understand.

‘Our findings suggest that charities may need to educate the public regarding the importance of holding cash reserves,’ Thambar says.

Adaptable approach

A further benefit of The One Box’s accounting practices is that they allowed it to adapt to the new environment – for example, with weekly revisions to the budget and forecasts, a greater focus on external fundraising and the frequency of meetings.

‘These adaptations helped the charity in increasing its funding base, including a three-year commitment from a philanthropic foundation, thus addressing its financial viability,’ Thambar says.

While The One Box example is a useful case study, the researchers caution that it may not necessarily be a template for all charities.

‘We acknowledge that different patterns of financial resilience may occur across charities,’ Kober says. ‘As such, charities’ responses to the Covid-19 crisis might not be uniform and accounting practices could play different roles, depending on the extent to which the charity has previously developed its anticipatory and coping capacities.’

Further research is required, he adds, to explore other roles accounting can play in developing a charity’s financial resilience to a crisis.