Why Not-For-Profits must make a profit

The Moore Australia Corporate Finance Team have a long track record of successfully advising Not-For-Profit Organisations (NFP) on their operations including sustainability of cashflows.
 
We have seen a big change in the way these organisations are funded moving towards ’in arrears’ instead of “’in advance’.
 
Many organisations were accustomed to receiving a funding payment upfront which is spent over a 12-month period. This provides the NFP and its Directors comfort in knowing they have adequate resources to fund operations. Sometimes funding agreements would state that they were only permitted to make a maximum profit from their operations, presume 5% .
 
NFPs are increasingly receiving funds in arrears with a transition to ‘fee for service’ models. This change is driven by the NDIS and an expected tightening in government budgets, a result of the COVID-19 government stimulus funding.
 
This means, much like professional services firms, the NFP will need to fund net working capital and wage costs in advance of receipts. Suddenly a 5% profit margin may not be sufficient to ensure adequate funding for ongoing operations, particularly if funds are received quarterly in arrears.

For this reason, the Corporate Finance Team believe that NFP as a term should be discontinued in favour of "For Charitable Purpose” (FCP). And for these organisations (NFP/FCP) to be sustainable, they will need to generate greater than 5% profits, and retain surplus cash to survive the new funding cycle.
 
In this new environment, “FCP’s” must now prepare robust 3-way financial forecast models, given that Directors can no longer be comfortable they have adequate funds in advance.

Our teams have assisted many clients in preparing such models and are available to discuss your individual circumstances. Get in touch with the team today.