All articles in Volume 12 Issue 2

NFP sector to regulate itself

5 Feb BRR Quote Image Not-for-profits (NFPs) may be encouraged to self-regulate and face US-style assessments and the Australian Charities and Not-for-profits Commission (ACNC) would be abolished.

That was the word from Minister for Social Services Kevin Andrews, when speaking at an Australian Institute of Company Directors’ lunch in Melbourne last week.

Andrews said the Coalition government was considering adopting an evaluation model, possibly similar to that of the US-based NFP group Charity Navigator, which provides free ratings of the finances, transparency and accountability of NFPs.

He noted that this was a voluntary quality-assurance model that worked through moral persuasion rather than government intervention.

He said no decisions had been made yet, but the government was exploring the various options available.

Andrews said he hoped Parliament would pass a law abolishing the ACNC in the next few months. And, as part of his government’s plans to reduce the cost of regulation by at least $1 billion a year, the Department of Social Services would move towards a single comprehensive contract model with each organisation that delivered services on its behalf.

“We’ll simplify the auditing process so that only one financial report will be required annually from each contracting organisation,” said Andrews.

“We’ll work to streamline reporting arrangements, asking organisations to report on a small number of key outcomes through automated processes where possible.”

Andrews added that rather than a cumbersome top-down “government-knows-best approach” the government believed in a bottom-up, grass roots enterprise.

“We believe in adept and adroit private NFP organisations that can adapt to changing circumstances and evolving needs. We believe that no-one knows local communities better than local community members. They have the best grasp on the problems in their back yard and how to best address them.

“This bottom-up principle is the motivating force behind our decision to set up the National Centre for Excellence. The abolition of the ACNC and establishment of the centre will move the focus from the stick to the carrot. We want to transfer the focus from coercive compliance and regulation to collaborative education, training and development.”

Andrews saw the Centre of Excellence as a fount of both innovation and advocacy and said it could play an important role in helping NFP directors address their capacity challenges.

The centre’s ambit would include charities, clubs and associations that focus on social welfare, the arts, environment, health, medical research, animal welfare, education and more. Its mandate would encompass both organisations that received government funding and smaller local community groups that got little or no direct government support.

“A one-size-fits-all attitude can never work because the needs in the tiny rural hamlet of Fitzroy Falls, New South Wales, are vastly different from the needs in inner-urban Fitzroy, Victoria. And the requirements of a human service agency will be light-years away from an arts centre or educational institution,” said Andrews.

“It’s a fundamental tenet of the Coalition worldview that civil society is neither an instrument nor an agent of the state. You’ll always know your business better than we do and that’s why our ultimate aim is to transfer ownership of the centre to the sector itself.”

Andrews also planned to resurrect the Community Business Partnership, initially established under the former Coalition government of John Howard. It would be chaired by the Prime Minister, with Andrews as his deputy, and would bring together leaders from the business and community sectors to promote philanthropic giving in Australia.

“We know Australians are very generous,” he said. “Australian Taxation Office (ATO) data for tax deductible donations tells us that in 2010-11, NSW taxpayers claimed deductions for $860 million, Victorians for $599 million and Queenslanders for nearly $332 million. Altogether Australia donated $2.21 billion in 2010-11 to deductible gift recipients registered with the ATO. And these figures don’t even include donations for which people didn’t claim tax deductions nor raffle tickets and fundraising dinners that aren’t classified as eligible for deduction.

“This a good start. But we can and should do more. Philanthropy is a community-building exercise, not merely at the recipient end of the equation, but at the donor-end as well. The giving of charity promotes comity, unity and civic responsibility. And that doesn’t just mean giving money, but includes the giving of personal time as well.”

Take control of your debts

Company directors are at risk of being held personally liable for tax debts if they allow their businesses to continue trading while in an insolvent state, warns Roger Mendelson, a debt collection expert and CEO of Prushka.

He notes that the Australian Taxation Office (ATO) is currently owed almost $18 billion, with small business taxpayers accounting for more than 60 per cent of this debt. To meet this challenge, the ATO is reviewing its debt recovery options with collectors to deal with bad payers.

Mendelson says not paying ATO debts is a dangerous game, because the ATO has powers far greater than other business creditors.

“For starters, overdue tax is subject to penalty interest rates which are higher than standard bank interest (currently 9.59 per cent) and the ATO interest is not tax deductible, whereas bank interest is.

“For tax debts against individuals exceeding $5,000 the ATO has a general policy of proceeding to bankruptcy, even if it may not be commercially viable to do so. The reason being is that it then effectively passes the power to the trustee in bankruptcy to flush out any assets which have been improperly disposed of or may form part of the bankrupt estate.

“For company tax debts, the ATO is the major petitioning creditor for wind up of companies.”

Mendelson says the ATO has powers to pursue directors of failed companies personally, in circumstances which go well beyond the powers of others creditors. For example, directors who allow a company to trade while insolvent face a real risk of becoming personally liable for unpaid tax debts of the company.

He adds that businesses which have outstanding tax debts generally operate poor financial systems and controls and this usually means that billing and collection of their own accounts is handled poorly.

As part of the solution, these businesses need help to set up and operate tight billing and collection systems to prevent further problems down the track.

Mendelson advises business owners to take the following steps to protect themselves from incurring debt and get their cash flow back on track in 2014:

  • Be proactive in your own debt recovery. Do not wait until tax time or when it begins to pile up – get ahead with your finances.
  • Ensure your trading terms are set up so that any debt recovery costs are covered by the debtor. This will make it far easier for you to recover money owed.
  • Go through old written off accounts and refer them to a collection agency which is prepared to take them on. The longer a debt is left, the harder it is to recover.
  • Any business that is unable to pay its tax debts needs to seek urgent help from an accountant in order to come to an arrangement with the ATO quickly. If the position is severe, help should be sought from an insolvency practitioner.
  • Directors who allow a company to trade while insolvent face a risk of becoming personally liable for unpaid tax debts of the company.

Dealing with the post-Christmas SME blues

The post-Christmas quarter can be a tough time for small and medium-sized enterprises (SMEs), with the traditional seasonal dip in cash flow making it harder to meet outstanding liabilities on time.

Scottish Pacific's head of product development Wayne Smith has been dealing with enquiries from SMEs looking to fund growth after the post-Christmas lull, or in some cases, looking for funds to meet their Business Activity Statement commitments while they wait for outstanding invoices to be paid.

He says there were four crucial areas directors of SMEs should focus on to keep their businesses on track with cash flow:

  • Debtor days.
  • Creditor days.
  • Stock holdings.
  • Borrowing facilities.

Smith says the cash flow questions directors should ask management include the following:

  • What are the average debtor days? How does the figure compare to the terms stated on the invoices? How do the terms agreed with customers compare to competitors? What is the prospect of shortening the debtor days?
  • Is the business paying suppliers/creditors to terms? Are the terms tight or generous? Are they the industry norm? Is there an opportunity to negotiate extended terms? Are ATO obligations (reporting and payment) up to date? Slippage here is often the first sign of cash pressure building, according to Scottish Pacific.
  • What is the stock turnover? Are stock holdings at the optimum level? Is the business holding obsolete stock or date sensitive stock that is nearing the end of its term?
  • Does the business have the optimum mix of finance facilities? Has the business recently reviewed its funding arrangements? How are stock holdings funded (creditors days/overdraft/trade finance)? How are debtors funded: overdraft/debtor finance? These are the two key current assets that tie up cash in businesses. Is the business meeting its funders' reporting requirements and not breaching any covenants?

Smith says mistakes directors should ensure their companies avoid include:

  • Debtor days - Look after the basics. Have correct details required on invoices, state payment terms, cross-reference purchase orders and have proof of delivery accessible in the event of query or dispute. Do not assume payment will be made on the due date. Issue regular reminders and make follow up calls.
  • Stock - understand which lines are fast moving/slow moving and ensure holdings are related to speed of movement. Do not hold on to stock that is date sensitive or in danger of becoming obsolete. Turn it into cash at a discount (be prepared to take the hit to profit margin to turn it into cash).
  • Creditor days – do not pay before due date. But equally do not push payments out too far without agreement. Make sure the business is not tied to terms that are shorter than the industry norm. Be careful about paying early for discounts as this helps profitability but not cash flow.

Smith cautions that relationships with funders are key. He says directors should keep up to date with reporting and ensure their companies operate on a “no-surprises” basis.

“Provide the required information in a timely and professional manner because facilities being withdrawn or reduced will have the biggest negative effect on cash flow. Regularly review options and be aware of what is available in the marketplace,” says Smith.

  • “Ensure there is headroom for growth - don’t wait until facilities are fully utilised and there is pressure to keep within limits.”

Smith says signs of looming trouble directors should keep a look out for are:

  • If debtor days extend outside industry norms, find out why: are customers struggling to pay or just won’t pay? Is there an issue with collections activity (for example, with statements, reminders and follow up calls)?
  • Are stock holdings increasing out of sync with sales? Is there a build up of slow moving stock items or out of date stock? Is too much stock being held? Is it possible to reduce stock holdings? Move towards JIT (Just in time).
  • Creditor days lengthening without the suppliers/creditors agreement. This could be evidence of cash pressure building, as could ATO obligations not being met on due dates.
  • Pressure on funders' facility limits, lending covenants being breached or funders looking to reduce facility limits. These could be signs of cash pressure and potentially a lack of confidence from the funders.

Being innovative about innovating

How innovative is your organisation about innovating? A new report from Deloitte advises directors to inquire about their organisation’s innovation culture and infrastructure, looking at who the innovation champions are in the organisation, what innovation strategies they are pursuing and how they support and nurture innovative ideas.

It says: “Boards should also ask management to report on the way digital disruption is affecting their organisation and its industry, and how they are responding to threats while also tapping and maximising the many opportunities presented by this change.”

The report, Greater oversight, deeper insight: Boardroom strategies in an era of disruptive change, provides the following list of questions directors can ask management to measure the organisation’s level of innovation:

  • What innovations has our organisation developed over the past two years? What innovations have our major competitors developed over the same period? Are we leading, keeping pace with or falling behind our competitors
  • What are the most disruptive innovations in our industry? How can we better test or harness these emerging business models?
  • Globally, what can we learn from other industries that have been materially disrupted?
  • Who are considered the brightest and most influential entrepreneurs in our industry? How do we forge stronger relationships with these people?
  • On an ongoing basis, how do we better sense and shape the trends in our industry?
  • Do we, as a board, have one or more directors with sufficient knowledge about digital disruption to understand how it is affecting our organisation and industry and how digital should be integrated into our organisation’s business strategy?
  • What is our organisation’s innovation culture? Are we willing to take innovation-related risks or is our organisation too tentative and, therefore, in danger of remaining stuck in the traditional ways it operated in the past? Do we encourage orthodoxies to be challenged?
  • Are we curious enough about our customers? Do we collect enough data often enough from our customers? Do we make good use of it?

Five lawsuit repellent strategies for start-ups

Directors of start-up companies should ensure they do not take shortcuts when it comes to their legal affairs.

So says Anna Pino, CEO of Lighthouse Business Innovation Centre, who has seen many instances where start-ups have tried to cut costs by copying things like privacy policies and terms and conditions off the internet, putting their businesses at risk in the process.

But while copying documents off the internet is very risky, she says many lawyers would also agree that it is not always necessary for start-ups to come in and see them.

Scott Chamberlain, CEO of Chamberlains Law Firm, says start-ups have more affordable options available to them before they start incurring the hourly fees most people associate with a traditional law firm.

“One of the options available to start-ups is to use online legal documents,” he says.

“While there are many online publishers providing ‘dead’ templates for which they accept no responsibility, start-ups should insist on ‘live’ online documents accompanied by a statement of legal advice.”

Chamberlain provides these five “lawsuit repellent” tips to ensure your business has the minimum viable legal protection:

  1. Shareholders agreement
    Ensure internal relationships are documented and solid. Founders should agree how the company will operate. This will include who will own it and control it, what will be contributed to its success and the circumstances in which people can be forced to leave. Without this agreement, it can be impossible to be rid of under-performers and you may find yourself in business with someone’s spouse or relatives if they die or get divorced.
  2. Remember equity is dearer than money
    Founders can be tempted to offer equity as a way of covering initial costs. This is almost always a mistake. Aside from the complex tax implications, any new shareholder should be bound by the shareholder’s agreement. Having too many small shareholders can pollute your share register and make it almost impossible for your company to restructure or attract new investment.
  3. Non-Disclosure Agreement
    Protect yourself from potential investors becoming competitors. You often have to tread a fine line between secrecy and collaboration when it comes to sharing information about your business. Non-disclosure agreements can protect the confidentiality of any information you might have to disclose when exploring the possibilities of a deal or project with another individual or business.
  4. Terms of Service
    Protect yourself from “deadbeat” clients. In real life things go wrong – for example, shipments are delayed, products break and we sometimes have deadbeat clients. Service agreements and terms of sale documents manage the fallout when things do not go according to plan. Most importantly, they confirm ownership of intellectual property (IP) and limit your liability so that you are not unexpectedly liable for massive damages because of a missed shipment date, or a small-but-crucial failure to perform.
  5. Employment service contracts
    Protect yourself from employees and contractors. Businesses can get themselves into trouble if they do not understand the difference between an employee and contractor. Start-ups can be crippled by unfair dismissal claims from disgruntled ex-employees they thought were contractors or payment of unpaid worker’s compensation premiums. Worse, while employers own the IP their employees generate, contractors own the IP they generate. You may find that someone else owns crucial parts of your business IP.

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The opinions in Boardroom Report do not necessarily represent the views of the publisher nor the publication. Every effort has been made to ensure accuracy, but no responsibility is accepted for errors. All rights reserved.