Who’s next?  Which social enterprise will be forced to shut its doors due to economic factors, labour negotiations and rising costs?  Goodwill Industries of Toronto, Eastern, Central and Northern Ontario (Goodwill) stopped operations suddenly on January 18, 2016 after over 80 years of serving the public.  Every charity management and board should take time to learn from this tragedy.  Was this an unpredictable catastrophe, or were there warning signs that the Board could have used to change Goodwill’s direction?

Selling assets to pay for operations

In 2011, the company sold a Toronto building, netting $3.7 million.  Selling assets or dipping into reserves to fund ongoing operations, particularly in an established program, is a major red flag that conditions have changed.  It bought Goodwill five years.  What else could have been done in that time?

Inadequate reserves

Based on Goodwill’s 2012 results, Charity Intelligence provided this analysis (https://www.charityintelligence.ca/charity-details/473-goodwill-industries-of-toronto )

The charity has funding reserves of $2.0m, which cover only 7% of annual program costs . . . The auditors have indicated that the charity's ability to continue as a going concern are dependent upon its ability to successfully generate positive cash flow from operations, which it has been unable to do in many prior years.

Different charities face different cash flow challenges, but they all need an operating reserve to keep them going through periods of low cash flow and to allow a graceful shutdown should the worst happen.  A good rule of thumb is having a reserve of at least 3 months of operating expenses.  Could some of the proceeds from the sale of the building have gone to the funding reserves?

Labour unrest

In 2012, Goodwill attempted to implement a “winter strategy” to reduce labour costs during its slower months.  This initiative resulted in a dispute with the union which went to arbitration.  Goodwill lost.  Even if they had won, the fact that they had had to go to arbitration should be viewed as a red flag.  Arbitration creates winners and losers.  Even if the losers form a small minority, it tends to be a vocal one, resulting in a loss of support for the charity or at the very least, a questioning of the motives of the Board and staff.  Charity leaders need to work towards consensus, even though it is a much slower process than arbitration or majority rule. 

Changing landscape

When I was small, I remember my mother telling me that every housewife in 1950’s Toronto had a CNIB broom.  The Canadian National Institute for the Blind had a very successful program for blind workers to manufacture brooms.  Unfortunately, as mass produced imported brooms became cheaper, there came a point where the CNIB program was no longer sustainable.  It had to be abandoned and another industry chosen.  Rather than clinging to a declining business model, charities selling products to the public need to do the same kind of analysis that any retailer does to check product margins, year over year sales and overhead costs.

Lessons learned

Looking at the publicly available information, it’s hard not to conclude that the warning signs of the impending financial crisis have been present for at least 4 years.   I expect that many of the points made in this article have been raised repeatedly at internal meetings.  Still, the worst happened.  The organization had to shut its doors.  For how long, we don’t know.    An important lesson can be learned from this:  it is one thing to see the warning signs, but it can be quite another to convince people to take action.

One approach a colleague of mine used was to say that unless the Board acts now, the accountants will make the decisions for us.  As an accountant, I’m not in favour of making us the bad guys, but this approach helps focus the discussion on strategic decision making before the financial factors force the organization to act. 

Alternatively, I recommend presenting the example of Goodwill, or a similar organization faced with a financial crisis, as a case study to management and the Board of Directors.  Shifting the focus to another charity can help decision makers gain objectivity, so they can find new ways of looking at the challenges the organization faces.

About the author – Bill Kennedy, CPA, CA http://EnergizedAccounting.ca is a member of a Toronto group of professionals focusing on supporting charity financial and fundraising systems:  sustainable results through sound systems.