Pacifica CFO Financial Overview - Feb. 2004
Pacifica Foundation Budget and Finances:
by CFO Lonnie Hicks
This is a report to the Pacifica Community on the finances of the Pacific Foundation, and, simultaneously, I hope to give the new Board and Local Station Directors a short primer on the over-all finances of the network.
I also hope to give those new to network finances points on how to read the budget and finance documents we work with. More pointedly, the goal is to provide an understanding of the financial dilemmas, choices and issues in our financial structure.
Overview of Network Finances
The fiscal year of the network begins October 1 of each year and extends to September 30 of the following year. As most of you know we receive most of our funds from listener fund drives which occur three times during the year. Most stations add a summer drive as well.
We also receive significant funds from grants, including those from the Corporation for Public Broadcasting which total $1.38 million or 9.3 percent of total revenue.
Legal Expenses: One of our Biggest Headaches
The good news is that most of the litigation is behind us. The bad news is that we have new current legal bills to pay. As of this date, the Pacifica Foundation faces current due and payable legal debt of approximately $475,000. This debt includes personnel cases, by-laws, elections, new legal settlements, and, of course, attorney fees. In addition, Pacifica faces $370,000 in legal and professional service firm debt dating back several years. Most of this $370,000 service firm debt is not active, not currently being invoiced, and is a potential write-off for Pacifica.
Please note that some of these legal costs are moving targets and may change as the fiscal year proceeds.
Staff costs total 33.5 percent of total National Office expenses.
Other expenses at the national level include monies for audit and legal, election expenses, and National Programming including Democracy Now! and other special event and news coverage.
Central Services in the proposed FY04 budget total 16.6 percent of total expenses, 14.8 percent of total revenue and 19.1 percent of listener income. The National Office holds the FCC licenses of the network and is the office with responsibility for the overall operation of the network.
The Bottom Line
The net surplus/deficit line indicates a total surplus of $1.64 million on expenses of $13.15 million. This is a return of 12.5 percent on “operating.” Operating expenses are those expenses incurred by the organization in the normal course of its yearly operations. Twelve and one-half percent is an excellent return. Operating return identifies how much surplus the organization can produce in a given year. By comparison, this amounts to saving $312/per month on a $2,500/per month salary.
After operating revenue and expenses are calculated, Pacifica’s practice in the past has been to add on a “Capital and Cash Budget” below the operating budget. This “Cash and Capital Budget” has been in use for several years. It tells the reader how each station plans to spend its “surplus” in a given fiscal year on capital items or other items which may require a cash layout. This particular aspect of the budget, I believe, ought to be eliminated because it causes some real difficulties not only for the network but also for staff as we seek to manage the finances of the system.
As I have relayed to the Board, here are a few points on this to consider:
Accounting practice is not to mix income statements, cash flow statements, and capital expense items in the same statement. This causes confusion and mixes apples and oranges, and is incorrect. It also confuses our bankers, our creditors and others who are not used to seeing this statement mixed in this way. It should be eliminated.
The “Cash and Capital” budget should be two budgets (Cash Flow and Capital Budgets) and I am working on reorienting our current systems, (accounting, budgeting, cash management, accounts payable, etc.) to produce the relevant information. Our current finance staff has had possession of the books here for only six months and will require time to finish the audit and then we will take up these issues. This will take time, perhaps several months. But it will be ready for the 2005 budget year. Meanwhile, I have taken some stop-gap measures which I use to measure our current situation.
This notwithstanding, the budget represents a considerable step forward for the network in that each station now has a requirement of one months operating reserves in the budget to be achieved by September 30, 2004. This is crucial in that it allows the system to have reserves for emergencies in the fiscal year including monies for emergency repairs to transmitters, and for unexpected events such as earthquakes, fires, lawsuits and other mishaps. The one-month reserve also provides reserves to pay our staff in the event something happens. Many thanks to our General Managers, accounting staff and others for making this reserve possible.
However note that we live in a period that, while revenues are rising, so are expenses. Workers Comp is up 15 percent this year; medical expenses up 30 percent; new union contacts have increases; and insurance, litigation, elections, and By-Law related costs all add up to substantial sums. We need to control costs in all areas. As new Board members, job one is to control costs issuing from the Board itself. Executive Director Dan Coughlin and I have stated that every Board proposal, idea, suggestion or program ought not to be entertained by the full Board or finance committee unless accompanied by a financial impact statement such that we know how much that item will cost. The ED and I will insist that this rule be adopted by the new Board as well. A reserve is essential. It can be wiped with one bad drive, or one or several significant cost over-runs.
So one month is minimum to have in place. Common practice is to have three to six months operating reserves in place. To do less is risky.
But what happens if expenses do exceed revenue? For example, a dip in listener support can be devastating and immediate leaving little time to react or plan. What to do? We could:
Reserves to Back Up Our Reserves
A last resort is to dip into the accumulated funds each station may have from years of operation or from drives from previous fiscal years. This figure can be found in the year-end audits which break out how much cash on hand each station has or has available in liquid or near liquid funds (i.e., money market funds). See the network audit available at Pacifica.org website. On the whole at September 30th, 2003, internal documents show that the network had $1.3 million cash on hand. As of January 2004, that figure had increased by $1.1 million. Again, this is excellent since it tells us that this “second reserve” is available “in the system” if needed. Moreover, it is 2nd source support if needed to handle very large, unexpected expenses.
So, by way of summary, the three documents we have examined are the Profit and Loss Statement (the Statement of Activities), and the truncated “Cash Flow and Capital Budget” statement alluded to above.
In addition, there is the network’s Balance Sheet which is normally published yearly or perhaps quarterly. Inventory counts are particularly difficult in the generation of a monthly Balance Sheet and, therefore, are not feasible on a monthly basis.
Budget Issues and Questions
Note the Annual Operating Budget is a plan of action and often changes from the moment it is written, and, given our fund-drive based revenue the budget ought properly to be seen as a rolling forecast. For example, a new grant or contract comes in unexpectedly, therefore, revenue and expense estimates change. Expenses may be higher than anticipated or lower than anticipated.
Normally, larger changes trigger forecast changes which are then presented to the Board for review with variances highlighted. Or, often, guidelines are created where latitude is given to make small adjustments internally as long as there is no variation to any line item by more that 10 percent of the original budgeted costs. This maximizes flexibility meaning that small changes do not trigger a multitude of budget changes.
Finance Budget Issues and Questions
1) How do I read the budget and the Financials?
2) Who is responsible for the Budget?
3) What are the Financial Goals of the Network?
A two pronged goal structure of just two over-arching goals:
4) What are the Financial Objectives of the Network
this fiscal year?
5) What are the legal and financial responsibilities of a new LSB or Board member?
This is a tremendously complicated area and I will address it in face to face meetings upon request. But please understand that as a Board member you and the network can be held collectively and individually responsible for each act, every word said in public and private. Such statements may be legally binding, actionable and may have enormous consequences. We must go to detail on how to proactively protect ourselves and the network.
Each LSB and Board member will get materials being developed by the National Office which will include essential source documents and information to include:
By way of summary: Much work is to yet to be done-Much to be achieved. Welcome aboard to all of you!
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