IMCK FINANCIAL CRISIS MANAGER, AUGUST-NOVEMBER 2010
IMCK currently has a monthly shortfall of $11,338 ($136,656 per year) in local receipts against operational expenditures needed to maintain current levels of service. When current levels of unrestricted outside donation are added to the revenue side, the monthly shortfall drops to $1,918 ($23,010 per year). As of November, 2010, IMCK had payables of $142,887, of which $138,598 was in the form of “hard debt” to outside creditors and to employees for unpaid back salaries. At the same time, IMCK had $744,198 in receivables, of which $593,979 is aged in excess of 6 months. Of this total, it is roughly estimated that perhaps as much as $100,000 might be collectible, but only over some perhaps extended period of time. A 2011 budget is proposed, based on these numbers.
DETAILED Findings AND Observations
I. Over the four month period of August-November, 2010, total local receipts at HBB were $118,785. Monthly receipts ranged between $17,390 for the short month of August and $49,674 in November, with an average of $29,696 per month for the period. At PAX the total was $37,504 with average monthly receipts for the period of $9,376 and for the Guest House they were $5,811 in total with a monthly average of $1,453. ITM and Dental are both problematic special cases that require discussion because both have been removed from the accounting system as integral components of IMCK (although they are, indeed, integral components, organizationally). The data in this chart for these two components had to be manually compiled from multiple sources. The accounting system has expenditures but no receipt data for them. In both cases, the receipts are handled entirely by the respective component and are invisible to the IMCK accounting system, yet their expenditures, especially for salary and benefits payments, are posted there. With no receipts credited to them and large expenditures debited to them, both components are this made to appear as if they have run up huge internal debts to the parent organization – IMCK. There appear to be no accounting system controls over their incidental expenditures and all of their revenues and expenses must be manually incorporated into IMCK financial statements and budgets. The reasons given for this anomalous treatment are historical in the case of the Dental Clinic (it was originally created with designated funds as a special project) and no longer apply. In the case of ITM, it was removed from the system in 2004, allegedly to relieve the accounting office of burdensome work. In reality the removal has created extra work and introduced additional vulnerability to errors.
II. The comparable receipt figures for all IMCK components combined were $170,449 in total, $31,419 in August, $51,713 in November and an average of $42,612 per month for the period. This is down from the combined receipt figures observed in 2009 when we found an 8-month average of $48,999 per month for the combination excluding ITM and Dental on different accounting systems (separate figures for PAX, HBB, GH and CE were not available at that time but the average monthly receipts for just those four in the above time period were $40, 574).
III. Over the same 4-month period, non-personnel expenditures for all components combined was $96,612. Monthly expenditures ranged between $20,604 and $28,567 with an average of $24,153 per month for the period. A breakdown by department appears in the chart below. However, a caution is in order that these expenditure levels are probably not sustainable. The non-personnel expenditures were artificially depressed during this period in order to reserve half of the receipts for partial salary payments and to avoid making any purchases on credit. Some of these cost cutting measures were achieved through better management and can be retained without negative consequences on quality of service, but others were simply a deferral of expenses that must eventually be paid.
IV. Over the same 4-month period, personnel expenses for all components combined accrued at a steady rate of about $24,000 per month. However, based on the availability of funds, actual payments were $80,790 in total and ranged between $14,970 and $24,111 per month with an average of $20,197 per month. This does not include the one-time costs of staff reductions made during the period. Thus, by holding back on non-personnel expenditures, the payments on accrued personnel costs were made with an average monthly shortage of about $3,800. In fact, during this period, salaries themselves remained in arrears to about the same extent that they had been at the beginning of the period—about five months—and the shortage was felt primarily in non-salary benefits that are still owed for July and prior periods.
V. Although it was a somewhat artificially controlled period, we can compare total local receipts with total expenditures during the four months indicated above. Total expenditures for this 4-month period were $177,402 (averaging $44,351 per month). Against the receipts noted in #b above, this results in a shortfall of $6,955 for the period and a mathematical average of $1,739 per month. This represents a virtual elimination of the $14,733 average monthly shortfall that was being experienced during the eight months of observations in 2009 when average monthly expenditures were running at $63,732 against average receipts of $48,999 per month. More importantly, this $6,955 shortfall was not amassed in incrementally with credit purchases over the last four months. Rather, it was a conscious decision in August to spend down a major portion of a cash balance (more than $7,800) that was found in the register, at the beginning of the period, for a significant drug purchase to replenish badly depleted stocks. Since expenditures were tightly controlled throughout the period against funds reported on hand daily by the cashier, rather than against daily receipts, this satisfied the requirement that spending could exceed revenue on a given day but was always held within available cash balances.
VI. The above chart may be surprising in that it shows HBB operating at a net profit and PAX operating at a net loss. This is contrary to conventional wisdom and would seem at odds with the observation that PAX delivers substantial receipts into the coffers each week. At least three factors contribute to this apparent anomaly and may indicate that that this analysis is actually more accurate, rather than being anomalous.
First, all PAX receipts are
brought back to the main cashier at HBB and all expenditures, including those
for PAX, are made from that same main cashier, many of those for PAX being
consolidated into combined purchases that were attributed solely to HBB. Heretofore, with PAX expenditures thus masked
and PAX receipts highly visible, PAX has appeared better off than it now
appears on more careful analysis. Also,
it is much easier to call HBB staff into the financial controller’s office and
negotiate down their purchases requests because they are co-located on site,
whereas PAX is
Second, the allocation of expenditures between HBB and PAX was only implemented in the accounting system at the beginning of September. An examination of the September data appears to show a reasonable distribution. However, the data from October and November were corrupted during the effort to upgrade and correct other problems in the accounting system—problems that have only finally been resolved in January, 2011. Therefore, the split of expenditures between HBB and PAX is based entirely on the September percentages, applied to the actual total expenditures for the four months, August-November. It is possible that errors could have been introduced in that process from a single month’s sample of data but it is also true that this is the first data available from the accounting system that truly begins to split PAX expenditures apart from those of HBB. More months of split data from the new accounting procedures are in order to fully resolve this question.
Thirdly and perhaps most significantly, this chart distributes the expenditures attributable to each of the other components (not just PAX) to their proper location, which has the effect of reducing the HBB expenditures, which is where the accounting system previously lodged virtually all expenditures (especially the personnel expenditures) by default. Once “relieved” of the “burden” of seeming to “support” all the other components, HBB, as a stand-alone entity, looks much more financially healthy that it previously appeared.
VII. In any case, the above analysis only shows that for a relatively short period the expenditures can be carefully controlled and held in line with receipts. In fact, the more important question is what spending levels would be necessary to sustain operations at a specified scope and quality of care. Based on the sustainable management adjustments made during the four month period, together with prior year budget experience and the results of a partially completed study of long term monthly material consumption rates, a sustainable level of monthly non-personnel expenditure at current service levels is projected to be approximately $30,000. The study of monthly consumption rates, even though all items have not yet been added in, already presents a higher total number ($32,000); however, many of the unit prices in that study have not yet been verified as the most economical available. The 2011 budget projection, which assumes some continued cost controls, produces about $29,800 per month. Until better and more complete data is available, $30,000 is a reasonable projection.
VIII. If the personnel and non-personnel costs were actually paid at the levels needed to sustain current levels of service—$24,000 & $30,000—then the total expenditures would come to about $54,000 per month. However, within the $42,612 average monthly level of receipts realized during the past four months, there would be a continuing shortfall of about $11,388 per month against the projected needs. Over 12 months, this would add up to a total annual shortfall of $136,656. This translates to a shortfall of $45,552 over the August-November four month period.
IX. The above situation illustrates the shortfall if one has only the local receipts to apply toward expenses. In reality, however, there are outside donations coming principally from ECO accounts at PC(USA) and from MBF. The PC(USA) funds are typically transferred to IMCK three times per year in 4-month increments. The first increment had already been transferred into the IMCK treasury by the time of the four month tenure that began in August and whatever largess it contributed was already reflected in the balances available. Thus, it is fair to observe that the opening position for the above analysis was not based purely on local receipts and that the drug purchase mentioned in #V above was probably made, effectively, from donated funds that had been melded into the cash available. However, we have no choice but to leave that in place for the analysis because it reflects what actually happened and would result in apparent negative cash balances over the period if it were subtracted out in an attempt to reconstruct a picture based purely on the prior local receipts. The availability of the second PC(USA) draw for May-August was communicated to IMCK during the four month tenure of the Crisis Manager but was not actually transferred and credited in to the cashier until December. Hence, neither it nor the final draw of the year played any part in the above figures. MBF donations are not drawn down on a trimester schedule like those of PC(USA). Therefore, substantial MBF donations had also already been melded into the treasury prior to the Crisis Manager’s August arrival and must also be left with whatever effect they had on the opening cash balance as well as the overall opening financial position for the period.
X. Although the donations previously drawn-down may color the picture somewhat for the exercise just conducted, of comparing local receipts with required expenses, the total annual donations are useful and necessary to project the impact on the shortfall (or absence thereof) when those donations are added in. As can be seen in the table at right, there were total donations available for operating expenses in 2010 of $113,646. If this is subtracted from the projected annual shortfall of $136,656 based on local income only (in #VIII above), it would reduce the shortfall to $23,010 but would not totally eliminate it. A breakdown of this net revenue to each of the IMCK components is not readily available because the unrestricted donations, by their nature, are available to all. It is also difficult to know where the under-spending occurred that must be compensated for in projected expenditures; however, the discussion above and its favorable cash flow strongly suggests that most or all fell on HBB (with perhaps a very small amount to CE based on observation). Since ITM, Dental and CN each has its own designated source of income, it seems reasonable to prorate the unrestricted and operations-designated donations between HBB and PAX on the basis of their respective expenditure levels after adjustments to reflect the needed overall spending level of $54,000 per month. The chart below illustrates this approach.
XI. While the above chart and analysis indicates that a net positive change of only $2,000 per month from a combination of all actions taken (or to be undertaken) is all that appears necessary to reach a positive cash flow, there is also the problem of a large existing body of payables. This will require a greater positive change than the $2,000 per month if it is to be repaid incrementally, or a larger single infusion if all or a major portion of the debts are to be paid back at one time. The chart below shows the details of the situation as of November, 2010. The last two categories are not debts in the sense that creditors are sending bills and actively seeking repayment but they do represent liabilities that must be paid in increments from time to time as the project, individual or other entity presents a request for a withdrawal. Note also that the last category includes only project funds that have been taken into the IMCK cashier’s register and melded with operating funds. The majority of project funds have been physically sequestered as real cash into their respective envelopes in the vault and do not enter into these calculations because those liabilities are exactly matched by the sequestered assets. IMCK management has recently taken a decision to move these from the vault into a recently opened bank account. The first three categories of “hard” debt in the chart add up to $138,598.35.
XII. IMCK also has an even larger body of receivables. A large part of this is very old debt owed by government entities for health care services rendered by IMCK to their employees over many years, and charged but never paid for. The government has proven very resistant to all attempts to collect on these debts. An agreement has been reached, in principle, with the provincial government, which owns about $60,000 of the total government figure shown in the chart below, to repay about half of their debt (thus, $30,000). However, no real progress has been shown yet in implementing this and expectations are not high, in part because IMCK has taken steps since July (at the Crisis Manager’s urging) to cut these non-paying agencies off from further services. This has not been well received by the government (hence the effort made toward the above agreement) and may not be possible to enforce completely or indefinitely. The remaining $280,000 of this government debt should probably be written off, especially once the IMCK financial situation is stabilized, but it is such a significant amount with very small amounts being paid from time to time, that it has been left on the books for now. It would be optimistic to expect full repayment of the $30,000 but if even a major portion of it were collected in increments over the course of 2011, it could have a significant impact on the cash flow projected above for the year.
A large number of NGOs and private
businesses in the
The Crisis Manager promulgated a policy of refusing further services to organizations that did not show at least some monthly reduction in their net balance owed, but in practice this leniency has been extended to any organization that made regular monthly payments of any amount. This is motivated in part by the desire not to alienate clientele who may eventually pay up, and also, in some cases, by the fact that the same client is also a debtor to IMCK with whom attempts to negotiate an offset have been unsuccessful. The possibility of legal measures was discussed with IMCK management but there is great reluctance to spend money for what is regarded as having a low probability of success. Several cases were cited in which IMCK, in the past, has spent large sums in court and come away empty-handed. Whether this is worth trying again, especially with some of the larger debtors, is a matter of judgment and would require either special funding or an allocation of IMCK resources that are needed for normal operating expenses. Based on all of the above uncertainties, it is difficult to estimate how much of this category might actually be collected in 2011 but a fairly reasonable guess of about 25% would eventually return almost $24,000 to the treasury, potentially eliminating the annual shortfall projected above—at least for 2011.
Very little of the money owed by individual patients is recoverable. The large bulk of it which is over six months old is owed by people who can no longer be located or who are simply beyond practical legal recourse or other means of suasion. Some small portion of the more recent patient debt may be collected but the vast majority must eventually be written off or paid for from the fund for indigent patients. Without the support structure of social services to help determine eligibility, it is extremely difficult to separate the truly indigent from the many who plead indigence. In any case, the fund of donations designated for the expenses of indigent and charity patients has typically been only a few thousand dollars per year (it stood at about $6,500 in November). The alternative of refusing service to people who cannot or will not pay up front (substantial down payments are already demanded from those being admitted as inpatients but are not collected if the person claims inability to pay), especially in urgent cases, is obviously not available to a mission hospital, one of whose principal reasons for being is to provide service to the poor. The best estimate for returns in 2011 from this debtor category may be nothing more than the crediting of the $6,500 in the charity funds as reimbursement to IMCK for operating expenses in the care of indigents.
Church organizations and parishes owe about $32,476, with about 75% of this being recent. IMCK could (and, from a business perspective, should) adopt the same sort of service policies toward this group as discussed above for the NGOs and private businesses but a decision to treat “family” the same way as other clientele would be almost as difficult as any decision to curtail services to the poor. Many of the Church parishes and organizations in question are already in dire financial straits themselves—barely able to pay pastor salaries and meet other small expenses from the combination of a few dollars per week in the collection plate plus whatever direct donations may be made to them (and thus unknown to IMCK accounting). The CPC treasury was recently wiped out by a $100,000 burglary, which would make any such decision even more difficult in the near future. To expect repayment in 2011 of more than about half of the shorter term portion of this debt—thus $12,000-$15,000—may be optimistic.
The $34,721 reported by the accounting system as owed by employees is, in some ways the most puzzling, but perhaps also the most hopeful. IMCK policy holds that when loans or advances are made to employees in times of need, they are to be repaid (incrementally, if necessary) by withholdings from subsequent salary payments. Although salaries are in arrears, salary payments have been made with some degree of regularity, as demonstrated in #IV above. Yet detailed reports from the accounting system show almost no movements at all in these employee accounts over the four month tenure of the Crisis Manager. When inquiries were made about this, accounting staff gave strong assurances that repayments were being withheld from salary payments, as required by the policy. Since the accounting reports do not seem to reflect this, either it means that the policy has not been followed, contrary to assurances (perhaps the action being justified because of the hardships of having missed five months of earlier salaries, but then the denials, of course, being highly unacceptable), or it means there have been posting and data entry mistakes in the accounting system. Also disturbing is the fact that almost ALL of the largest debtors, including 6 of the 7 over $1,000, are people who are or were members of the administration office staff, including the accounting office itself. In any case, if these loans are truly outstanding to the extent reported by the system and shown in the chart above, then the offsets to be imposed on salary payments over the next few months should result in significant reductions to the salary portion of expenditures projected in #XI above. Most of this would, of course, have only incremental impact over a few months until the debts were paid off, but over time the total impact for 2011 should improve the annual cash flow by $34,721. This is all theoretical and depends on verification that these loans are, indeed, outstanding, rather than being some anomaly of the accounting system; but if true, it has the potential for eliminating the remaining shortfall demonstrated in #XI above for 2011.
XIII. Based on the forgoing analysis, the Crisis Manager’s proposed budget for 2011 is attached. IMCK budgets have typically been Performa documents that relied too heavily on simply projecting current and prior year experience into the future. They have contained line items plainly copied in from the accounting system, such as “prior year losses” and “amortizations of real property” that are not actual budget receipts or expenditures. They have used production values of services from the accounting system rather than actual receipt data to project revenue. And they have been organized and formatted in ways that were less than helpful for management or Board decision making. The attachment includes the old, unrealistic numbers in the 2009 column but new and more realistic assumptions in the 2011 column. Some numbers in some categories differ somewhat from those presented in the foregoing tables because some data was taken from different sources, but overall, it presents a similar picture except that an assumption is made that results from actions which will be taken on this report will boost income by about the 4% needed to achieve a balanced budget.
Respectfully Submitted by