How financial stability was lost

Over the past couple of days I managed to reconstruct the process how financial stability of the IOF was lost over the past couple of years. As I discussed in my previous post, IOF finances are on a knife edge. Net cash reserves are close to zero level, and debt has jumped almost ninefold from €29,000 to €252,000 in one year from end 2015 to end 2016.

But that was not always so. A decade ago the IOF had sufficient net cash reserves to cover around half a year’s operations. Since then the combined effect of rising expenses (3 fold in 10 years!) and evaporating reserves (over 80% lost since end 2008!) has resulted in the current situation.

Financial stability has been lost for many years to come. A serious revision of the expense structure and many years of reserve building required to regain the stability the IOF enjoyed a decade ago. But that is unlikely to be delivered by a leadership involved in losing that stability.

The chart below shows how the net cash position of the IOF has decreased close to zero over the past decade due to increased costs and lower reserves. For details see the previous post. It has been adjusted for the revised 2017 forecast. Obviously, the downward revision of expenses by €100,000 was forced due to unachievable revenue targets presented to the General Assembly in August 2016.

IOF Expenses vs net cash v2

This chart shows an optimistic view of the situation. As discussed in the previous post, the actual net cash position was probably less than half of the book value at the end of 2016  due to items that were unlikely to represent cash equivalent value.

Important to note that it took a decade to build up reserves to a level that provide stability (at least half a year of expenses). It is also interesting to note that the decade long erosion of the financial position of the IOF correlates closely with the rise of the position, and thus the influence of the current and previous presidents. That may reduce the likelihood of meaningful short term adjustment of the financial strategy of the IOF.

There are three additional thoughts I would like to share on this topic:

  • the importance of reserves
  • the triple whammy of IOF finances
  • the value of financial stability

The importance of reserves

I had a discussion with Leho, the reigning President, in August who argued that a not for profit organisation, like the IOF, should not accumulate reserves but spend all the money on the sport. Of course it sounds good if somebody wants to spend more money on the sport, but long term stability of the organisation should be taken into account.

Living with low reserves is doable, if at least one of the following conditions apply

  • expenses can be quickly adjusted if revenues are falling short of plans,
  • suppliers are ready to wait to receive their payment, or
  • members are ready to put in extra cash at short notice, if needed.

Unfortunately, these do not really apply to the IOF:

  • Majority of the expenses (as discussed earlier) are fixed or close to fixed costs (staff, IT systems, etc). These are difficult to adjust rapidly. Serious rethinking and restructuring of IOF tasks and services would be required.
  • Staff represent the dominant part of the suppliers, and delaying salaries seldom ends well.
  • Member federations already complain about their annual fees. An extra payment, for example an extraordinary “annual” fee, is unlikely to be met.

In addition, it is open question what has been achieved by spending in essence all the reserves of the IOF over the past decade. Was there meaningful growth or improvement achieved? I am afraid, there is very little to show for spending all the “crown jewels”  – but that will be the subject of a later post.

The triple whammy of IOF finances

The state of IOF finances is serious for three reasons:

  • The absolute value of reserves is small. The estimated real net cash position of €16,000 is less  than typical cost overruns, like the €20,000 extra cost of World Games arena production added in January
  • The relative value of reserves between 1 and 2 weeks of expenses is very small. Even small delay in incoming cash likely to result in need to delay suppliers, including employees
  •  The volatility of finances has increased significantly. The types of expenses added over the past 10 years, like IT development and TV production expenses, have a tendency of overrun; while the expected additional commercial revenues  have a tendency to stay below expectations (as shown both in 2016 and 2017).

As a result, small variations, much smaller than experienced in the past couple of years, could tip over finances.

The value of financial stability

The interesting thing is that stronger financial stability has little value for small not for profit organisations like the IOF (unlike for major financial institutions) – but financial instability may result in significant loss of value.

The IOF’s lack of reserves and skyrocketing debt is at a level when suppliers (including employees) should ask themselves whether they can afford delayed payments, or should they look for a more reliable client (or employer).  They may also start to factor in the cost of delayed payments into their pricing, or demand at least partial upfront payment. Obviously that would stretch even further the dwindling finances.

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Of course, this is just half of the story. There would be still reasonable reserves, if the IOF would have been able to deliver its own budget approved by the General Assembly. But starting from 2009 financial results have fallen short of the budget every year. 2017 expectations were already revised down to €9,700 from €70,200 in the approved budget. Looking at the tendencies it is also very unlikely that the budgeted profit of €169,000 for 2018, the highest ever profit budgeted for the IOF, will be met.

For 10 years the Council could not deliver that targets proposed by themselves and rubberstamped by the General Assembly. That is 10 years of continuous financial underperformance and evaporation of almost all of the reserves in an organisation led by Presidents and Vice Presidents like Ake, Brian and Leho, with distinguished business background and management experience on their CVs.

More on this in the next post.