Ten Years of Underperformance – Skill or Will or Something Else?

The decade long erosion of the financial stability of the IOF discussed in the previous post did not come as a result of a sudden event. It was the result of continuing underperformance of the IOF leadership who missed the budget target for 10 years in a row.

This post has turned out to be longer than expected. I had little time to write it, so I could not make it shorter. Here is the summary if you are also pressed on time:

  • The IOF Council has missed the budget target every year since 2009. The target set by themselves, and rubberstamped by the General Assembly without change.  It would take a miracle to achieve the targets for 2017 and 2018. That makes 10 years of missed targets. 10 years of continuous underperformance.
  • It is unlikely that this was due to lack of skills: the leading figures of the IOF during this period (Ake, Brian and Leho) all prided themselves with business background.
  • Looking at recent events one may get a feeling that the IOF leadership just did not care about the budget approved by the GA, hence they could not possibly deliver it:
    • In a letter to member federations about the difficult financial status of the IOF signed by Leho and Tom, the “GA Budget 2017” is different from the 2017 budget published as approved on the IOF website in the minutes of GA 2016.
    • In the same letter they claim that in October 2016, 2 months after presenting the 2017 budget to the GA, they already started to modify it “to get costs in line with expected income”. There was not a hint of an unexpected event that could have modified expected income in the 2 months after the GA. This gives the feeling that the Council presented a 2017 budget to the GA that was not realistic, but the GA approval gave the Council free hand to modify it to their liking.
    • The outcome of budget modification(s) started in October 2016 was not shared with member federations until 14 July 2017, nine days after the  Presidents’ Conference in Tartu. This gives the feeling that the IOF leadership decided to avoid any open discussion about budget modification with the member federations who approve the IOF budget.

Here are the details of the story that may make you wonder how long IOF member federations will put up with being treated like this.

The numbers

The Council missed their own target every year since 2009, for 8 consecutive years. They already conceded that 2017 will be missed (€66,235 surplus was budgeted, but only €9,767 was expected in July 2017). It looks also highly unlikely, that in 2018 the budgeted €169,010 surplus, that is 2.5 times(!) higher than ever achieved in the IOF’s 56 year history, will be delivered. That gives a solid 10 consecutive years of missing the budget as shown on the chart below.

IOF Net income vs budget v2

 

This level of  underperformance is most remarkable under any circumstances. It is even more remarkable, because
a) the IOF was run by experienced managers according to their CV, and
b) the budget was set by the Council themselves, only rubber stamped by the General Assembly.

Officially it is the General Assembly who sets the budget, but in practice it simply approves the one submitted by the Council. I could not find a case in recent memory when the GA modified the budget. I could not even find a case in recent memory when the GA has even debated a line item. There were some high level remarks now and then, but everything was approved as suggested by the Council. So we are not talking about some stretch targets not being met. No, simply the IOF leadership could not deliver for 10 consecutive years on their own promises made with no external pressure. Remarkable.

Skill or Will?

Seeing this level of underperformance one should ask whether it was due to missing skill or missing will. Could it happen that the leadership of the IOF did not have the basic skills required to prepare and deliver a budget for a quite simple small operation? Or was it due to lack of motivation or intention to deliver on their promises, and follow the budget approved by the General Assembly? Or was there something else behind all this?

Let’s try to find some pointers that may help us decide.

Continue reading “Ten Years of Underperformance – Skill or Will or Something Else?”

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

Continue reading “How financial stability was lost”

IOF Finances – on a knife edge

In the following couple of posts I have to come back to IOF finances. Over the past two months I talked to several members of the Council. I had to realize that either they did not understand the severity of the financial situation, or did not really appreciate it. “We have lot’s of cash in the bank” and “I am positive that everything will be fine” were the typical replies when we talked about IOF finances.

So let’s have a closer look at the net cash position of the IOF on 31 December 2016, the date of the last audited accounts, as published on the IOF website. Below I’ll try to explain the accounting basics required to interpret the numbers.

There are two key points people concerned about the IOF should understand:

The net cash position of the IOF is practically zero. In simple terms: there is substantial money on the bank account only because there are substantial unpaid invoices.

The IOF has started to accumulate serious debt. Short term debt has jumped almost ninefold from €29,000 to €252,000 in one year from end 2015 to end 2016.

Net cash position shows the real amount of cash reserves assuming that all current invoices are paid (including consumed services not yet invoiced), and all current outstanding receipts are paid (including revenues earned, but not yet invoiced). There are variations to this calculation, due to the sad fact of life that it is more likely that you have to pay for services consumed, than that everybody pays you all the money you expect from them. It is always a question how to find the right balance between the optimistic and the prudent approach. Here we make adjustments only when there is a clear indication that not all the monies may be received.

On the chart below you can see the estimated net cash position of the IOF at the end of year 2016. It shows the accounting book values and it is also adjusted for items that are unlikely to be “cash equivalent” (like inventory and Brazilian debt) and an estimated “membership debt” referred to in Council minutes.

IOF Net cash 2016

Despite the €191,000 in the bank, the net cash position of the IOF was only €37,000. Taking into account adjustments, the actual net cash is estimated at around €16,000.

At €16,000 (or even at €37,000) the IOF has practically no meaningful net cash reserves for its annual budget of €800,000 to €900,000. The budget overrun in early 2017 only for the World Games arena production was at around €20,000!

It should be noted that the revised budget of 2017 will not solve the problem. The new forecast is a profit of just above zero: €10,000. It was reduced from €70,000 planned for 2017 in August 2016. That, even if delivered, will not change principally the difficult financial situation of the IOF.

Below I’ll explain the various items for a better understanding.

Continue reading “IOF Finances – on a knife edge”

The World Games are dear to us

The World Games – “the highest profile event for sports not in the Olympic Games” according to the IOF Newsletter – have started on 20 July.

Chances are that you did not hear about The World Games from other sources. It is not carried by mainstream media. In Britain it is a “no event” for the BBC and Sky. Not a word on Lenta.ru, the leading Russian internet news portal.  In Hungary you can read about the occasional Hungarian gold.  You have to go to the IOF arena on facebook to find some excitement about The World Games.

There is nothing surprising about this silence. Not only most of the sports are somewhat offbeat, or shall I say, cater for  a specific taste, but it overlaps with several major sport events.  Just try to think about artistic roller skating, precision petanque, competitive life saving, indoor rowing, or dare I say, orienteering competing for media attention with the  completely overlapping FINA Aquatic World Championships (swimming, open water, water polo, synchro, diving), and partially overlapping Tour de France, Fencing World Championships, Beach Volleyball World Championships, and several other world events in major olympic sports.

Despite the heroic effort of the IOF PR team to present The World Games, there are two aspects not mentioned: what is the point and how much does it cost.

IOF World Games spend

Some notable points:

  • The 2017 World Games budget has increased from €10,000 in August 2016 to €30,000 in January 2017. Plus 200% in 5 months! With such dynamics, it may not be the end of increases.
  • The 2013 spend is huge, because almost all expertise (including people who can place a control on the morning of the event) had to be flown in on intercontinental flights.
  • The final spend in 2013 was more likely to be more than €86,000. For example the 2011 budget of €5,000 turned into €17,500 spent. For 2012 we have only the budget, but actual spend may be much higher. There were also rumours at the time of last minute cost increases that may have been booked on other accounting lines.
  • I am not aware of any summary report for multi-year “investments” like The World Games 2013. Apparently nobody considered important (or did not dare) to add up  the how much was spent on these events.

Continue reading “The World Games are dear to us”

Close to the Edge – IOF Financials 2016

The good news is that the IOF has just published their 2016 accounts. This is an unprecedented move. In living memory accounts were published only for General Assemblies. Never on their own more than a year before the GA meeting that should approve it in October 2018. Pity though that it took more than 3 months (or a blog?) for the Council to publish it. The financial report was signed off by the Council in March 2017. But interestingly, it was published only on 14 July, 9 days after the Presidents’ Conference.

The bad news is that the numbers are below all expectations. The losses of 2016 were even higher than the shocking results expected in January. Insolvency is not just a theoretical option any longer.

Less than 2 weeks net cash reserves left. A small negative variance (far smaller than experienced in previous years!) may push the IOF over the edge.

The Council has also sent a revised budget to member federations for 2017. Budgeted expenses were cut from €935,000 to €771,000 (a 18% cut), yet the annual profit is expected to be below €10,000, or 86% down from the €70,000 presented by the IOF Council to the General Assembly in August 2016.

Here are some of the highlights until I find some time to present a more detailed and easier digestible analysis.

  • Result for 2016 was a loss of €65,281. This is well below the €37,000 loss expected in January(!), and a shocking €132,737(!!!) below the €67,456 profit predicted by the IOF Council in August 2016 – only 4 months before year end!
  • Reserves are down to €45,022 – a low level last seen in 2003. The difference is that in 2003 when costs were below €200,000, it covered 3 months of it. In 2017, at the original budget reserves cover just above 2 weeks of average expenses. With the revised 2017 budget, at lower expected expenses, it covers 3 weeks of average expenses.
  • Net cash position is getting very tight. Out of the €45,000 reserves net cash is probably not more than €27,000 – and likely to be less. This includes adjustment for less than €8000 machinery and equipment, and €10,000 debt of the Brazilian Federation from 2014 converted into long term debt to finance South American development. (see https://www.cbo.org.br/financas  2016 – Acordo IOF CBO – Debt Agreement Original em inglês.pdf – unfortunately, this information for some reason is not available from the IOF website) There are other items that are likely to reduce the net cash position further (there were references to long outstanding debts in Council minutes, inventory may not be fully used, etc).
  • Net cash position of less than €27,000 covers less than 2 weeks of average expenses, even under the cut budget of 2017. Any development below optimal would wipe it out.
  • The stated cash of €191,000 in hand and at banks should not confuse anybody. There were unpaid invoices in the amount of €172,000, and a further €80,000 services already consumed with no invoices received yet.
  •  The less than €10,000 expected profit for 2017 would not change the situation in practical terms. We – including IOF suppliers, contractors, and employees – are in for a long ride close to the edge. We can only hope that we will ride on the right side of that edge.

The overall situation of the IOF has become difficult to sustain. Even if insolvency can be avoided, the sword of Damocles will hang over it for many years to come, if things are not changed radically.

Member federations may need to start to warm up to the idea of a cash call, say an extraordinary annual membership fee.

A complete rethink of IOF’s operation also looks unavoidable – asap! It would be inconvenient, but it is better to do it now, before one is forced to do it by the circumstances.

Insolvency, bankruptcy, and Orienta

Before we start to discuss the vulnerability of the IOF’s financial situation, it is important to clarify some concepts, around financial difficulties. Most of the visitors of this blog (and happy to see already 1300 unique visitors just over the first 10 days of July!) probably know little about the concepts of financial difficulties of organisations. So we have to clarify some basic ones to be able to have meaningful discussion.

Volunteer member based organisations (clubs, federations, etc) typically run very simple cash based finances, often with little or no non-cash assets. The IOF is no exception. The book value of fixed assets was only €10,000 out of the total €145,000 at the end of 2015. The rest was cash or cash-like asset (money expected and money owed within one year).

The only two basic concepts that you need to understand are as follows. I tried to explain them in layman’s terms to avoid the sometimes confusing language of accountancy as much as possible – while risking being excommunicated by finance professionals.

  • insolvency: when there is no cash left to pay the bills, or in other words no liquidity left – AND the ones whom you may owe money (e.g. employees, utilities, service providers, bank, tax office, etc – what they call altogether “creditors”) decide to wait no more.
    Note: one may be wealthy in general, maybe even own huge property, but if there is no cash left, only angry creditors circling around you, that means insolvency.
  • technical bankruptcy: when the value of what you own (either what you have in hand or as a firm promise – called “total assets”), is smaller than your obligations (whatever money you owe others in unpaid bills or in cash advance received – called “total liabilities”). It is technical, because you will get into trouble only if everybody you owe something would ask for it. That is rarely the case. Nevertheless, you live on borrowed time. Your net “savings” are less than zero.  It is also called “negative equity”.
    Note: one may have lot’s cash, but if total assets are less than total liabilities, that means technical bankruptcy. The cash in your pocket belongs to somebody else, just not paid yet.

These concepts are simple, but may be tricky to grasp when written down. So instead of getting into lengthy explanations, I would like to introduce you Orienta, a lady artist in her mid-50s, and explain these concepts showing  the problems around her finances.

Meet Orienta

Orienta was an artist with a small, but devoted followership who were rushing around with little painted pictures. She was living mainly on allowing charity festivals to use her name, and she charged them a fee. She also got some money from her fanclub every year, and some little from grants and the odd sponsor. She tried to earn some money on her own, but that wasn’t very successful. You know, artists….

Many dreamt about a happy and enduring relationship with Orienta, but she was capricious with most. She had a sweet spot though for a skinny tall French guy, whom she showered for over a decade with precious bijoux most of us never even dared to dream of. Ah, c’est la vie… But here we want to discuss not Orienta’s romantic life, but her finances….

… and her finances were not in good shape.

Continue reading “Insolvency, bankruptcy, and Orienta”

Where the money is going

Probably you were also wondering where all the money collected mainly as fee/tax is going. Many people are guessing, but very few know the numbers. My feeling is that even the ones who know the numbers have only vague ideas about the trends. So I am happy to present here probably the only historic overview of IOF expense evolution from 2000 to present.

The short summary:

  • IOF expenses have grown unrelentlessly since 2005, from around €200,000 to a budgeted €900,000 in 2018
  • Staff cost is the dominant expense that also provided the backbone for total growth, a superb confirmation of Parkinson’s Law
  • Spend on IT systems has exploded from €0 in 2013 to a planned €110,000 in 2018 – or close to 4 times what he IOF spends on quality assurance for all events in a typical year
  • The Olympic project is a less visible sink for freely spendable money, but its average annual cost is comparable to all spend on IOF event quality
  • Some growth is related to taking on flow through expenses (TV, AD), that were part of the sport, but now they are more visible, which is a good thing.

IOF Expenses 2000-2018 v2

I have to admit, that it was not easy to put together the data, despite IOF being committed to the highest standards of transparency. It is bad form to complain about the difficulty of an analysis, but I have to give this caveat: post-2006 the data is mainly estimate, directionally correct, but may deviate slightly in detail. Audited reports have a different cut than relevant budget. Post-2012 60% of the expenses were on one single line “Other expenses” in the audited reports, so I had to rely on adjusted budget numbers. Where some details were given, like 2013 and 2015, they did not appear to match the totals in the audited reports, and so on.

The 2017 budget numbers were adjusted in January according to the Council meeting minutes of 2017, but not many specific details known, other than lower cost for staff (one part timer has left, but a part timer may have become full timer), and an extra €20,000 authorised for the World Games (Olympic project).

Despite all the uncertainty, the most reliable number is the ever growing total staff cost, because that was the only major expense reported on a separate line in all audited reports used. Luckily, that is also the single largest expenditure that worths attention. The other ones that exploded over the past couple years are IT systems, Olympic project, TV and Anti-Doping expenses.

Let’s have a look at these in a bit more detail.

Continue reading “Where the money is going”