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”

Presidents’ Conference – will there be questions?

I am just getting curious, if there will be any questions on the Presidents’ Conference in Tartu regarding the critical financial situation of the Federation.

The IOF finances have deteriorated to a point where normal business variation may result in bankruptcy, not to talk about the impact of an unexpected event.

The presidents of IOF member organisations will meet the President, the Council and the Secretary General on Wednesday, 5 July, during WOC 2017. The Presidents’ Conference is an advisory body to the IOF, typically meets every second year in between General Assemblies. Yet, all key participants are the same as on a General Assembly, hence it gives the opportunity to discuss all important IOF questions with the members.

The agenda for this years Presidents’ Conference was sent on 24 April

• Strategic Directions 2018-2024
• Strategic Planning Calendar for IOF Events
• IOF Sustainability Policy
• Update on the IOFs Anti-doping work
• Reports on on-going activities

No mention of financial questions, whatsoever, though it was clear in January that IOF finances took a nosedive after years of steady decline (see here). One may – mistakenly – believe that there are two topics where overall finances may be addressed, but that is not the case.

The strategic directions document is light on numbers (contains only dates and page numbers), despite the sad fact that finances often present hard constraints to strategic dreams.

The IOF Sustainability Policy is all about environmental impact, while the sustainability of the IOF as a financially viable organisation is taken for granted.

(Interesting to note that the Consultation Paper on IOF Sustainability includes fascinating ideas like using Eventor to make participants of orienteering events pay an environment fee dependent on where the participant travel from – but that deserves a separate post).

 

Budget and results 2016-17 v2

Yet, the Council knew already in January that the 2016 and 2017 combined financial results were expected to be €160,000 worse than the budgets the Council presented to the General Assembly 5 months before. (see 12.2 and 12.5 in Council Minutes #183).

Compare this with the IOF reserves of €114,630 at the end of 2015, and an estimated €77,000 at the end of 2016. The uncertainty in the budget forecast shown above is comparable to the reserves left after the continued decline since 2008. Another downward revision comparable to what happened in 2016 or expected for 2017 would mean that the IOF looses all its reserves. That is called bankruptcy.

Continue reading “Presidents’ Conference – will there be questions?”

Live Orienteering in action

If you ever wondered why IOF online ticket sales were lagging far behind expectations, here is a series of screenshots from today’s Sprint Final live session on Live Orienteering.

Price: €6 for one day only, and €20 for 5 days, but you learn about it only when you try to pay.

Apparently the chat box was removed. I guess due to unfiltered comments about the service. You may read on Attackpoint some honest reaction of enthusiastic orienteers who were willing to pay to watch the action real time.

This happened 5 weeks after Live Orienteering’s flop on the first round of the FootO World Cup. Some comments are here on facebook where people were demanding their money back.

Liveorienteering 4

Liveorienteering 1Liveorienteering 3Liveorienteering 2

Where the money is coming from – Part 2

Let’s look at external (not fee based) income attracted by the IOF. As you can see from the chart in Part 1 of this post,  this has been a minor part of the revenue, since 2002, but there are ambitious plans to grow it.

The details around external revenue streams are rather unclear, but it is very likely that they fall far short from becoming major contributors to freely spendable IOF resources.

The shortfall is most spectacular in IOF services (LiveCenter, eventor, etc) where the 2015 revenue was €61,040 or 98.5% lower than the budget.

IOF Services budget vs result v2

Continue reading “Where the money is coming from – Part 2”

Where the money is coming from – Part 1

Let’s get to exploring IOF finances further. It would be great to understand where the continued losses come from. First we look at the revenues, and then at the skyrocketing expenses. It makes sense to have a look at where the money is coming from first. After all,  makes a huge difference if the money spent was earned on the market, or simply squeezed out from within the sport.

This task is surprisingly difficult for the post-2012 period. IOF’s commitment to highest level of transparency means that a whopping 92%(!!) of the revenues are reported on one line as “Funding/income” in the 2015 Profit and Loss Statement. One may have thought that reporting 60% of expenses on one line as “Other expenses” was interesting enough. The point is that post-2012 it is unavoidable to make estimates on the breakdown of revenues, and do a bit of a guesswork.

This is also a long topic. In this first part I look at the general picture and the various fees (taxes) charged by the IOF. In the second part I look into the attempts to bring in monies from outside orienteering: grants and ambitious commercial revenues.

The sad news is: 80% to 90% of IOF revenue comes from within the sport as various fees, in essence taxes on the love of our sport.

If you look from a distance, ignoring the details, this looks like a dynamically growing successful organisation.

IOF Revenues 2000-2018 v2

Alas, details tell a different story. The expectation of dynamic growth of commercial income appears to be way overestimated when it comes to facts. It looks promising only in the budget. TV rights are balanced with similar TV expense, that makes them in essence a zero sum game. More details on that in Part 2 of this article.

The dominant source (80% to 90%) of the freely spendable revenue comes from within the sport as various fees. They come directly or indirectly from athletes, both elite and masters, and volunteer organisers who are all being taxed by the IOF for the love of our sport.

Continue reading “Where the money is coming from – Part 1”