British charity Childrens Aid Direct (CAD) ceased to exist as an independent entity at the end of August 2002. After 12 years providing humanitarian relief to children and families in crisis overseas, CADs doors were finally closed for financial reasons. This article is written in the hope that it may help other NGOs facing financial difficulties. It does not dwell on the reasons for the collapse, nor does it apportion blame. What happened to CAD could happen to other NGOs. There are lessons to be learned from CADs demise.
Much that CAD achieved over those 12 years was exemplary, in particular the high quality of humanitarian work at the point of delivery, the speed of response to appeals from institutional/government donors, and the willingness to undertake work at the frontiers of safety and security. We remain proud of these qualities, even after the hard times of 2002.
The story begins at a meeting in February 2002. The meeting was the first of a series for the newly-appointed chair of trustees, during which the executive director and the acting director of finance spelt out in great detail the true nature of the organisations finances, and the longer-term prognosis. After this meeting, we spent two months in negotiations with other NGOs trying to find a merger partner, but in May CAD had to enter into a company voluntary agreement (CVA). Under the CVA, a process particular to the UK, CADs creditors agreed not to take legal action if we took steps to recover and repay as much as we could, thus avoiding having to go into liquidation (in which case creditors would have lost virtually everything). This meant that, from May, when the CVA came into force, until August, all CADs programmes had to be wound down, staff made redundant and assets sold. By the end of August, we had merged all that was left (essentially our database) with another NGO. Those four months were extremely stressful, and very exacting.
Although the CVA arrangement applied only in the UK, what happened to CAD is relevant to any other charity throughout the world. There was no single reason for its demise. It was a combination of many factors, a chain of individually small misfortunes or mistakes. To have prevented the collapse, the chain needed to have been broken a long time previously, and a number of those parts of the chain removed. Some of these links in the chain will apply to other NGOs, and need addressing if others are to avoid the grief and pain that CAD has had to go through.
For a number of years, it had been CADs practice to spread its operations by maintaining a presence on average in ten countries at any one time. On occasions over the past few years, particularly at times when trustees became aware of financial pressures, it was asked whether we should not reduce the number of countries that we operate in. However, the fewer countries we were in, the fewer opportunities there were of identifying new contracts. Because 75% of our income was from institutional donors, this was a major factor. To this day, it is not clear whether reducing (or indeed increasing) the size of CADs operations could have had a significant impact on its future. The fact was that arguments for not dropping below ten always prevailed at the time.
The conduct of our institutional donors was a very significant factor in CADs demise. Some were extremely slow in paying. Even after a huge push to recover outstanding funds in the autumn, by the end of 2002 (after CAD had ceased to exist) we were still owed an estimated £450,000 (more than $730,000). The biggest impact was from CADs major donor; once our financial difficulties became known, this donor demanded bank guarantees for every new grant. This was one of the factors that pushed CAD over the edge.
Outdoor activities represented CADs major source of unrestricted funding. Six or seven events were held every year, where teams from various companies were sponsored to climb mountains in the UK. The outbreak of foot and mouth disease among Britains beef herds in 2001, which caused the closure of the national parks where these mountaineering trips took place, was a huge blow, and highlighted again that too great a dependence on one single fundraising activity was dangerous.
During the final months of CADs existence, many people asked what role our external auditors played. Looking back, their reflections and support for the work we undertook at the time were excellent. A senior partner attended virtually all of our many crisis board meetings, and consistently confirmed that all our actions were legitimate. His reassurance was most helpful. Interestingly enough, though, only two weeks before the fateful discussions with the incoming chair in early February, the board had met to receive the auditors report of the previous years accounts. His report, whilst urging caution, confirmed his satisfaction with the 2000/1 accounts. The auditors role appeared to be reflecting on the previous years financial performance and commenting on the legality of continuing to trade, rather than giving direct advice on solving the enormous financial problems we found ourselves in.
The final external factor, and again one not unique to CAD, came from fluctuations in exchange rates. The net loss to us over three years was considerable.
Culture and behaviour
Not of all the reasons for CADs collapse were external, of course; some relate to the culture of the organisation. CAD was rightly proud of its record of providing an excellent service in the field. It had done this without ever building up financial reserves, preferring instead to spend every penny available. The result was an unbusinesslike approach the idea of living within our means entered CADs lexicon only in its final couple of years. Financial crises were old hat; weve been here before was a common response, and persisted even after the February watershed. For what appeared to be a very positive, task-centred organisation, there was a culture of secrecy. The minutes of all meetings with trustees and senior managers were confidential. As a result, financial difficulties were often kept quiet.
The distance between CADs board and its staff, even at head office, was obvious. Staff would see trustees passing through the office every three months for board meetings. The board did not challenge management, and knew little of the issues facing staff. Board members were genuinely shocked when, in early 2002, they saw the size of the list of outstanding creditors. A new briefing system was introduced in September 2001 to let staff and trustees know far more about what was happening. One such briefing in October explained CADs cash-flow difficulties in detail, and why this meant things were slowing down dramatically. One of the trustees contacted the executive director at the time, amazed that the situation was so advanced.
The failure to recognise impending insolvency early enough was the outcome of a board that kept its distance and failed to ask searching questions. In drawing up the budget for the new financial year in September 2001, it was not apparent even then that CAD was probably insolvent. Likewise, the impending insolvency was not made clear to the new executive director when he began in September 2001. None of the trustees had personal experience of working for an NGO, yet as with any charity they were solely and collectively responsible and accountable for everything the charity did.
Management and day-to-day running
Although CAD had a clear mission statement, this did not appear to be owned and shared by all staff and departments. Staff from the different departments in head office rarely spoke to each other, and there were many internal barriers between departments. The charity had been developed through the inspiration and energy of one individual, but as the organisation grew, a more managerial style and culture was lacking. The new executive director arrived too late, and trustees did not choose a candidate with a particular specialist knowledge of finance. The over-reliance on one particular model for fundraising was a long-standing mistake. During the period when information was being assembled for this article, there was also a view, though not one shared by all concerned, that too much emphasis had been placed on fulfilling all of the projects proposed by the programmes department, and not enough time spent on adapting to the realities of fundraising capacity and to general financial disciplines. The unnecessary secrecy surrounding the handling of information reflected the inappropriate way in which the whole organisation was managed.
CAD had a considerable overdraft for over four years. The failure to create reserves and an over-dependence on the overdraft created the cash-flow problems that became increasingly evident during the autumn of 2001. In the past, budget controls had been inadequate: spend because its needed, rather than spend if its affordable. There were poor controls over purchasing and systems of approval; money was applied with scant attention to controls. In the final 18 months, financial-monitoring systems were tightened considerably, but by this time it was too late.
In previous years, constructing the budget had been an interesting exercise, with little involvement from operational managers. CAD was not alone in co-mingling budgets (keeping all the income from different contracts in one account), but to create separate bank accounts for every grant would have been an enormous and hugely expensive task, and one not required by donors. It did, however, cause serious difficulties as the lack of cash flow became more and more of a problem.
The relationship with the charitys bankers was mixed. Two years ago, the bank insisted on an independent financial review. The process was fraught; the independent audit team sent in by the bank showed little knowledge of the way NGOs operate, and much energy was spent trying to educate them. The outcome was inconclusive, other than to lead the bank to put pressure on CAD to reduce the size of its overdraft. This reduction was successfully achieved, but at the cost of further delaying payments to creditors. Once the cycle of delaying creditors and reducing cash flow took hold, work in the field slowed down, in some cases grinding virtually to a halt. This led to delays in finishing off contracts, further delays in beginning new contracts, and therefore delays in the budgeted flow of income. The outcome was that, for the first three months of the new financial year, no new grant money was received, and budget predictions were knocked back by three months. The cash-flow problems became severe and, by the time the new chair was appointed, the situation had got out of hand.
It is ironic that, from the February watershed, many of the old weaknesses disappeared. The dialogue between trustees and management improved dramatically and the involvement and commitment shown by all staff was very impressive. It is tragic that this all happened too late in the day. But it remains impossible to know at what point a rescue plan could have been mounted, and the crisis avoided; too many weak links needed to be repaired.
In the end, CADs history and culture proved too much. Governance was weak, management kept trustees in the dark and trustees failed to ask the right questions. There were too many financial failings. Some were fairly small, but added together they resulted in a lethal mixture. CAD was constantly using money today which was committed for tomorrow; as one of the trustees pithily put it, no matter what your heart says, follow the money. Trustees have enormous responsibilities vested in them, but are left with no external monitoring and precious little support. Staff are not members of managing boards, and bear virtually no corporate responsibility if anything goes wrong. For a local charity with a relatively small turnover this may not be a major issue, but for an agency the size of CAD, with a turnover of £15m ($24m), the responsibilities of trustees are great. Including full-time paid directors on the board, as is the case in the commercial world, together with external scrutiny are therefore fundamental issues that need to be addressed if another agency is not to share CADs fate.
Nick Thompson is former executive director of CAD. His email address is: firstname.lastname@example.org.