Annual Audit for Fiscal Year 2004-05
Rosemary Gordon and Ellen Shein
LLLI Board of Directors
From: LEAVEN, Vol. 42 No. 1, February-March 2006, pp. 20-21.
The annual independent audit of LLLI for the fiscal year April 1, 2004 to March 31, 2005 was conducted by Mann, Weitz and Associates, LLC, Certified Public Accountants, based in Deerfield, Illinois, USA. The audit covers the financial operations of the LLLI office in Schaumburg, Illinois, USA. It was completed in June 2005 and its findings were accepted by the LLLI Board of Directors in September.
This year the Audit Committee of LLLI requested that the financial statements published in LEAVEN (see page 22) show both the 2003-04 and 2004-05 figures, so that it would be easier to compare revenue and expenses, and to see at a glance how various programs and services do from one year to the next. Some items may still be difficult to compare from the final statements because the 2004-05 fiscal year saw the introduction of project-based accounting and the grouping of some salaries under various departments. However the comparative figures were useful for most items.
The Financial Health of LLLI
The bottom line of audited financial statements is, "How are we doing? How is the financial health of LLLI?" Unfortunately, the short answer is, "Not very well." We ended the fiscal year with a deficit, we spent more money than we took in, we were unable to add to the reserve fund, and the cash flow situation was not good for most of the year. "Cash flow" is the amount of cash on hand on any given date that can be used to pay bills or salaries. When cash flow is not good, we must borrow money to meet our obligations.
As you review the Statement of Activities you will see that we completed the fiscal year with a deficit (change in net assets) of $151,929. A clearer picture of the serious financial situation can be gained by looking at the Statement of Financial Position, which shows that although LLLI has unrestricted net assets of $1,211,297, once property and equipment, valued at $976,037, have been excluded, we are left with unrestricted net assets of only $235,260. To put this in perspective, in 2001, LLLI had $814,215 in such unrestricted net assets, and apart from a minor improvement in 2004, this amount has continued to decline to the current level.
You may look at the Total Liabilities and Net Assets and see that these total $2,630,696 compared with $2,354,861 for 2004 and wonder why we say that LLLI has a deficit for this fiscal year. This apparent increase is due entirely to the large amount ($692,818) in temporarily restricted assets. These assets are available only for the purpose for which they were given, and for this year, over $400,000 of these assets were donated for the Information System Project, which will completely overhaul the LLLI currently outdated and inefficient information system, including the addition of an easy-to-use online catalogue.
The auditors have reminded us, and the Board of Directors is well aware, that LLLI cannot sustain further deficits of this magnitude except by further borrowing. This is no different from a family's household budget. If we continue to spend more than we earn, we may reach a point where the bank will no longer allow us to borrow. Moreover, interest has to be paid on such borrowing, which diverts money away from the activities that further the mission of LLLI.
One further result of the deficit is that we have been unable to add to the reserve fund. It is good business practice to have a reserve fund large enough to cover several months of operating expenses in case of large, unexpected expenses or a dramatic decrease in revenue. The auditors have been recommending that LLLI build up a reserve fund of around $1.25 to $1.5 million over the next four to six years, and the Board of Directors has agreed that such a reserve is vital to the long-term financial stability of our organization. Although the 2004-05 budget included provision for building the reserve, we were unable to meet this target due to the deficit. The fact is that bills have to be paid before we can put money away in savings -- again, no different from household budgets.
How did this deficit happen? Although expenses were down, our revenue did not even cover these reduced expenses. Sales of publications were not as high as expected and there were lower attendances at Lactation Specialist Workshops and the Physicians' Seminar. Memberships continue to be less than was budgeted for and unrestricted donor contributions were well behind budget. Donor contributions are always one of the most unpredictable sources of income for any organization, and no one can foresee events like the December 26, 2004 tsunami, which coincided with one of the LLLI major donation periods and which drew money out of donor budgets for all organizations worldwide.
Some Good News
There were some positives in the audit. This fiscal year, the inventory was reduced by over $100,000, as the staff, especially the Executive Director, Hedy Nuriel, took active measures to reduce stock and get rid of really old, outdated stock. No business can afford to carry a large amount of old and slow-moving stock. Accounts Receivable was also down by almost $100,000 from the previous year. However having Accounts Receivable of $182,093 is still far too high. It is not sound financial practice if LLLI has to borrow to pay its bills (Accounts Payable), while so much is owed via Accounts Receivable. For this reason, the auditors have been recommending prepayment for all orders -- i.e., goods are not shipped until payment has been received. The new e-commerce system being developed for LLLI in the Information System upgrade will require prepayment with a credit card, and other credit polices are also being considered as a matter of some urgency. In the meantime, all customers, whether Leaders, Groups, Areas, Divisions, Affiliates, or others, can help our financial situation by paying bills promptly.
The LLLI Board and LLLI staff are well aware that measures must be put in place to improve the LLLI financial position and that difficult decisions may well have to be made. These include seeking new sources of funding, expanding the donor base, and seeking new business partnerships. We can all play our part as members of the LLLI community to increase revenue. Some examples are: promoting memberships, making a financial donation to LLLI and/or encouraging others to donate, holding or attending a 50th Anniversary House Party, ordering from LLLI and prepaying for those goods, and paying the royalty fee due to LLLI when selling items with the LLL logo.
Some may be wondering what happens between an audit taking place and the Board of Directors accepting the results. While the Board has ultimate financial responsibility for the organization, an Audit Committee of the Board works with the auditors, examines the audit report and asks questions, and then recommends to the Board that the audit be accepted. While the majority of Audit Committee members must also be members of the Board of Directors, its membership may also include others with financial expertise or a keen interest in financial matters. This year the Audit Committee is co-chaired by Rosemary Gordon and Ellen Shein, and includes Board members Jane Tuttle, Donna Cookson Martin, and Sharon Vines, LLLI Management Advisory Council member Bill Heritage of Auckland, New Zealand, and Leaders Anne Hutton of Texas, USA and Debbi Heffern of Missouri, USA.
If you have questions about the auditor's report or about the work of the Audit Committee, please write to either Rosemary Gordon, 84 Grace Crescent, Taupo, New Zealand or email irgordon at xtra.co.nz or Ellen Shein, 2 Motta Gur St, Tel Aviv 69694, Israel or email elky70 at netvision.net.il. If you have financial expertise and would be interested in being considered as a member of the Audit Committee for next year, please let Rosemary or Ellen know.