The CFO's Survival Kit for the (Kinda-Sorta) Recovery

By: Whitney Redding

The GDP is ticking up and the unemployment rate is ticking down, but a genuine economic recovery remains frustratingly out of reach. Amid such uncertainty, how should associations be thinking about their investments, budgets, real estate, and financial controls? Here's what you need in your survival kit.

For association CFOs, weathering the "Great Recession" has meant surviving a gauntlet of financial stress tests. And yet, five years after the economy crashed, even the most optimistic economists still have a hard time saying the United States is in a full-fledged recovery.

Leading indicators seem to point to a turnaround, except when they don't. The stock market has rebounded, but the overall economy is still adrift. Partisan gridlock in Washington continues to stymie progress toward a clear fiscal policy. The reality of a "jobless recovery" continues to hit home for many associations.

Given that the only certainty for the economy in the foreseeable future is continued uncertainty, how can association CFOs best position their already lean, mean organizations for the coming year? Associations Now called on a range of financial experts to answer that question.

One recurring theme is a bit of good news: "There is a sense that we've weathered the storm and that, although we don't know we've got it completely behind us, it's not raining, and from that standpoint we can look around and be more strategic and really figure out how to do what's best for the association," says Dennis Gogarty, president of Raffa Wealth Management LLC. "We're not in a sort of emergency state anymore."

Jump to:

  1. Take Stock of Investments
  2. Be Nimble With Budgets
  3. Look for Real Estate Savings
  4. Watch Out for Fraud

1. Take Stock of Investments

Associations' investment returns took a major hit when the stock market crashed. Not surprisingly, a period of soul searching followed. Many associations shored up their reserves and are paying closer attention to their asset allocation mix. "As opposed to monitoring it on maybe a quarterly basis, investment committees are meeting maybe every other month now," says Christian Spencer, a partner at Tate & Tryon CPAs and Consultants.

It also has become more common to segment some reserves into buckets for particular purposes, such as technology or other capital needs. Gogarty says this is usually prudent, even if it often entails moving some money from longer-term, high-risk investments into safer waters with lower rates of return.

As for other investments, associations that stuck to their strategy for long-term investments were rewarded when the market rebounded last year. "It's not ideal to have changed midstream and moved to a more conservative position while markets were down, because you would have missed the rebound," Gogarty says.

At this stage, association CFOs are frustrated with persistently lower yields. "We're all concerned about the rate of return on our investment portfolios," says Monique Valentine, CFO of Associated General Contractors of America. "AGC used to have a $200,000 budget line item from interest income on our bank account. It was $10,000 last year," she says. "That keeps me up at night."

Yet if there is one lesson the recession has taught CFOs like Valentine, it's the value of sticking to long-term investment strategies rather than trying to make up lost ground by shifting to riskier investments.

This year, Gogarty advises CFOs to focus on what they can control. "There's a lot you can't, but the good news is, all the things that really matter you can control, so make sure your investments are compliant with the policy, make sure fees are as low as they can be, and make sure that performance is within an acceptable range of expectation," he says.

Assuming that an association's policies reflect its ability to take risks and that the investments are compliant with policy, he adds: "I don't think they need to be thinking about their investment portfolio too much, and they can really focus on improving the overall financial position of the association."

2. Be Nimble With Budgets

Some industries continue to struggle, dragging on the bottom lines of the associations that represent them. Construction is one of them; AGC saw dues revenue drop from $11 million in 2008 to $9 million last year, an 18 percent decline. Nondues revenue also declined dramatically.

Valentine's advice for CFOs is to be nimble. "We have a budget, it's approved, and yes, it's our guideline, but we do regular forecasts. We don't change our original budget; we report to our board what our budget is, but we are constantly forecasting, so I'm looking at it on a monthly basis starting in May or June," she says.

As it regularly readjusts, AGC doesn't spend money just because it's budgeted. For example, every position vacancy is scrutinized, even in government relations, where a lobbying position has gone unfilled for about a year. "That's huge for us. That's what we do, we lobby," says Valentine. "But it's essential to keep a balanced budget. ... We have ended the year in the black every year because we tightly manage our expenses."

That said, Valentine cautions against top-down budgeting or budget-cutting. She gives monthly reports to department managers on how they're doing against their approved budget and relies on them to identify new cuts as required. "You get a lot more ownership," she says.

Of course, associations sometimes need to spend more to remain relevant to members in a tough economy. "Think about either enhancing existing programs or what would the return be, so to speak, on investing in a new program. It's a bit of a risk any time you do something like that, but now's the time to consider that, when members are going to be looking to their organization to continue to provide value," says Spencer.

Despite frugal times, AGC underwent a major overhaul of its online documents platform in 2012. "We knew that we had to upgrade our 10-year-old platform and have a good system in place when the market turns around, so we invested a lot of money to get that up and running last year," says Valentine. "People will think you're crazy doing that when times are tough, but you've got to start now if you want to be positioned to take advantage when the market recovers."

3. Look for Real Estate Savings

Valentine has also set her sights on another source of potential savings: AGC's premium office space in Arlington, Virginia. AGC is working with a broker to rethink its rental lease now, three years before it expires. "We need to reduce our footprint because we're spending a lot of association resources on rent, and times are changing. So, we need to put those dollars into staffing and services for our members," she says.

According to Kenneth King, senior vice president at The Ezra Company, a tenant brokerage firm in the Washington, DC, area, the downturn has resulted in a renter's market in many cities across the country, and associations are taking advantage. "Certainly, over the past couple of years, we've seen increased vacancy rates, which have resulted in a decline in [rental] rates, and that's throughout the country. We've also seen landlords contributing significantly more to the tenant in terms of concessions," says King.

King recommends a lease audit to identify errors and provisions that the landlord may be willing to renegotiate. Common revisions include caps on controllable expenses or how the base year and rent escalations are calculated.

"All these things play such a big role, and we're talking about hundreds of thousands of dollars that's left on the table in some cases," says King, who estimates his firm finds lease errors in 45 percent of lease audits. "The point is, unless you have this supporting information, you determine the validity of expense allocations from your landlord. There's no way to really know why your operating expenses, for instance, may have increased 8 percent over a previous year's cost."

Recasting the lease is "one of the best ways to reduce your costs," King says. "If the organization plans to stay, then it makes sense to try to renegotiate sooner rather than later, while the market is still favorable to you as a tenant."

If an association has a stable membership base and predictable growth, there are benefits to buying, especially now. These include great deals in many markets, historically low financing rates, the opportunity to build equity, and stabilization of costs.

"Given interest rates, you can absolutely beat what you're paying in rent, and it stays flat. You're not looking at these big [rent] increases every year," King says.

4. Watch Out for Fraud

Unfortunately, the extended downturn has caused employers to be at higher risk for occupational fraud and embezzlement. "More people are under greater financial pressure than in normal times, and basically that creates more fertile ground," says William Devaney, a partner at Venable LLP.

Often the perpetrator is a longtime executive or employee with a sense of entitlement. "What you see in a lot of these, at least in the beginning, is enormous rationalization," he says. According to the Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations, the typical organization loses 5 percent of its revenues to fraud each year.

Devaney's advice for preventing fraud or embezzlement:

  • Have a compliance policy.
  • Require segregation of duties, such as two signatures for every check.
  • Run background checks for new hires, and check up on references.
  • Train employees on business ethics and policies.
  • Establish a hotline or other means of anonymous internal reporting. Occupational fraud is more likely to be detected by a tip than by any other method, according to ACFE.

Last, be careful where the budget ax falls. "Compliance is not, on its face, revenue generating, but organizations ought to be very wary before they look to trim compliance," says Devaney.

Whitney Redding is a freelance writer in the Washington, DC, area. Email: [email protected]

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