Friday, May 15, 2015

Rose Colored Finances and the Fall of FEGS

The venerable New York City nonprofit, Federation Employment and Guidance Service (FEGS), abruptly closed its doors earlier this year and subsequently filed for bankruptcy. The move shocked many and has threatened to seriously disrupt social services throughout the city. Its bankruptcy filings, coupled with its most recent financial statements, provide a painful case study of an organization whose troubles were clouded by persistent growth and excessive optimism about revenues.
  • Though the organization now says its programs faced declining revenues in 2103 and 2014, its (consolidated) financials didn't show these trends thanks to continued growth in its portfolio of programs. In fact, overall program revenues and total revenues increased even in its most recent fiscal year (up 5.1% and 4.1%, respectively).
  • Not only did revenues grow, the organization even showed positive change in net assets (i.e., profits) in 2013. It wasn’t until 2014 that the losses finally appeared -- a staggering $21.4 million loss before considering one-time insurance proceeds and $19.4 million loss after considering the insurance proceeds.
  • In 2014, persistent growth caught up to the organization, with expenses rising drastically, most notably salaries (up 13.5%) and bad debt writeoffs (up 440.1%).
  • The bad debt writeoffs in 2014 ($7.7 million, up from $1.4 million in 2013), coupled with the disclosure of an audit that revealed it had received estimated overpayments of $20.7 million in previous years (through its subsidiary, Home Attendant), suggests in hindsight that the organization’s recorded revenues in previous years were overly optimistic. In other words, the problem that their operating costs exceeded their potential reimbursements may have been festering for a while, but it wasn’t until 2014 that this bubbled up in their financials.
  • In the end, the organization's problems led to mounting cash flow troubles, which ultimately forced its sudden closure. These cash flow troubles too were tied to the organization’s growth mentality. Their net loss in cash in over the two years 2013-2014 was not due to operating losses (they had increases in cash from operations of $4.7 million and $1.0 million in 2013 and 2014, respectively), but rather due to cash used up elsewhere including purchasing new fixed assets ($7.5 million and $4.9 million in 2013 and 2014, respectively). That is, it was persistent growth, not operations alone, that was eating into their cash balances.


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