How to Survive the NDIS Cash Crunch
11 April 2018 at 3:55 pm
To succeed and thrive under the National Disability Insurance Scheme a fundamental rethink in the way CFOs do business is required, writes wealth advisory director Scott Girdlestone.
What’s the problem?
Since the introduction of the NDIS in July 2016, we’ve seen disability service providers struggle to survive with the pressures of uncertain cash flow and a transitional business model, from block funding for standardised services to participant-led care.
To succeed and thrive under the NDIS, a fundamental rethink in the way CFOs do business is required.
Current conditions compounded by the NDIS pricing model – in particular its price controls, red tape and resulting cash-flow issues – are leaving disability providers out of pocket, with many unable to operate at the same level as before the introduction of the scheme.
Reports suggest that the capped service fees and delay in repayments from NDIS (of up to 18 months), has seen a rationalising and lowering of quality services. Providers have indicated that the increased pressure could result in thin and under supplied markets, particularly in regional and remote areas.
Participant-led care has created a market where providers essentially sell themselves to create awareness, wear the cost of programs, then struggle through cashflow issues until receivables are paid.
The NDIA’s response
The recent response by the NDIA into the Independent Pricing Review (March 2018), attempted to tackle the concerns by providers with their transition from block to participant-led funding.
The outcomes of this report seem promising for providers, with the board accepting all 25 recommendations, many within the next six months.
The new framework includes Temporary Support for Overheads (TSO) to support providers with the transition for a period of 12 months, updating the 2018-19 price guide to allow for more flexibility and allowing time to be claimed for writing reports that are requested by the NDIA.
While the TSO will provide some temporary relief, it’s a band aid fix for an ongoing trauma. The question most CFO’s will be asking after 12 months is, now what?
What’s the solution?
For a CFO operating in the evolving market that is the NDIA, its current state raises serious concerns about their organisation’s competitiveness, as well as how a CFO can manage issues relating to cashflow.
Growing the treasury reserves is key to the organisation’s strategy, to not just survive in the NDIA administered world where delays are common place, but in effect build a platform to ensure programs being run can be relied upon in the future. In other words, the organisation needs to become self-sustainable.
The first step for CFO’s is to look at changing their traditional ways of managing their organisation’s liquidity to maximise their return.
The traditional means of managing reserves has been term deposits. However, the days of 6 to 7 per cent term deposit rates are long gone. The cash rates are low and are very likely to be lower for longer. Currently, the best rate in the market for a three-month term deposit is 2.45 per cent and for a five-year deposit, the best rate is 2.9 per cent. This is the market telling us that interest rate rises may happen but not in a substantial way. As a result, providers are often forced to dip into their capital reserves to continue funding their vital programs.
Quite simply, this is a cash flow crunch for these organisations and they need to re-consider how their treasury funds are managed to improve their income overall. At present, every single dollar helps.
So, what’s the next step?
Here’s three strategies a CFO can implement now to build the organisation’s reserves:
- Review their investment policy for treasury reserves and make it work harder, particularly the income yield.
- Consider the monthly operations of the organisation and the cash flow required, then design a strategy to meet the organisation’s overall requirements, whilst increasing its expected return.
- Clearly operational cash should not be held in anything other than cash. However, if an organisation can be more strategic in their thinking, a portion of funds could be put to work focused on building funding for longer-term projects and indeed, the organisation’s reserves.
As an example, a very conservative portfolio with say 40 per cent in growth assets (shares and listed property) and 60 per cent in defensive assets can still deliver up to 4.5 per cent income per annum to supplement operational cash flow, with the opportunity to build the organisation’s equity through capital growth. Whilst you need to take a longer-term view, in the last 27 years this asset allocation hasn’t had a negative return over any four-year period.
While managing cashflow within a new model is essential, where else can a CFO create value to ensure both sustainability and capability of their quality services for participants?
Strategising for the future
From a strategic perspective, it’s important to access information into market signals and the nature of demand, so CFO’s can better equip themselves by understanding their market position.
Accessible statements contain critical information about the emerging NDIS marketplace, giving providers a better understanding of expected growth areas and characteristics of geographical markets around Australia.
At an internal level, it means addressing core competencies, identifying unique specialisations and where possible strategic alliances to increase efficiency. This is as well as making changes to service design, workforce planning and risk management practices.
A CFO must be able to create value by changing the way their organisation operates both financially and strategically, so they can continue to provide these essential services, which ultimately increases the participant’s social and economic involvement.
There’s no doubt this is a challenging time for CFOs, however, building the organisations strategic reserves is critical to achieving self-sustainability and their role in this will prove decisive.
About the author: Scott Girdlestone is a wealth advisory director at William Buck, providing advice on treasury governance for NFPs including funding strategy, asset consulting and portfolio management.