Maintain Financial Sustainability

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Definition

Financial sustainability is the generation of sales revenue to cover all costs and financial obligations associated with Correctional Industry (CI) operations.  The concept of a triple bottom line has emerged in Correctional Industries which focuses not only on the needs of customers, but also the funding of the social mission and value provided by the organization to offenders for successful re-entry.

e.g. The cost of goods sold including variable and fixed overhead, materials, and labor both direct and indirect, general and administrative costs, burden, and other associated expenses for cost centers. Also includes the costs for staff and offender training.
 

This can also depend on net income and funding reserves for capitalization.

e.g. Modernization of existing or replacement of aging or redundant equipment, new factory implementation (startup), building and equipment costs and/or expansion of existing operations.

Financial Sustainability is essential to CI’s mission of providing vocational and soft skills training and certifications for offenders while incarcerated. These certifications and training, in turn, lead to increased opportunities upon release for real life employment for offenders, thereby reducing recidivism.

Rationale/Benefits

Failing to achieve financial self-sufficiency will result in annual financial losses and the depletion of operational funds.

The depletion of funds, depending on the severity, will impact capitalization, equipment purchases and maintenance, and the expansion of projects, thereby, reducing the ability of Correctional Industries to provide state-of-the-art equipment. It will also negatively affect processes for the offender workforce or operational expansion to provide additional offender job and training opportunities.

There may be business units that are not financially self-sufficient but employ numerous offenders or offer valuable work skills.  Correctional Industries can balance the benefits and maintain this business unit with a more lucrative business unit that can offset the financial loss.

If long-term unsustainable conditions occur, a reduction of offender work opportunities, DOC/Correctional Industries staff, and closure of entire operations can result.

Financially self-sufficient Correctional Industries are recognized as a viable reentry/ offender job program that does not burden annual General Fund appropriations. Additionally, Correctional Industries reduces the cost of corrections security and/or programming staff required for the supervision of the offenders. 

Financial sustainability and funding reserves also provide the basis for promoting current operational expansion as well as the ability to explore, consider, and implement new operations, thereby not only maintaining current offender job rates but also creating and expanding offender opportunities within Correctional Industries.

Financial self-sufficiency is the key to sustainability and a key element in cost accounting operations which allows Correctional Industry programs to maintain a competitive edge in the market. Conversely, failing to cover overall costs of operations can generate a calculation of excessive burden or overhead ratios which directly and adversely affects costs and pricing of products and services.

Practices

  1. Develop annual business operating plan to support the strategic plan.
    1. Budgets (Short and Long-Term)

      Forecasts of sales are generated for the budget period by the sales and marketing plan. Define key market segments, customer groups, and stakeholder groups and the key requirements and expectations for products, customer support services, and operations.

      Include asset planning in the budget development process. The primary goal of asset planning is to maximize the return on investment in assets which leads to delivery of customer value. SEE FINANCIALS

    2. Expansion Planning

      Correctional Industry programs must always have a focus on the future. Monitoring market trends and identifying opportunities is essential in understanding when investments should be made in particular business units.

    3. Costs

      Determine costs based on sales volume and product mix using Generally Accepted Accounting Principles (GAAP). The following is a list of some common costs that should be included:

      • Cost of sales (raw materials, indirect and direct labor)
      • Administration
      • Rent
      • Depreciation
      • Utilities
      • Communications
      • Fees
      • Freight
      • Building and equipment repairs
    4. Analyze financial statements

      Managers at every level should be able to read and interpret financial results so that trends, threats, and opportunities can be acted upon as quickly as possible. SEE FINANCIALS

    5. Maintain positive cash flow

      Revenue streams are the channels through which money flows into an organization. CI is self-supporting and must rely primarily on sales of products and services. These streams can be direct sales or contracts.

      Maintain sufficient operating funds needed to pay monthly bills and to purchase raw materials and goods to efficiently run its business operations

      One of the biggest factors affecting cash flow is the cash conversion cycle – the period of time beginning with initial outlay of cash for raw materials and ending with payment for good or services provided.

      Determine your value proposition. Learn what customers value most and develop a statement summarizing the goods and services that the organization offers that match customer needs. In Correctional Industries, there are financial benefits to self-sustained operations that provide work opportunities and job training for offenders, thereby impacting the social arena through the reduction of recidivism.

    6. Communicate financial progress and business operating plan to staff

      The three primary types of financial statements useful to manage a financially self-sufficient organization are:

      • Balance Sheets
      • Profit and Loss (P&L) Statements
      • Statements of Cash Flow

      Monthly P&L statements need to be generated and tracked by your fiscal department and distributed to executive, operational, and sales management for analysis and adjustments in operations/sales.

  2. Manage a cost-driven business model within a fund-driven agency.

    Look for new business partners/models to bring in new products. Seek progressive procurement policies and cooperation with General Services Agencies. Be customer-driven, focusing on:

    • Quality
    • On-time Delivery
    • Competitive Pricing

    Maintain cost efficiencies and competitiveness while operating in a corrections environment. Monitor legislation that allows the transfer of funds for budget augmentation because of the adverse effect on CI’s financial self-sustaining status. Review legislative language for possible market expansion. It is important to understand the legislative landscape and revenue streams available in each state to maximize offender training opportunities.

    • PIECP
    • Not for Profit Organizations
    • Sales to State Employees
    • Sales to Contractors Working on Public Contracts
    • Service Operations
  3. Implement Enterprise Resource Planning (ERP) software solutions.
    • Inventory Control
    • Real time order processing
    • Estimated versus Actual costing
    • Accurate and timely financial reporting both monthly and annually
    • Develop annual budgets with sales and capital forecasting

  4. Solicit necessary support from Executive Leadership and Industry Boards.
    • Apprise department leadership of initiatives and challenges
    • Establish open communication and regular meetings with executive staff
    • Train staff to focus on facility safety and security procedures in CI operations. Safety and/or security breaches impact both the facility and CI which can result in harm to staff, offenders and the general public as well as damage CI’s relationship and credibility with the facility. In addition, these breaches can lead to loss of production and an inability to fulfill the requirements of customers. Continual training, reminders, and an overall workplace awareness will assist staff in maintaining this focus.
  5. Obtain compliance verification in conjunction with your Department of Corrections or through external sources
    • Fiscal Audits
    • Performance Audits
    • ACA Audits

Measurements

  • Positive net income and fund reserves
  • Percentage of True Financial Sustainability (requires no General Fund appropriations or Departmental staff augmentation)
  • Expanded operations, increased market offerings, build or open new operations, and maintain overall annual fund sustainability including reserves.
  • Ability to fund CI reentry programs for offenders
  • A diversified customer base
  • Sales of capital fund projects vs. general fund projects
  • Customer Satisfaction Rating through surveys, customer inquiries and unsolicited feedback

Resources

Publications

Bragg, S.M. (2011) Inventory Best Practices (2nd ed.). Hoboken, NJ: John Wiley & Sons, Inc.

Bruner, R. F., Eaker, M. R., Freeman, E. R., Spekman, R. E., Teisberg, E. O., Venkataraman, S. (2003). The Portable MBA (4th Ed.) Hoboken, NJ: John Wiley & Sons, Inc.

Piasecki, D. J., (2003). Inventory Accuracy: People, Processes, & Technology. Kenosha, WI: OPS Publishing.

Womack, J. P., Jones, D. T., Roos, D. (2007). The Machine That Changed the World: The Story of Lean Production. New York: Free Press. 

Websites

www.aicpa.org/
American Institute of Certified Public Accountants, Subject matters: Risk Management and Internal Controls.

www.gao.gov/
Government Accountability Office, Subject matters: An Audit Quality Control System: Essential Elements.

www.iso.org/ 
The International Organization for Standards outlining International Standards for business, government and society. Subject matters: ISO 31000 Risk Management – Principles and Guidelines

www.nist.gov/baldrige/
The Baldrige Performance Excellence Program website, Subject matters: Baldrige Criteria for Performance Excellence

Tools

www.aca.org
ACA Standards

Budgets and Strategic Plans, 1 year and 5 year

Enterprise Resource Planning (ERP) solutions (Global Shop, Epicor, SAP)

Financial statements:  Monthly and Annual. See “Monthly Financial Statement” and “Annual Financial Report” on NCIA website under Reentry Task Force for reference materials. 

Generally Acceptable Accounting Practices (GAAP)

NCIA Regional and National Conferences including:  vendor contact, training sessions and networking with other Correctional Industries professionals.

CI Models with Data to Support Success

California Prison Industries Authority 
http://www.calpia.ca.gov/pdf/Public_Affairs/2014-July/PressRelease-7-1-14.pdf
http://www.calpia.ca.gov/pdf/Public_Affairs/2014-July/Annual%20Plan%202014-15.pdf

Maryland Correctional Enterprises – Managing for Results
http://mce.md.gov/MCE/Portals/0/Containers/MCE/images/page/Business%20Plan%20with%20Cover.pdf

Minnesota MINNCOR Industries Employ Program (OWD)
http://www.employmn.com/about.asp

Pennsylvania Correctional Industries – Statewide Laundry Expansion

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