Financial Literacy for Community Groups

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Guide for Community Board Members.

1

Contents.So you’re a Board member. 3

Broadly speaking . . . 4

A Note on Terms. 5

Financial Reports – what’s what? 6

1. StatementofFinancialPosition(BalanceSheet) 6

2. StatementofFinancialPerformance(IncomeandExpenditureStatements) 10

3. CashFlowStatement 14

Cash Accounting or Accrual Accounting? The Board decides. 16

CashAccounting 16

AccrualAccounting 16

CashorAccrual–thechoice 17

Why is it all necessary? Practical applications in planning. 18

StrategicPlan 18

BusinessPlan 19

MarketingPlan 20

FundraisingPlan 21

Why is it all necessary? Practical applications in budgeting. 22

AnnualBudget 22

ProjectBudget 24

Monitoring your progress using financial reporting. 26

Treasurer’sReport 26

OutcomeReports 28

Troubleshooting. What to look for. 29

FinancialRatios:whatarethey? 29

1. BalanceSheetRatios 29IncometoExpenditure 29AssetstoLiabilities 29DebttoEquity 30

2. AssetManagementRatios:Efficiency 30BeneficiariesSurplustoIncome 30NetSurplusMargin 30FundingStreams 30

3. AssetManagementRatios:Productivity 31Incomeperunitofoutput 31Overheadperunitofoutput 32IncometoAssets 32EmployeeCosts 32

4. AssetManagementRatios:WorkingCapitalCycleratios 33

FinancialRatios:AnalysisandQuestionstoask 33

FinancialRatios:PolicyDecisions 35

Last Word: What the Board has to do. 36

Glossary. 37

Community Solutions for the not-for-profit sector. 39

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ThisGuideisthesecondinaseriesdesignedtohelpbuildthefinancialcapacityofAustralia’s700,000communitygroupsandnot-for-profitorganisations.

Morethan65%ofAustraliansbelongtoatleastonecommunitygroup–theseorganisationsareabsolutelyvitalforthedevelopmentofathrivingandvibrantAustralia.

Togetherwithitscompanionvolume,theGuide for Community Treasurers,thisGuideispartofongoingworkbyOurCommunityandWestpactomakesurethisimportantsectorhasreadyaccesstotheinformationitneedstooperateeffectivelyinourcomplexandchangingfinancialenvironment.

Formoreinformationaboutthepartnershipvisitwww.ourcommunity.com.au/finance

Our Community.OurCommunity,throughitsinnovativewebsitewww.ourcommunity.com.au,extensiveresourcesandinformationservices,ishelpingtobuildthecapacitytostrengthenthecommunitybyprovidingtheresourcesthatenableAustralia’scommunitygroupstogrowstronger–ineveryAustralianstateandterritory.

OurCommunityisaone-stopgatewayforpracticalresources,supportandlinksbetweencommunitynetworksandthegeneralpublic,businessandgovernment.

Over65%ofAustraliansbelongtooneormoreofthe700,000communitygroupsthatexistinthiscountry.TheseorganisationsareabsolutelyvitalforthedevelopmentofathrivingandvibrantAustraliaandOurCommunityassistscommunitygroupstomeetthechallengestheyfacebyinvestingitseffortsinprovidingpracticalproductsandservices.

Theseincludehelpinggroupstofindfunds,members,boardmembersandvolunteers,tooperatemoreeffectivelyandefficientlyandtosourcegood-valuesupplies.

Formoreinformationvisitwww.ourcommunity.com.au

Westpac Social Sector Banking.Westpachasbeenworkingwithcommunityorganisationsofallsizesforyears—andwhetheritbelocalsportsclubs,schoolsornationalagedcarefacilities,we’velearnedthatthedemandsandopportunitiesofthenot-for-profitsectorarebothuniqueanddiverse.

Soweoffermorethanjustbanking.Wearecommittedto:

•understandingyouruniqueday-to-dayfinancialworkingsandrequirements

•designingandinnovatingourproductsandservicestoalignwithyourneeds

•providingspecialistbankers,whoarededicatedtoservicingthenot-for-profitsector

•connectingyouwiththeeducation,training,resourcesandotherareasbeyondjustbankingthatwillhelpstrengthenyourorganisationandachieveyourlong-termvision.

Wewanttoprovideyouwiththemostbeneficialbankingpartnershipforyourorganisation.

Formoreinformationvisitwww.westpac.com.au/business-banking

The Guide for Community series.

3

What makes people become Board members of community organisations? Some have a personal experience with the cause, others have a particular area of expertise which they believe they can employ to achieve a better tomorrow.

So you’re a Board member.Whateverthereason,beingaBoardmemberisaboutmorethanjustoverseeingtheday-to-dayworkoftheorganisationwithwhichyou’reinvolved–it’saboutunderstandinghowtheorganisationworks,andmakingsureeverydollarcominginisworkingit’shardesttohelpyourealiseyourorganisation’smission.

AlthoughallBoardmembersbringsomethingspecialtothetable,notallhavein-depthaccountingskillsorexperiencebeingaTreasurer.Thetaskthereforeoftenfallstoeachindividualtobringtheirunderstandingoffinanceuptoscratch.Thatway,youwillbebetterabletounderstandhowyourorganisationoperates,andmakedecisionswhichwillhelptoenhancetheworkyourgroupdoeseverydayinlocalcommunities.

ThisGuiderecognisestheimportantroleBoardmembersplayinthelivesofcommunitygroupsandtheinfluencetheycanhaveinensuringtheorganisationsurvivesandthrives.ItisdesignedtohelpBoardmembersofcommunityorganisationsofallshapesandsizestotakeontheirrolewithgreaterknowledgeandconfidence–fullyunderstandingthefinancialreportspresentedtothembytheirTreasurer.

“AsBoardmembersweoftengetpresentedwithfinancialupdates,year-endsummariesandstatementsoffinancialposition.Eachisexplainedusingfinancialjargon,andlookingatapageofnumberswithlittlecapacitytounderstandthemeaningbehindthefigurescanresultinthemakingofpoordecisions.

Bylearningabouthowtoreadandunderstandthefactsandfigurespresentedinthesereports,Boardmemberswillbeequippedwithmorecomprehensiveknowledgeonwhichtheycanbasemajordecisions.”

CameronBisley,Boardmember,SouthBurnettEventsCorporationInc.

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Among the things that you’re going to be called on to contribute to are your organisation’s arrangements for fundraising, marketing, and evaluation – all of which, of course, have financial implications.

Broadly speaking . . .UltimatelyasaBoardmemberyou’reresponsibleforthedecision-makinginanorganisation.Youarelegallyaccountablefortheresourcesandactivitiesofanorganisation,andcommunicatingitsvisiontothecommunity.Anypolicythatyoudevisewilldefinetheguidelinesunderwhichtheorganisationwilloperate.

Attherootofallofthisis‘finances’.Howmuchcomesin,howmuchgoesout,whereitgoesandwhatisachievedbyitsexpenditure.Thesefundamentalthingscanmakeorbreakanorganisation,yetoftenthewaytheyarecommunicatedcan,formanyBoardmembers,beovercomplicatedandeasilymisinterpreted.

ThismanualisintendedtowalkyouthroughwhatyouneedtoknowaboutthefinancialsideofbeingaBoardmemberandtoshowyouhowtousetheknowledgeathandtoensuretheorganisationisstayingtruetoitsobjectives.

So, what exactly do you need to know?Youdon’tneedtobeanaccountanttounderstandthefinerpointsofanorganisation’saccounting.Yourjobisnottoproducethesereportsbuttoexamineandassessthismaterialonceitisprovidedtoyou.Youhavetounderstandhowit’sbeenputtogether,youhavetoknowwhatthejargonmeans,andyouhavetoknowtheimplicationsofwhat’sinfrontofyou.

Withasmallamountofknowledgeofthebasicelementsofaccounting,youwillbearmedwithenoughinformationtohelpyoufeelconfidenttoweedyourwaythroughthefinancialdocumentswhichformpartofyourresponsibilities.

Hence,thisGuide.

Remember,asamemberoftheorganisation,theremaybetimeswhenyouarethemost‘financiallyliterate’personatameeting,sohavingsomeknowledgeoftheapplicableaccountingproceduresandterminologywillcomeinveryhandy.

Publicationssuchasthisoneonfinancialmanagementfornot-for-profitBoardsdosometimestendtogivetheimpressionthatfinancialmanagementiswhatbeingaBoardmemberisallabout.Itisn’t,ofcourse.You’revolunteeringyourtimetothiscausebecausethereareoutcomesyouwishtoachieveandchangesyouwanttosee.It’syourworkonthesepositiveelementsthatisgoingtogiveyouinnersatisfaction,andit’syourworkonachievingthemissionthatmakesyouaworthwhileassettotheorganisation.

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A Note on Terms.The not-for-profit sector operates in all Australian states and has to cope with several different legal formats. So, there are a number of terms used for things that essentially mean much the same thing. To make life easier, in this Guide we’ve used one set of names.

Whenwesay ‘Board’ wemean ‘Board’or

‘Council’or

‘CommitteeofManagement’

Whenwesay ‘Board member’ wemean ‘Boardmember’or

‘Committeemember’or

‘Trustee’or

‘Director’

Whenwesay ‘not-for-profit sector’

or ‘social sector’

wemean ‘not-for-profitsector’or

‘non-profitsector’or

‘communitysector’or

‘thirdsector’or

‘voluntarysector’

Whenwesay ‘not-for-profit organisation’ wemean ‘IncorporatedAssociation’or

‘CompanyLimitedbyGuarantee’or

‘Cooperative’

Whenwesay ‘Chief Executive Officer (CEO)’

wemean ‘CEO’or

‘Director’or

‘Manager’or

‘ExecutiveOfficer’

Whenwesay ‘clients’ wemean ‘clients’or

‘customers’or

‘users’or

‘consumers’or

‘members’

We’vetriedtoexplaineachtermthroughout.Howeverthere’salsoahandyglossaryattheendofthisGuideifyouneedmoretechnicalexplanations.

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Financial Reports – what’s what?The easiest way to bring you up to speed with the accounting practices you will need for your not-for-profit organisation, is to introduce you to the financial reports you are likely to receive throughout the year. Rather than throw you in at the deep end to watch figures swim around a page, we’ve provided a simple list of the reports to look out for.

LaterintheGuide,we’lldiscusswhythesereportsareimportantandhowtheycanbeusedtohelpyoumakedecisions.

Allyouropinionsonyourorganisation’sfinancesshouldbebasedonthreecorereportsthatbetweenthemcontainmostoftheactualinformationyouneedtokeeptrackofyourmoney.Theyare:

1. StatementofFinancialPosition(BalanceSheet)

2. StatementofFinancialPerformance(IncomeandExpenditureStatements)

3. CashFlowStatements.

Defining Financial Reports Financialreportscomeinmanyformats–anytimeyoutellanyonehowthingsaregoingmoney-wisethat’saFinancialReport.Reportscanbemadetothepublic,tomembers,togovernments,ortograntmakers,andallofthesethingsmayrequiredifferentformats,withdifferentpointshighlighted.

1. Statement of Financial Position (Balance Sheet)TheStatement of Financial Position(thisusedtobecalledtheBalance Sheet)givesyouasnapshotofthefinancialpositionofyourorganisationataspecificpointintime–generallytheendofthefinancialyear.

Itlistsyourorganisation’sAssets(whatyouown)andyourLiabilities(whatyouowe)andtheoutcomeofboth(whichinaccountingtermsisknownasNet Assets).

TheStatementofFinancialPositioncanbesimplydefinedusingthefollowingequation:

Assets–Liabilities=NetAssets

Evenmoresimply,itcanbedefinedasfollows:

Whatyouown–Whatyouowe=Whatyouhaveleftover

INSIGHTA Statement of Financial Position does more than act as a stocktake on your assets and liabilities, it can also provide you with picture of how the organisation is performing by identifying potential problems that could disrupt the effective operation of the organisation.

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How to read a Statement of Financial Position

ASSETS Everything that the organisation owns – including such items as cash, inventory, prepaid expenses and vehicles.

CURRENTASSETS Whattheorganisationownsthatisexpectedtobeturnedintocashwithinaperiodofoneyear.

CashatBank Cashheldinbankaccounts.

FundsonHand Cashheldinpettycashandnon-banksources.

Debtors(orAccountsReceivable)

Invoicesissuedforamountsowingtoyourorganisation.

Stock(orInventory) Goodsheldbyyourorganisation,awaitingsale.

Prepaidexpenses Itemsthattheorganisationhaspaidfor,buthasnotyetgainedthefulluseof(althoughtheywilldosowithinthenext12months).Includesitemssuchasrentandinsurance.

TOTALCURRENTASSETS Thetotalvalueofalloftheaboveitems(eg:CashatBank+FundsonHand+Debtors+Stock+PrepaidExpenses).

FIXEDASSETS(orNon-CurrentAssets)

Whattheorganisationownsthatisnotacurrentasset.

InvestmentFunds Allinvestmentsheldwithamaturitygreaterthanoneyear(generallytermdeposits).

Land&Buildings Alllandandbuildingsthatareownedintheorganisation’sname.

OfficeEquipment Allofficeequipment,suchasfurnitureandcomputers(thevalueshownistheoriginalpurchasecost).

Depreciation Allnon-currentassetsdeclineinusefulnessastheyage.Depreciationisanon-cashitemthatsystematicallyspreadsthecostofeachasset(exceptland)overitsusefullife.

TOTALFIXEDASSETS Thetotalvalueofalloftheabovefixedassets.

TOTAL ASSETS The total of all CURRENT and FIXED ASSETS.

LIABILITIES Everything that the organisation owes – including loans and creditor invoices.

CURRENTLIABILITIES Whattheorganisationowesthatisexpectedtobepaidbackwithinaperiodofoneyear.

Short-TermDebt Theamountsowingonoverdraftsandcreditcardsheldinthenameoftheorganisation.

CurrentportionofLong-TermDebt

Theamountowingwithinthenext12monthsonanylong-termloansheldintheorganisation’sname.

Creditors(AccountsPayable) Amountsowedthattheorganisationhasbeeninvoicedfor,buthasyettopay.

Accruals Itemsthattheorganisationhasgainedthefulluseof,buthasnotyetpaidfor(althoughtheywillneedtodosowithinthenext12months).Includesitemssuchassalaries,leaveloadingandtaxes(whereapplicable).

TOTALCURRENTLIABILITIES Thetotalvalueofalloftheaboveitems(eg:short-termdebt+currentportionoflong-termdebt+creditors+accruals).

FIXEDLIABILITIES(orNon-CurrentLiabilities)

Whattheorganisationowesthatisnotacurrentliability.

Long-TermDebt Totalofallloansowedbytheorganisationwithamaturityofgreaterthanoneyear.

TOTALFIXEDLIABILITIES Thetotalvalueofalloftheaboveitems.

NET ASSETS The difference obtained by subtracting TOTAL LIABILITIES from TOTAL ASSETS.

GENERAL FUNDS This is the ending balance from last year’s Statement of Financial Position.

RETAINED SURPLUS/DEFICIT This is the amount of surplus/deficit generated and retained by the organisation this year.

NEW BALANCE This is the new balance (achieved by adding the amount of GENERAL FUNDS to the RETAINED SURPLUS).

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Example

BelowistheStatementofFinancialPositionforamid-sizednot-for-profit–let’scallittheWalshStreetCentre.Theorganisationhasbuiltupafundovertheyearstobuyapropertytoworkin.Thisyearithastakenmostofthemoneyoutofthebank,borrowedanother$220,000,andmadethepurchase.Here’swhattheBalanceSheetwouldtellus.

The Walsh Street Centre Statement of Financial PositionThis Year Last Year

ASSETS

Current Assets

Cashatbank 37,081 25,672

Debtors 8,279 9,655

Fundsonhand 7,262 6,041

Total Current Assets 52,622 41,368

Fixed Assets

Investmentfunds(Termdeposits) 75,000 365,000

Land&Buildings 510,000 0

Office equipment (at cost) 32,095 27,637

Less provision for depreciation 21,991 17,688

Equipment–Written-downvalue 10,104 10,104 9,949 9,949

Total Fixed Assets 595,104 374,949

TOTALASSETS 647,726 416,317

LIABILITIES

Current Liabilities

Creditors 18,253 24,931

Total Current Liabilities 18,253 24,931

Long-Term Liabilities

ProvisionforLongServiceLeave 61,041 54,363

Long-TermDebt 220,000 0

Total Long-Term Liabilities 281,041 54,363

TOTALLIABILITIES 299,294 79,294

NET ASSETS 348,432 337,023

GENERALFUNDS

Balance1stJuly 337,023 327,200

Surplusforyear 11,409 9,823

Balance30thJune 348,432 337,023

TotalAssets–TotalLiabilities=Balance

Note:BalanceisalsoknownasNet AssetsorEquity.

INSIGHTMost financial records for not-for-profit organisations are now done on spreadsheets, which is an immense saving of time and effort. Available software ranges from the free, like OpenOffice, to the standard, like Microsoft Excel, to theprofessional, like MYOB (which has special modules for not-for-profits).

AskyourTreasurertoissuetheaccountstotheBoardbothinhardcopyandasaspreadsheet,sothattheBoardmemberscan,iftheywantto,checkoutthecalculationsthatunderliethefigures.

TipFinancial Reports – what’s what?(continued)

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Analysing the Statement of Financial Position ThekeytogettingthemostoutoftheStatementofFinancialPositionisinmonitoringtheperformanceofparticularelementsovertime.Thebestwaytodothisisthroughratioanalysis.Aratioissimplytherelationshipofonenumberincomparisontoanother.Forexample,aratioof2:1canbederivedfromeither20:10or2000:1000.Thesizeofthenumbersdoesn’tmatter–buttherelationshipbetweenthosetwonumbersdo.

Intheory,youcanmeasureanyrelationshipyouchooseontheStatementofFinancialPosition.However,thetrickistoidentifytherelationshipsthatmakeadifferencetowhatyoudowithintheorganisation.FortheStatementofFinancialPosition,therearethreekeyrelationshipsthatmatter–thesearedescribedinthetablebelow.

Ratio How to calculate What it means in dollars and cents

CurrentCurrentAssets

CurrentLiabilities

Measuressolvency:ThenumberofdollarsinCurrentAssetsforevery$1inCurrentLiabilities.

Forexample:aCurrentratioof1.76meansthatforevery$1ofCurrentLiabilities,theorganisationhas$1.76inCurrentAssetswithwhichtopaythem.

QuickCash+AccountsReceivable

CurrentLiabilities

Measuresliquidity:ThenumberofdollarsinCashandAccountsReceivableforeach$1inCurrentLiabilities.

Forexample:aQuickratioof1.14meansthatforevery$1ofCurrentLiabilities,theorganisationhas$1.14inCashandAccountsReceivablewithwhichtopaythem.

Debt-to-WorthTotalLiabilities

Equity

Measuresfinancialrisk:ThenumberofdollarsofDebtowedforevery$1inNetWorth.

Forexample:aDebt-to-Worthratioof1.05meansthatforevery$1ofEquityintheorganisation,itowes$1.05ofDebttoitscreditors.

Amorein-depthdiscussionofratiosisincludedlaterinthisGuide.

Itwillhelpifyoureadthethreeratiosinthetableusingthephrase:

“Foreverydollarofwhat’sonthebottom,thereisxofwhat’sonthetop”.

Forexample,let’ssaythatyoucalculateaCurrentRatioof0.99.Usingtheabovephrase,thisreadsas:

“ForeverydollarofCurrentLiabilities(what’sonthebottom),thereare99centsofCurrentAssets(what’sonthetop)”.

Tip

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2. Statement of Financial Performance (Income and Expenditure Statement)

An Income and Expenditure Statementrecordsmoneycominginandgoingoutandthefinaldifferencebetweenthetwo–theSurplus,ifyou’reahead,ortheDeficit,ifyou’rebehind.

IncomeandExpenditureareusuallygroupedeitherbytheirnature(Stationery,Travel,Gas,LightandPower),projectorsection(MorelandClinic,BondiClinic–seenextsection),orallthree,dependingonwhatcomparisonsyou’regoingtowanttomake.

INSIGHT

Once you’ve got these figures down you can calculate how they compare with your benchmarks and whether they suggest the need for any action.

How to read a Statement of Financial Performance

INCOME Allsourcesofincomethattheorganisationgeneratedoverthepast12months.Examplesinclude:

●● Grants●● Sponsorships●● MembershipFees●● Donations●● Revenuefromevents●● Saleofgoodsandservices●● Interestearnedfrominvestments●● Othersundrysources.

EXPENDITURE Allcostsincurredbytheorganisationoverthepast12months.Examplesinclude:

●● Salaries●● Superannuation●● Insurance(WorkCoverandother)●● Equipment●● Utilities(electricity,telephones,etc)●● Fundraisingcosts●● Depreciation.

SURPLUS/DEFICIT Thetotalfundsleftoverattheendoftheyear(calculatedbysubtractingEXPENDITUREfromINCOME).

Financial Reports – what’s what?(continued)

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Example – Income and Expenditure grouped by natureHerewevisittheWalshStreetCentreagain,withanexampleoftheirStatementofFinancialPerformanceforthelasttwoyearswithIncomeandExpendituregroupedbynature.

The Walsh Street Centre Statement of Financial Performance by natureINCOME This Year Last YearGrants–FederalGovt 56,000 32,000Grants–StateGovt 48,000 0Grants–LocalGovt 42,000 36,000Grants–Philanthropic 37,400 55,150Sponsorship,etc 24,000 14,900Membership 7,900 3,726Donations 52,790 92,897Events 18,128 13,678Salesofgoods&services 82,520 28,072Interest 8,256 7,768Sundries 11,216 2,518

TOTAL INCOME 388,210 286,709

EXPENDITURE FOR YEARSalaries 220,480 162,650Superannuation 19,844 14,278WorkCover 1,815 1,020DepreciationonOfficeEquipment 5,250 4,422MissionEquipment 17,294 8,402Telecommunications 6,716 5,188FundraisingCosts 17,400 11,534Rent 32,576 30,160Cleaning 1,400 1,038ComputerConsumables 6,600 5,170Conferences 2,174 1,454Gas,Light&Power 5,564 3,948Insurance 5,588 4,042Travel 13,976 9,668StaffAmenities 260 358Printing 6,468 5,078Photocopying/Stationery 3,248 2,018Security 800 602RepairsandMaintenance 2,938 3,886DuesandSubscriptions 1,260 504PostageandFreight 1,934 1,036Sundries 3,216 430

TOTAL EXPENDITURE 376,801 276,886

Surplus/Deficit 11,409 9,823

Note on Depreciation

Inthistable,theStatement of Financial Performancedoesn’tincludethepaymentof$540,000forthenewproperty,anddoesn’tincludethefullcostoftheequipmenttheCentrebrought,either–justtheamountit’sdepreciatedby.

Thiscanbequiteconfusingifyouaren’tfamiliarwith‘Depreciation’,becauseitrecordsmoneygoingoutwhennomoneywasinfactspent.Depreciationrepresentsthesmallamountputawayeachyear(inanimaginaryfund)tobuyreplacementequipment,that’swhyit’sseenasarunningcost.

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Financial Reports – what’s what?(continued)

Analysing the Statement of Financial Performance ThekeytogettingthemostoutoftheStatementofFinancialPerformanceisinmonitoringtheperformanceofparticularelementsovertime.AswiththeStatementofFinancialPosition,ratiosareaneffectivemethodofidentifyingefficiencywithintheorganisation.

Income Statement Ratios

Employee Costs to Income

EmployeeCosts

Income

MeasurestheefficiencyofemployeesoftheorganisationatproducingIncome:ThenumberofdollarsspentonEmployeeCostsforevery$1ofIncome.

Forexample:anEmployeeCoststoIncomeratioof50.0%meansthatforevery$1ofIncome,theorganisationspends50centsonEmployeeCosts.

Net Surplus MarginSurplus

Income

MeasureshowefficientanorganisationisatconvertingIncomegeneratedintoauseableSurplus:ThenumberofdollarsofNetSurplusproducedforevery$1ofIncomeEarned.

Forexample:aNetSurplusMarginratioof2.9%meansthatforevery$1ofIncome,theorganisationproduces2.9centsofNetSurplus.

Amorein-depthdiscussionofratiosisincludedlaterinthisGuide.

Again,itwillhelptoreadthethreeratiosinthetableusingthephrase:

“Foreverydollarofwhat’sonthebottom,thereisxofwhat’sonthetop”.

Forexample,let’ssaythatyoucalculateaCurrentRatioof0.99.Usingtheabovephrase,thisreadsas:

“ForeverydollarofCurrentLiabilities(what’sonthebottom),thereare99centsofCurrentAssets(what’sonthetop)”.

Tip

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Example – Income and Expenditure grouped by projectBelowweshowtheWalshStreetCentreagain,buttheStatementofPerformancethistimehastheIncomeandExpenditurebrokendownbyproject.

Walsh Street Centre Statement of Performance by project

Project 1 Project 2Walsh St

Centre TotalIncomeGrants–FedGovt $52,000 $4,000 56,000Grants–StateGovt $48,000 48,000Grants–LocalGovt $19,000 $21,000 $2,000 42,000Grants–Philanthropic $12,000 $7,400 $18,000 37,400Sponsorship,etc $6,000 $18,000 24,000Memberships $7,900 7,900Donations $12,000 $40,790 52,790Events $4,072 $14,056 18,128Salesofgoods&services $49,544 $26,680 $6,296 82,520BankInterest $8,256 8,256Sundries $3,678 $3,551 $3,987 11,216

Total Income $154,222 $110,703 $123,285 388,210

ExpenditureSalaries $121,000 $54,480 $45,000 220,480Superannuation $10,891 $4,903 $4,050 19,844WorkCover $996 $448 $371 1,815DepreciationonOfficeEquipment

$900

$650

$3,700

5,250

MissionEquipment $4,105 $5,189 $8,000 17,294Telecommunications $1,820 $696 $4,200 6,716FundraisingCosts $4,166 $13,234 17,400Rent $11,000 $21,576 32,576Cleaning $350 $1,050 1,400ComputerConsumables $1,890 $2,100 $2,610 6,600Conferences $200 $180 $1,794 2,174Gas,LightandPower $1,252 $800 $3,512 5,564Insurance $1,800 $900 $2,888 5,588TravelandTransportation $3,880 $2,507 $7,589 13,976StaffAmenities $21 $183 $56 260Printing $860 $880 $4,728 6,468Photocopying/Stationery $289 $238 $2,721 3,248Security $236 $65 $499 800RepairsandMaintenance $1,211 $58 $1,669 2,938DuesandSubscriptions $124 $238 $898 1,260PostageandFreight $460 $50 $1,424 1,934Sundries $878 $550 $1,788 3,216

Total Expenditure $168,329 $75,115 $133,357 376,801

TotalSurplus/Deficit ($14,107) $35,588 ($10,072) 11,409

It’seasyforaprojecttomakeanaccountingprofitifitdoesn’thavetopayforallthebackofficeoverheads,soincludetheirfairshareofthecentraladministrativecostsintheprojectcosts–eitherprorataor,ifyoucanmanageit,byactualcosts.

Tip

INSIGHTShowing the projects separately this way enables you as a Board member to see that while you’re in overall surplus one of your projects is losing money. This doesn’t mean you should close it down – you’re a not-for-profit, and cross-subsidy is quite within your possible goals – but it’s something you should be aware of.

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3. Cash Flow StatementWhileBalanceSheetsandIncomeandExpenditureStatementsarecompulsoryfeaturesofallfinancialreports,notallorganisationsaddtheextraflourishofprovidingaCash Flow Statement.

CashFlowStatementsreportonthecashpaymentsoutandcashreceiptsin,overthesameperiodastheotherstatements.Traditionallythestatementisdividedintomoneyinandoutinthreecategories–Operating,InvestingandFinancing.

TheCashFlowStatementshowstheopeningbalanceincashandcashequivalentsforthereportingperiod,thenetcashprovidedbyorusedineachoneofthecategories(operating,investing,andfinancingactivities),thenetincreaseordecreaseincashandcashequivalentsfortheperiod,andtheendingbalance.

INSIGHTWe split it up this way because when you’re analysing such a statement it’s important to consider each of the various sections which contribute to the overall change in cash position. In many cases, an organisation may have negative overall cash flow in a given year, but if it’s generating positive cash flow from its operations then the negative overall cash flow may be a result of heavy investment expenditures, which is not necessarily a bad thing.

Financial Reports – what’s what?(continued)

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Example – Statement of Cash FlowThis Year Last Year

Inflow/ Outflow

Inflow/ Outflow

CASH FLOW FROM OPERATING ACTIVITIES

ReceiptsfromMembers,Grants,Donations,Sales,etc 379,954 269,118

Interestreceived 8,256 7,768

Paymentstosuppliers&employees (371,551) (272,464)

Net Cash provided by Operating Activities 16,659 4,422

CASH FLOW FROM INVESTING ACTIVITIES

Debtors (1,376) (3,267)

7,262

Fundsinhand 8,041

Creditors 213,322 6,971

Purchaseofproperty (510,000)

PurchaseofOfficeEquipment (4,458) (2,344)

Net Cash Used by Investing Activities (295,250) 9,401

CASH FLOW FROM FINANCING ACTIVITIES

TermDeposit 290,000 (4,000)

Net Cash Used by Financing Activities 290,000 (4,000)

NetincreaseinCashHeld 11,409 9,823

CashatthebeginningoftheFinancialYear 25,672 15,849

CashattheendoftheFinancialYear 37,081 25,672

Note:CashforpurposesoftheCashFlowStatementnormallyincludescashandcashequivalents(short-term,temporaryinvestmentsthatcanbereadilyconvertedintocash,suchasmarketablesecurities,short-termcertificatesofdeposit,treasurybills,andcommercialpaper).

Cash flows from Operating activitiescaninclude:

• Cashreceiptsfromsalesorfortheperformanceofservices

• Payrollandotherpaymentstoemployees

• Paymentstosuppliersandcontractors

• Rentpayments

• Paymentsforutilities

• Taxpayments.

Cash flows from Investing activitiesincludecapitalexpenditures–spendingthatisn’tchargedtoexpensebutratheriscapitalisedasassetsonthebalancesheet.Investingactivitiesalsoincludeinvestmentsthatarenotpartofyournormallineofbusiness.Thesecashflowscouldinclude:

• Purchasesofproperty,plantandequipment

• Proceedsfromthesaleofproperty,plantandequipment

• Purchasesofstockorothersecurities(otherthanthekindofpaperthat’snearlythesameascash–seebelow)

• Proceedsfromthesaleorredemptionofinvestments.

Cash flows from Financing activitiesincludecashflowsrelatingtothebusiness’debtorequityfinancingsuchas:

• Proceedsfromloans,notes,andotherdebtinstruments

• Installmentpaymentsonloansorotherrepaymentofdebts

• Dividendpayments,purchasesoftreasurystock,orreturnsofcapital.

16

Now you are familiar with some of the documents you will be regularly faced with as a Board member, it doesn’t seem so bad does it?Don’t exhale just yet though. There’s still a very important concept that you need to understand before you are on your way to being a fully financially equipped Board guru.

Therearetwodifferentkindsofaccountingforincomeandexpenditure–Cash AccountingandAccrual Accounting–anditisuptotheBoardtodecidewhichoneitwantstouse.

So,it’simportanttounderstandtheprosandconsofeachkind,andwhateachkindcanandcannotdo.

Cash Accounting CashAccountingrecognisesincomewhenitisactuallyreceivedandexpenseswhenthebillispaid.Thestrengthofthismethodisinalwaysknowingyourcashposition,howeveritdoesnottellyouhowprofitableyouare.

Thisisthesimplestformatofaccounting,andmostsmallorganisationsuseit.Itworksonthebasisoftrackingtheactualdollarsinanddollarsoutasiftheywereactualcrumplednotes.

Thechoicewouldbesimpleifyourorganisationreceivedallitsincomefromno-stringsdonations(or,asaccountantsrefertothem,‘non-reciprocaltransfers’).However,ifyourgroupgetsanysignificantproportionofitsincomeaspaymentforservices–ifyougetgrantsforparticularprojects,orifyoucontractwiththegovernmenttodeliverclientservices–thensimplecashaccountingmaynotbetherightchoice.

Accrual Accounting AccrualAccountingmatchestheincomeearnedagainsttheexpensesincurredtoearntheincome.Incomeisrecordedasitisearned(i.e.whentheinvoiceisissuedratherthanwhenthemoneyisactuallycreditedintoyourbankaccount)andexpensesastheyareincurredgivingyouanaccuratepictureofprofitability.

AlthoughsmallorganisationscangetbywithCashAccounting,mostlargeorganisationsthatdeliverservicesinreturnforpayment(byclients,governments,orgrantmakers)useAccrualAccounting.It’smorecomplicated,andrequiresmorefinancialexpertise,anditmayrequiremoreresourcesforyourfinancesection.

AlthoughsmallorganisationscangetbywithCashAccounting,mostlargeorganisationsthatdeliverservicesinreturnforpayment(byclients,governments,orgrantmakers)useAccrualAccounting.It’smorecomplicated,andrequiresmorefinancialexpertise,anditmayrequiremoreresourcesforyourfinancesection.

In a nutshell

Method Income is recorded when . . .

Expenses are recorded when . . . Measures

Accrual Earned Incurred Profit

Cash Received Paid Cash

Thesimplescenarioonthenextpageisrepresentedusingbothformsofaccounting.Itmayhelptoclarifythedifferenceinapracticalway.

Cash Accounting or Accrual Accounting? The Board decides.

17

ExampleThegovernmentcontractswithyoutodeliverpsychologicalservicestohomelesspeoplefor$100,000;tobeprecise,theyrequireyoutohire1.5psychologistsfor12monthsandhireclinicpremises.

Scenario using Cash AccountingAccordingtothebudgetyousubmittedforthetender,thisprojectisgoingtocostyou$92,000.Simplecashaccountingwilldrop$100,000intotheIncomecolumnassoonasyougetthecheque.It’snotaloan,soyoudon’thavetomakeanentryintotheLiabilitiescolumn.

TheriskisthattheBoard,lookingattheaccountsandseeingthemboostedby$100,000withoutanyoffsettingdebits,couldassumethatthe$100,000isadditionalfundswhichtheycouldthenauthoriseexpenditureonanynumberofthingswithoutrememberingthatwithinthenextyearthey’regoingtohavetofind$92,000forextrasalariesandrent.

YouwouldassumethattheTreasurerwouldpointoutthetruecircumstances,butifyoucan’tseesomethingintheaccountsit’salwayspossiblethatit’llgetoverlooked.

Scenario using Accrual AccountingYouputthat$100,000intheaccountswhenyouprovidetheservicesyou’rechargingfor,notwhenyouactuallygetthecheque.Youdebittheaccountsonthedateyouwritecheques–thedayyouactuallypromisetopayallthesepeople–nottheoftenmuch-laterdateafterpeoplehavegottheirmail,gotyourchequesdowntotheirbank,waitedfivebusinessdays,andactuallyseenthemoneydropoutofyouraccountintotheirs.

Cash or Accrual – the choiceBothmodels–cashandaccrual–havetheiradvantagesanddisadvantages,andwhichyouchooseisgoingtodependonyoursize,yourorganisationalmodel,andyouravailableresources.

Cash Accounting Accrual Accounting

Advantages ●● It’smoreintuitiveandeasierfornon-accountantstouseandunderstand.

●● Itprovidesareasonableviewoftheorganisation’sliquidity,formostofthetime.

Advantages Itgivesamoreaccuratepictureoftheorganisation’soverallfinancialperformanceandfinancialposition.

Disadvantages ●● Itdoesn’tcaptureobligationsthatareduebutnotpaid–coststhatwillhavetobeincurredlater,orincomethat’sbeenearnedbutnotpaidover.

●● Itdoesn’tgiveacompletepictureofwhat’sactuallyoccurred,onlyonwhatmoneyhaspassedfromhandtohand.

Disadvantages Itrequiresasophisticatedunderstandingofaccountingandbookkeepingprinciples.

Important Note:

It’spossibletohaveanaccountingsystemthatincorporateselementsofbothmodels,butthatbecomesquitecomplicated.

Whichmodelyousettleonisn’tinitselfsoveryimportant;whatisabsolutelyvital,however,isthattheBoardknowswhichoneisbeingusedandthereasonsforchoosingthatapproach,andunderstandshowtoreadthefinancialreportsproducedunderthatmodel.

18

One of the main duties of the Board is planning. Without planning you have no idea of where the organisation should go, where it is going and what it’s going to do when it gets there (or doesn’t get there). The financial reports we have shown you so far form the basis of all the important decisions that are made for the future of an organisation.

Theymoreorlessprovidedocumentedevidenceshowingwhetherornotyourorganisation’seffortsareleadingyoutowardstheimportantgoalsyouhaveplannedtoachieve–offeringasolidgroundingfromwhichplanscanbeadjusted,directionsaltered,andnewgoalsformulated.Inshorttheyarevitalforensuringtheoptimumuseoftheresourcesyouhaveavailabletoyou.

Yourorganisationshouldideallydrawup(andreviewregularly)aStrategicPlan,aBusinessPlan,aMarketingPlanandaFundraisingPlanandthenagreeonthewaysyouplantomeasureandevaluateprogress.

ThenextfewpagesofthisGuidewillshowyouwhyplanningissoimportantforyourorganisation.Inunderstandingthis,youwillalsogainaninsightintothepracticalapplicationofthefinancialreportstowhichyouhavejustbeenintroduced.

Strategic PlanThestrategicplanisthefoundationofeverythingyoudo.

Thestrategicplanningprocessisforworkingoutwhereyouwanttogo–thegoalsyoucanreasonablyexpecttoreach,theobjectivesthatwillallowyoutoknowwhenyouhavemetthosegoals,andthebroadstrategiesthatwillallowyoutoachievethoseobjectives.

Itenablesorganisationstothinkthroughanddocumentwhattheyaredoing,forwhomtheyaredoingit,andwhy.Inmatureorganisations,theprocessencouragesexaminationofestablisheddirectionsandstrategiestoensurecontemporaryrelevanceandresults.

Duringtheprocess,difficultquestionsareencouragedanddiscussed:

●● Whatisourmission?●● Doweneedtochangeourmissiontoadjusttochangingcircumstances?●● Hasourtargetcommunityshifteditsfocusorneeds?●● Shouldweabandonmuch-lovedprogramsthathaveoutlivedtheirusefulnessandconcentrateourresourceselsewhere?

●● Isthereenoughcapacityandcommitmentwithinourpresentstaffandmanagementteamtoachieveourgoals?

AsuccessfulstrategicplanningprocesswillinvolvenotonlytheBoard,butalloftheorganisation’sstakeholders–paidandvolunteerstaff,clients,funders,andthecommunity.Itshouldfocusonanorganisation’svisionandprioritiesinresponsetoachangingenvironmentandtoensurethatmembersoftheorganisationareworkingtowardthesamegoals.

Environmental ScanAspartoftheprocess,theBoardwillneedtoconductanenvironmentalscan,reviewingtheorganisation’srelationshiptothebroaderpolitical,socialandeconomicenvironments.Anewcompetitor,achangeofgovernmentpolicy,orashiftindemographicsmayallimpactontheorganisation.

TheBoardthenlooksatthewaytheorganisationisplacedtomeetthechallengesdescribedintheenvironmentalscananddecideswhatitneedstodotorespondtothemajorissuesandopportunitiesitfaces.

Why is it all necessary? Practical applications in planning.

19

Mission StatementFirst,theorganisationmustidentifyorreviewthereasonsitexists.Thisisdocumentedintheorganisation’sMissionStatement,whichcontainsthebasicguidingprinciplesthatprovidedirectionandinspirationtotheBoardanditsstaff.

TheMissionStatementisasuccinctdescriptionoftheorganisation’sbasicpurpose,alongwiththeactivitiesorbusinessitundertakestoachieveitspurpose,andthebasicvaluesthattheorganisationholdsincommonandendeavourstoputintopractice.

SMARTER Goal SettingTheBoardmustthenchoosespecificpriorities–settinggoals(or‘objectives’or‘outcomestatements’)basedontheMissionStatementinthelightoftheenvironmentalscan.

Goalsorobjectivesshouldbedesignedandwordedasmuchaspossibletobespecificandmeasurable,acceptabletothoseworkingtoachievethegoals,realistic,timely,extendingthecapabilitiesandrewardingforthoseworkingtoachievethegoals(anacronymforthesecriteriais‘SMARTER’).

INSIGHTFinancial Reports such as a budget and the Statement of Performance by project are very helpful to determine which projects are underperforming and which are not. This would assist in making decisions about which projects should continue and which should perhaps not. Of course, because of the not-for-profit foundations of your organisation, not all underperforming projects should be ended, however these reports will draw your attention to any problems which are on the horizon, and help you determine strategies to work through them.

Business PlanAbusinessplan,ontheotherhand,isaboutbusinessand,ofcourse,money.Itisfundamentallyascalemodelofyourorganisation.

Yourbusinessplanshouldincludethefollowingelements.

Mission statement/goals/objectives–Alltheelementsthataren’taboutmoneyarecarriedoverfromyourstrategicplan.

The situation report–It’sherethatyoufeedintheresultsofyoursurveys,yourSWOT(strengths,weaknesses,opportunities,threats)analysis,yourjudgementsofthetrends,yourevaluationofthecompetition,andyourseat-of-the-pantsanalysis–thebestinformationyouhave.Factsarebetterthanestimates,andestimatesarebetterthanguesses,butevenguessesarebetterthannotputtinganythingdown.Guessesprovideastarting-pointforlaterrefinement,amarkerforwhatelementsthebudgetisparticularlysensitiveto,andareminderthatdecisionshavetobetakennomatterwhat.

Plans–Eachplanattemptstoexpressinconcretefinancialterms:

●● theoutcomesthathavetobeachievedoverthenextyear/threeyears/fiveyears●● thestepsthatwillbeneededtogetthere●● thescheduleforthesetobedone●● thepeoplewhowillneedtodothem,and●● whattheywillcost.

20

Oneelementoftheplanmightlooklikethis:

Hiring Project Staff Timeline Person Responsible

Positionstatementsprepared August Projectco-ordinator

Positionsadvertised September Projectco-ordinator

Shortlistinterviewed October Projectcommittee

Staffhired October Projectco-ordinator

AndattheendofthedayyouemergewiththeinformationthatyourbudgethastoincludeprovidingforthesalariesofthosenewstafffromOctober.

MostBoardsdelegatetheactualpreparationoftheirbusinessplantothestafforasub-committeeortheTreasurer.It’sacomplicatedbusinessandinvolvestoomanyinterlockingandinterdependentdecisionstobesuitedtoalargegroup.

Onceyou’vebeensentadraftplan,though,it’stheBoard’sjobtoreviewit,interrogateit,andimproveit.HavingagoodBoardisanexcellentwayofuncoveringdefectsandgapsinaplan.

Onceyou’vereachedthepointofdiminishingreturns,whereextraworkontheplanisn’tproducinganymoreimprovements,theBoardhastoapproveit,andfromthenoneverybodyinvolvedknowsroughlywhatthey’reaimingatoverthenextfewyears.

INSIGHTBusiness Plans are where you determine what you want to achieve throughout the year, so they feed directly into the budget. If there’s no money up front for it in the budget, your plans for expansion can not be achieved.

Marketing PlanMarketingisn’tjustaboutmakingasale,orgettingadonation,it’sthewiderangeofactivitiesinvolvedinmakingsurethatyou’recontinuingtomeettheneedsofyourstakeholdersandgettingvalueinreturn.

Yourorganisationshouldhaveamarketingplan,anditshouldcomebeforetheBoardforapproval.Thisplan,alongwithyourbusinessandstrategicplans,andfinancialmanagementplans,willultimatelydetermineyourdegreeofsuccessorfailureinachievingyourmission.

Tomarketyourorganisationsuccessfullyyouneedtoundertakeawiderangeofactivitiestomakesurethatyoucontinuetomeettheneedsofexistingclientsandencouragemorepeopletoparticipateinwhatyouhavetooffer.

Theoverallaimsofyourmarketingplanareto:●● Attractandkeepasteadygroupofloyalsupportersandclients●● Expandyoursupportbasebyidentifyingandattractingnewsupportersandclients●● Assistyoutoreducerisksbyanticipatingandidentifyingchangesthatcouldincreaseordecreaseyourshareofthe‘market’.

INSIGHTSuccessful fundraising has to build on a foundation of good marketing. It’s worth bolstering your marketing skills with a visit to the Marketing, Media & Post Centre at www.ourcommunity.com.au/marketing. Set up by Our Community and Australia Post, this site provides community groups with the resources and tools to develop and spread their message to the wider community, and to build greater public awareness and support.

Why is it all necessary? Practical applications in planning.(continued)

21

Fundraising PlanFundraisingisavitalsourceofincomeforanot-for-profitorganisationandit’stheBoard’sbusinesstokeepthefundraisersunderpressure.It’salsotheBoard’sbusinessnottobeunrealisticallyoptimistic.

It’stheBoard’sbusiness,too,tomakesurethattheorganisation’sfundraisingmodelissustainableoverthelongterm.Thisinvolveslonger-termplanninganddiversificationofyourfundraisingefforts.

Youneedyourgroup’smoneytobecomingfromasmanysourcesasyoucanmanage,raisedbyasmanypeopleasyoucancoordinate.

Agoodfundraisingplanrestsonsixpillars.Theseare:Donations,Grants,Community-BusinessPartnerships,Membership/Alumni/Friends,SpecialEventsandEarnedIncome.

Someonehastoprepareafundraisingplanthatsetsouthowyou’regoingtoapproachalltheseopportunities,andtheBoardhastobesurethat’shappening.

TheBoardandthestaffneedtoformapartnershiptodevelopandimplementafundraisingplantosecuretherequiredfunds.AgoodfundraisingplanisexplicitaboutBoardandstaffresponsibilities.

INSIGHTMany groups get into trouble because they have only two or three sources of funding, or because they have only two or three people really involved in raising money. If any one of the sources or any of the people goes away, the organisation starts to slide into trouble.

What you can do as a Board member SomeBoardsregarditaspartoftheBoardmember’sdutiestomakesignificantdonationsthemselves,justtosetagoodexample,butthat’ssomethingyourBoardwillhavetodecideforitself.ThingsBoardmemberscandoinclude:

• Identifyingpotentialphilanthropicgrantsorcorporatesponsors

• Providinginputintofundraisingplans

• Joiningthefundraisingcommittee

• Cultivatingnewdonationprospects

• Accompanyingstaffonkeyvisitstofunders

• Helpingwithexpressionsofthankswhenappropriate

• Organisingafundraisingevent

• Makingapersonalcontribution

• Layingthegroundworkwithheadsofgovernment,philanthropicfoundations,andcorporationsforfurthersupportfromthesesectors.

22

Budgeting is what makes things happen. If there’s no money set aside up front for a project or a new staff member, then starting the project or employing the staff member is never going to get off the ground. Careful planning and meticulous reporting can make all the difference when it comes to knowing what money is needed where and when.

Therearetwomainbudgetformats,eachasimportantastheother.Theyare:anAnnualBudget,whichcoverstheexpectedcomingsandgoingsforeverycentavailabletoanorganisation,andaProjectBudget,whichmapsouthowallocatedfundswillbespentwithinanindividualproject.Wetalkfurtheraboutbothtypeshere.

Annual BudgetAnAnnualBudgetspeculatesonwhatincomeyouwillhavecominginoverthenextyear,andincludescostestimatesandaStatementofIncomeandExpenditurethatcoversthenextyear(oreventhenexttwo,three,orfiveyears).

Unfortunatelythisinvolvesquitealotofguesswork,butitalsoallowsyoutoputboundariesaroundwhatyouarewillingtospendondifferentareasofthebusiness–inturneliminatingtheguessworkfromdecision-making.

Mostorganisationsdrawuptheirbudgetsbybeginningwithlastyear’sbudgetandincorporating:

●● thechangesthatflowoutofyourbusinessplan(likeextrastafformoreadvertising)●● likelychangesintheenvironment(costinflation,pressureonsponsorships)●● policychanges(raisingorloweringyourcharges,offeringnewservices).

MorerigorousBoardsbeginfromscratchandarguethrougheveryentry.ThebenefitofstartingearlyisthattheBoardmayfindthereareopportunitiestomakeoperationalchanges.Forexample,aBoardmaydecidenottoincludeanentryforGas,LightandPowerjustbecauseitwasinlastyear’sbudgetbutmightinvestigatethepossibilityofself-servicethroughinstallingsolarpanels.

EachyeartheBoardhastoapprovethebudgetforthecomingyear.ThisisanotheroftheBoard’smostfundamentaldutiesandcanfuelsomehealthydiscussion.

Themostimportantthingtorememberwhenyou’relookingatthenumbersinabudgetisthatit’snotaboutthenumbersintheend.PartofthebusinessofbeingaBoardmemberistobeabletolookthroughtheveilofnumbersandseethemissionproceedingunderneath.Isyourorganisationdevelopinginthewayyouwantitto?

Why is it all necessary? Practical applications in budgeting.

DON’TSWEATTHESMALLSTUFF

Itiseasytobedrawntofiguresofthesizeyou’reusedtoinyourdailylife–under$10,000,orperhapsunder$1000.Thiscanleadtoobsessingovercleaningcostsormaintenanceexpenseswheretheamountstobegainedarelittlemorethanroundingerrorsinthebigpicture.BunchthemtogetherintoMiscellaneousExpensesuntilyou’vesettledontheimportantareas.

Tip

23

A good budget . . .• is brought to the Board in good time

ThebudgetforthenextyearshouldbeputinfrontoftheBoardwithplentyoftimetoaskquestions,requestchanges,andweighupalternatives.Realistically,thatmeansthatitshouldbebroughtupnolaterthanthesecond-lastmeetinginanyfinancialyear.

• is clear about its assumptionsAfigureinalist–“Salaries,$154,000”,say–isopaqueandunresponsive.Ifit’stocontributetothediscussionitneedsanaccompanyingnotetosay:

Basedon

–currentstaffcontinuing

–3.2%salaryadjustment

–extrastaffmember@SeniorClinicianIIlevelfromSeptember.

• provides alternativesWheretherearechoicestobemade,theTreasurermayneedtoaddanote(orevenextracolumns)tosetoutwhatthebudgetwouldlooklikeif,say,youhiredaClinicianinsteadofaSeniorClinician,orwaiteduntilJanuarytomaketheappointment.Decisionsneedtobeflagged.

• doesn’t include any nasty surprisesWhenyou’retakingonarecurrentobligation,suchasanextrastaffmember,lookahead.Budgetingrequiresforethought.ManyBoards,however,takethingsayearatatime,lookingnofurtherthanthenextJune30th.ATreasurerhastofightthistendency,spellingtheconsequencesofeverydecisionoutforthenextseveralyearssothattheBoardcanseewhat’sgoingtohappenafterthegrantrunsoutandtheextrastaffmemberisstillonthepayroll,thistimeforthefullyear.Doyourforwardbudgetingtwoorthreeyearsatatime.

• is comfortable with uncertaintyOnceyousetabudget,anythingcouldstillhappen–itmayrainonthedayofthefête,governmentfundingguidelinesmaychange,asuddenrecessionmaymakepeopleunwillingtopay–it’stheoreticallypossiblethatyoumayhavenoincomeatallnextyear.Ifyouspendonlywhatyou’resureof,you’lldonothingatall.Butthatoutcome’snotlikely,andwhatyou’rebeingaskedforisyourbestestimate.

• doesn’t lead to complacencySettingyourgranttargetforthisyearequalto10%lessthanlastyearmaybeconservative,butitdoesn’tmeanthatalltheworkisn’tstilltheretobedone–justassettingitat10%moreisgoingtomeanharderwork,soyouneedtoensurethereisresourcetocopewiththis.

• doesn’t pretend more accuracy than it can deliverDon’tbeafraidtoroundupordown.Ifyouaveragethelastthreeyears’postagecosts,say,andcomeupwithafigureof$1,202.27,don’tjustputthatfigurein–youcan’treasonablyexpecttogetitrighttothecent,orthedollar,oranythingmorethanthenearesthundred.Don’tgivethewrongmessage.Say$1,200.

• is passed in good timeStrictlyspeaking,ifyouhaven’tadoptedthebudgetbyJune30thyoudon’thaveauthoritytospendanythingonJuly1,orthereafter.NotmanyAustraliangroupsarethatpunctilious,butoperatingonspecisnonethelessaverybadplanindeed.

Oncethebudget’sapproved,thestaffortheBoardareauthorisedtospenduptothatlimit,subjecttoanychangesmadefromtimetotimeaseachmonth’sfiguresarereviewedbytheBoard.

24

Project BudgetOntopofhavingabudgetforyouroveralloperations,youwillalsoneedbudgetsthatcananswerquestionsaboutdifferentsectionsofyourorganisation.

Ifyou’recarryingonseveraldifferentprogramsorprojectsyou’llwanttoknowwhethereachofthemismakingmoneyorlosingmoney.There’snothingwrongwithlosingmoneyonanypartofyourmission–that’swhatbeinganot-for-profitmeans–butthere’salotwrongwithnotknowingthatthat’swhatyou’redoing.

It’salsothecasethatyoumayhavetodoprojectbudgeting,particularlyifyou’reaskingsomeoneelsetopayforit.Ifyou’redrawingupagrantapplicationoratenderyou’llneedtobeabletopulloutitscostsandsetthemupseparately.

CostsManyorganisationsrunintotroublebecausetheycountonlydirectcosts–whicharetheresourcesthatareactuallyexpendedontheprojectservices.Whatotherexpensesisyourorganisationgoingtohavetomeettosupportthisproject?Youradministratorisgoingtohavetoorganisepaymentsofmoney,theprojectpeoplewillbetakingupspaceandusingequipment,andyourCEOwillbespendingtimehandlingtheproject.

Ifyou’vegotsparecapacityinalltheseareas,youmaynothaveanyextraexpenses;if,ontheotherhand,youhavetoaddextra,orifyouhavetocutbackonothercurrentactivities,thendocountthemin.

IncomeEstimatingincomemaybesimple–themoneyfromaprojectgrant,forexample,maybeset.Ifyouareestimatingsomethingmorevariable,likesalesorfees,thatwillrequiremorethought.

Don’tforgettocalculatetheGSTimplicationsofallyourincometransactions.

Profit marginIt’simportanttoseewhetheryouaregoingtomakeaprofitontheproject,breakeven,orhavetothrowinsomeofyourownmoney.Doyoucomeoutaheadonceindirectcostsareaddedin?

INSIGHTSome organisations make the mistake of jumping at anything that promises income, without checking that there is a margin to meet on-costs and indirect costs. This can lead to a financial squeeze further down the track.

Why is it all necessary? Practical applications in budgeting.(continued)

25

Tendering for a projectTenderinginvolvesnotonlycalculatinghowmuchtheprojectwillcostbutalsohowmuchyourcompetitorsaregoingtoquote.Yourtendershouldbeeitherslightlylessthanyouthinkyourcompetitorswillbidorslightlymorethantheprojectwillcost,whicheveristhehigher.

Monitoring project costsIt’simportanttomonitorprojectcostsagainstthetimeline,sothatyoudon’tenduphavingspentallthemoneybeforehavingcompletedtheproject.Again,projectmanagementsoftwarecanhelpyoustraightenthesethingsout,butitisn’talwaysnecessary.

Note about Direct CostsHereisalistofthedirectcostswhichwillbeassociatedwithyourproject.

1. Personnel/Staff Wagesandsalaries,benefitsandpayrolltaxes.

2. Supplies/permits/insurancesConsumablesuppliesusedfortheproject,anyspecialpermitsorlicenses,anyspecialinsurancecoveragethatmaybeneededtocoverpreciousgoodsorvenuesbeingusedinwaysthattheirregularinsurancedoesnotcover.

3. TravelAlltravel,mealcostsandvenuehirerelatedtotheprojectshouldbeincluded.

4. Publications (print and online)Printing,publishingorcopyingbrochures,invitations,reports,books,reprints,website.

5. ContingencyYoumaybewisetoincludeanitemforContingency.Thisisusuallycalculatedat5%oftotalbudgettocoverthingsthatoccurunexpectedly,forexampleunavoidablechangeofvenueorreplacementofcancelledspeakersorpoormaterials.Mindyou,funderscanbewaryofamiscellaneouscolumninthebudget.Thissometimessignalsthattheapplicantshaven’tthoroughlythoughtthroughtheiractualbudgetrequirements.

Donotfollowyourcompetitorsdownintomakingaloss.Letthemvolunteertolosemoney.

Tip

26

There’s no point making plans to do things if you don’t pause from time to time to see whether they’re actually happening.

Havingdecidedonwhat’stobedone,theBoardthenhastokeepaneyeonthesituationdownthetrack.TheBoarddoesn’thavetonoteeverytransactionitself–itjusthastomakesurethatsomebody(generallytheTreasurer,butsometimestheCEOorstaff)reportstotheBoardinasmuchdetailasisneeded.

Treasurer’s ReportTheTreasurer’s ReportdrawsontheIncomeandExpenditureStatementtotelltheBoardhowtheorganisationistravellingataparticularpointintime.WegobacktotheWalshStreetClinicwiththeexampleonthenextpage.

Thebasicinformationcomesinthe‘YeartoDate’column;thisishowmuchwe’vespent(ortakenin)sincetheendofthelastfinancialyear.TheYeartoDatefigureiscomparedtoadditionalbenchmarkssuchasBudget(thisisthefigurewe’dexpectedtoseeatthisstage)andPreviousYear(thisiswhatwe’dspentbythistimelastyear).

Ingeneral,anymajordifferencebetweenbudgetandactualfiguresisamarkerforconcern,andtheTreasurer’sreporttotheBoardistheplacetochecktheseout.Forthisreason,youmaywanttodoubleuponthevariancefigures,givingthemasbothnumbersandpercentages(seenotebelow).

Monitoring your progress using financial reporting.

Note:

TheargumentagainstgivingthepercentagesisthatsomeBoardmemberstendtoobsessoverlargepercentages,andwillspendhoursdiscussingwhySecurityhasrisen20%sincelastmonth,from$75to$90,whileoverlookinga6%riseinSalariesfrom$350,000to$371,000–givingmoretimeto$20than$20,000.You’llneedafilterthatflagsdifferenceswhenthey’reoveracertainpercentageandacertainamount.

27

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28

Outcome ReportsAlmostallmeetingagendashaveaTreasurer’sReportinthemsomewheretomakesurethattheBoardiskeptuptodatewiththefinancials.However,notallmeetingagendashaveaslotforsomeonetoreportonhowwelltheorganisationisfulfillingitsmission.

Bydefinition,withanot-for-profitorganisation,themoneyisn’tthemostimportantthingaboutwhatyou’redoing.Somakingsurethatthere’sareporteverymeetingonthedeliverablesinyourstrategicplanisjustasimportant.

Askyourself:Howwellarewedoingwhatwe’reinexistencetodo?

Inordertoanswerthisquestion,you’llneedtoworkoutthemeasuresthatbestencapsulateyourgoals,andyou’llthenhavetocutthembacktothemeasurementsthataremostfeasible,affordable,andinformative.

Unfortunately,whileaccountingmeasuresareprettywellstandardised,outcomemeasuresaredifferentforeverygroup.Therearenosimpletemplatesthatyoucandownload.

Youcaninterpretyourworkinmanyways,atdifferentlevels.Youcancountyouroutcomes–somanypamphletsdistributed,say,orsomanymealsserved,orsomanyteachinghours.Ultimately,though,thatisn’twhatyou’reinterestedin,anddoesn’ttellyouexactlywhatyouneedtoknow.Youwanttoknowwhatyourworkhasachieved–howmanypeoplehavechangedtheirbehaviourbecauseofyourpamphlets,orhowmanypeoplearenolongerhungry,orhowmanypeoplenowhavenewskills,andwhat,inallthesecases,thismeansfortheirlives.

Gettingthatkindofinformationtogetherismuchmoreinformative,andalsoingeneralmuchmoreexpensiveinmoneyandresources.You’llhavetomakesomekindofcompromisebetweenwhatyouwanttoknowandwhatyouhavetospend.

Here,again,youmaybedirectedbyyourstakeholders,whoalsowanttoknowwhatyou’redoingandhowwellyou’redoingit.Funders,too,havetobalancetheconvenienceofharddataagainsttheinsightstobegainedfromqualitativeresearchfindings.

Monitoring your progress using financial reporting.(continued)

29

You want as much warning as possible that trouble is coming; more than that, you’d like some indication of what kind of trouble it is and what you should do about it. For this purpose, a Balance Sheet or a Financial Statement are too blunt and cover too much ground. To get a more precise diagnosis we turn to specific probes. There are some measures that can help show when your financial affairs are out of balance. One such tool is ratio analysis.

Financial Ratios: what are they?AsexplainedbrieflyearlierinthisGuide,aratioistheproportionofoneimportantnumbertoanotherimportantnumber.Youlookattheratiosaswellastherawfiguresbecausethisenablesyoutofindouthowthingsareshiftingwithinthetotalpicture.Yourincomemayhavegoneupsincelastyear,andthecostoffundraisingmayalsohavegoneup;inthatcase,you’llneedtolookattheexactratioofthetwofiguresineachyear,andbetweenyears,toseewhetheryou’regoinguphillordownhill.

Whenyou’vebeenpresentedwiththeseratiosbyyourTreasurer,youfirstlooktoseeifthey’reinthedangerzonealready.Ifthatdoesn’tstandout,youthenlookforthewaytheratioischangingovertime.Comparedwithlastquarter,orlastyear,aretheygettingbetterorworse?Andonceyou’veestablishedwhetherornotthere’scauseforconcern,doesthenatureoftheproblemtellyouanythingaboutthecourseofactionyouneedtotaketoturnthetrendaround?

Notallofthesearenecessarilygoingtoberelevantforyourorganisation,andtheremaybeotherratiosthataremoreimportant.Ifyou’redealingwithcontractedfundraisers,forexample,theratiobetweenhowmuchofthefundsraisedgoestoyouandhowmuchgoestothemiscrucial–insomestates,it’sevenregulated.We’renotattemptingheretocoverallbases,justtheonesthatfitthemostgroups.

1. Balance Sheet RatiosOnesetofratioslooksatyourbottomlineandaskshowcloseyouaretogoingoutbackwards.

Income to Expenditure

Let’snotforgetthemostobviousratioofall:apositivebalance.You’renottryingtorunasurplusforitsownsake,butyouneedtokeepgoing,andoverandabovethatyouneedextratoenableyoutoexpandandbuild.

Anegativebalanceisn’teverabsolutelydesirable,butitcanbetherightthingtodoregardless.Youmaywanttodrawonyourreservestobridgealeanyear,ortospendupbigtotakeadvantageofarareopportunity,ortoanticipateincomethatyouexpecttoarriveshortly.It’sneversomethingtotakelightly,though,anditshouldalwaysserveasanextragoaltoraisetheintensityofyourfundraising.

Forexample,let’slookattheWalshStreetCentreagain.TheCentre’sincomewas$388,210thisfiscalyear,andtheirexpenditurewas$376,800.Thereforetheratioiscalculatedusingthefollowingformula:

388,210/376,800=1.03:1

Theratioof1.03(finalamount)ispositive(i.e.morethanone)indicatingthattheorganisationisperformingwellinthismeasure.IftheCentrewastohaveascoreequalinglessthanone,thisratiowouldbeacauseforconcern.It’sgreattohaveyourTreasurerworkoutthesurplusordeficitfortheorganisationasawholeandofallitscomponentparts.Thiswillgiveyouanideaofhowyou’redoingasanorganisationandwhichprojectsarechewingupthemajorityofyourfunds.

Assets to Liabilities

You’renotnecessarilytryingtomaximiseyourequity.You’reanot-for-profit,andtheonlythingyouhavetomaximiseisyourmission.However,it’seasiertocarryoutyourmissionifyouhavealittlesecurity,andfromthatpointofviewithelpstohaveacushion.

If,atthebottomofthepage,yourequityturnsouttobenegativeandyourliabilitiessignificantlyoutweighyourassets,thereareobviouslyquestionsaboutyourfinancialviability.Thisisn’talwaystradingwhileinsolvent–youmayknowthere’smoney

Troubleshooting. What to look for.

30

cominginbeforeyourdebtshavetobepaid–butyou’rewalkingoneggshells.AndifyourCurrentAssetstoCurrentLiabilitiesratio(‘WorkingCapitalRatio’)islowornegativethenyou’rereallyupagainstit.

Ifyou’renotyetinthedangerzone,butifyourratioisheadingdownwhenyoucompareityear-to-year,you’vestillgotcauseforconcern,andneedtohaveadiscussionaboutwhat’schangedsincethelasttimeyoucheckedandwhatyouneedtodoaboutit.

Debt to Equity

Thisratiomeasureshowmuchyou’veleveragedyourassets.For-profitcompaniesliketoleveragetheirassetsbyborrowingmoreagainstthem,thushavingalargerpoolofmoneytomakemoneyfrom.Thisisahandyfinancialtoolingoodtimesandamassivesourceofriskinbadtimes.(Leverageworksbothways–itincreasesyourprofitswhenyou’remakingprofits,andincreasesyourlosseswhenyou’renot.)

2. Asset Management Ratios: EfficiencyAnothersetofratioslooksathowyou’reemployingyourmoneyandresourcesinrelationtoyourgoals.

Beneficiaries Surplus to Income

Notallthemoneyyouraisecangodirectlytothepeopleyouexisttoserve,andthere’snothingwrongwiththat.Youcan’tdothatworkwithoutfirstsettingupthesystemandthefacilitiestohousethem.Youhavetopayrentandhirestaff(andauditors)andpayforpencilsandpaperandpaperclipsandallthemyriadexpensesthatgraduallyadduptorealmoney.Ofcourse,youwanttospendaslittleaspossibleonallthesethings,butthat’snotnothing.

Sowhat’stheidealratioofoverheadstoactualproduct?Whatproportionofthemoneyshouldbespentupthepointyend,andwhatshouldgoonadministrationandfundraisingandmarketingandPR?There’snoabsoluterightfigure,asofcourseitvariesfromorganisationtoorganisation,andsituationtosituation,butitisimportanttoknowwhereyoustand,and,again,howyou’retrending.

Net Surplus Margin

TheNetSurplusistotalincomelesstotalexpenditure,andit’sthemoneyyouhavetocarryovertothenextyear(orthedeficitthatyou’llneedtofillfromthereserves).

Ifyouwereafor-profit,thatwouldbetheprofityoumadeandyou’dhavethechoiceofreinvestingitortakingitoutofthebusiness.Beinganot-for-profityoudon’thavethesecondoption,soit’smoneyyouhavetospendonaddingtoyourservicesorbuildingupyourreservesincaseofabadyear.

Funding Streams

Ifyou’redependentononeincomestream,thenyoucanbeintroubleifitfallsofforcutsout.It’sbesttohaveabalancedfundraisingplanthatbringsinincomefromdonations,publicappeals,businesspartnerships,governmentandphilanthropicgrants,yourmembership,andspecialevents.OurCommunityprovideshelpsheetsonhowtogetallthesestreamsworkingintheCommunityFundingCentreatwww.ourcommunity.com.au/funding

Workoutwhatproportionofyourincomecomesfromeachsource,workouthowmuchofyourincomeisunderyourowncontrol,andkeepaneyeonyourvulnerabilitytosuddenchangesofmind.

Troubleshooting What to look for.(continued)

31

3. Asset Management Ratios: ProductivityRatioanalysisdoesn’tjusthelpyouwithkeepinganeyeonyourmoney,itcanalsobeusedtoshowyouhowefficientyouareatperformingyourmission.WhileyoumaynotnecessarilypublishthesemeasuresinyourAnnualReport,it’simportanttoknowforyourownmanagementpurposesjusthowyou’retracking.

Income per unit of output

Ifyouknowyou’reworkingforagoodcause,it’salltooeasytothinkthat’stheendofthestory.Youactuallyalsoneedtoask“Giventheamountwe’respendingonthis,couldthatmoneybebetterusedforotherthings?”and“Giventhere’sunmetneedoutthere,couldwebedoingmorewiththesameresources?”

Toanswerthosequestionsyouneedtolookatwhatitcostsyoutoturnoutyourproduct–whateverthatis(somethingyouwillhavealreadyconsideredinthelastsectionunderOutcome Reports).

ExampleLet’ssayyourunHappillness,anorganisationthatgrantswishesforkidswithlife-threateningconditions.Betweenallyourincomesources,you’reraising$14,214,211.Yougrant433wishes.That’s$32,827perwish.

Byitself,thatdoesn’ttellyoumuch.Bycomparingitwithpreviousyears,however,yougetmoreinformation.Lastyear’s473wishesworkedoutat$30,462,soeachwishhasgoneup7.7%.Again,that’snotautomaticallygoodorbadinitself–butit’ssomethingyou’dbeaskingtheTreasurertogivemoredetailon.Younowhavesomebasicfactstostructureyourunderstanding.

Itmaybe,ofcourse,thatyou’renotjustdoingonething,you’redoingseveral–that,say,you’renotonlygrantingwishesforthesekidsbutalsoeducatingthepublicabouttheirproblemsandadvocatingtogovernmentformorefunding.Thethingtodohereisnottosmudgeitalltogetherunderoneheading,butrathertocostoutthethreestreamsseparatelywithdifferentmeasuresforeach.Evenaroughbreakdowncanbeveryhelpful.

We’retalkinghereabouttheaveragecost,whichwillhelpyoudetermineapproximatelyhowmucheachactivitycosts.Howeveritmayalsobeimportanttolookatthemarginalcostoftheserviceyouoffer.Thisisthecostofaddinganotherunitofyourservice.Forexample,ifyou’rerunningaschool,whereoneteacher(at$40,000p.a.)canonlyeverteachupto30students,andyouactuallyhave20students,theaveragecostperstudentis$2,000,butthemarginalcostiszero–youcanaddanother10studentsfornoextramoney.Afterwhich,ofcourse,themarginalcostofthe31ststudentis$40,000(becausetheoreticallyyouhavetoemployanotherteacherforthatstudent).

Youneedtoknowboththeaveragecostandthemarginalcost.Knowingbothwillhelpyoumakeeffectivedecisionsaboutyourfutureactivitiestoallowyoutomakethemostofyourincome.

32

Overhead per unit of output

Asyou’reanot-for-profit,peoplearealsointerestedinhowefficientlyyou’reemployingthefunds–whatproportionofthemoneyyouraisegoestothepeopleyou’retryingtohelp.

ExampleUsingtheHappillnessexampleagain,let’ssaythatofthat$14,214,211some$5,716,721isspentonwishes.Theoverheadload–theamountthathastobespenttomakeitallcometogether–dividedbythenumberofgiftscomesoutat$19,624,almostexactlythesameaslastyear’sfigure.

Note,too,thatthecostofraisingfundsisbothsignificanttoyouandofinteresttothepublic(andthegovernment);that$14,214,211cost$5,138,525tobringin,aratioof36%orareturnofonly$2.76foreveryfundraisingdollar.

What,then,istherightratio?Assooften,there’snoonerightanswer.Somecausesarehardertosellthanothers,someenvironmentsareworseforfundraisingthanothers,someorganisationshavetomakethemselvesexpensivelyknownforyearsbeforethedonationsstartcreepingup.Largecharitableorganisationstrytokeeptheirratiosto10%,oratthemost20%,becausetheyknowthatthepublictendtobecomemutinousiftheythinktheirmoneyisgoingastray.

Again,inourtablesearlierinthisGuidewecanseethattheWalshStreetCentrespends$17,400onfundraisingexpensestobringin$52,790indonations,aratioof33%–disturbinglyhigh,especiallywhencomparedtothe12%ratioinvolvedinraisingmoremoneytheyearbefore.Theremaywellbeperfectlygoodexplanationsforthedeteriorationinefficiency,butonewouldwanttoknowwhattheywere,andonewouldwanttofindawayaroundthemforthenewfinancialyear.

Income to Assets

Bringinginnumbersfromtwoofthetables,howdoesyourannualincomecomparetoyourtotalassets?Thisisessentiallyameasureofhowwellyoumanagewhatyouhave.

ExampleTheWalshStreetCentre,forexample,isrunninga$380,000businessonanassetbaseof$350,000,aperfectlyacceptableratioofneartounity.If,however,ithadnetassetsof$3,500,000andwasstillonlyspendingthesameamount,therewouldbeagoodargumentthattheresourcescouldproducemoreresultsifinvestedinanotherway(ifnotinanotherorganisationaltogether).

Employee Costs

It’salsoworthlookingatyourstaffingcostsandhowtheyrelatetothetotalpicture.Howmuchofyourbudgetgoesonstaff(EmployeeCoststoIncome)?Whatdoestheaverage(full-time-equivalent,orEFT)staffmembercostyou(EmployeeCostsperEmployee)?AreyousufferingfromSeniorityCreep,whereyouraverageemployeeisgettingolderandyoursalarybudgetfatter?There’snoonerightanswer,butyouneedtokeepaneyeonit.

Troubleshooting What to look for.(continued)

33

4. Asset Management Ratios: Working Capital Cycle ratiosTherearealsoothermetricsthatcanhelpinmanagingyourorganisation.AccountsReceivableTurnover(InvoicedIncome/AverageAccountsReceivable)measureshowtightorlooseyouareinyourcreditpolicywithpeoplewhooweyoumoney.AccountsReceivableTurnDays(365/AccountsReceivableTurnover)measureshowlongittakespeopletopaytheirbillstoyou.AccountsPayableTurnover(Totalexpenses–EmploymentExpenses/AverageAccountsPayable)measureshowfastorslowyouareinpayingyourbills,andAccountsPayableTurnDays(365/AccountsPayableTurnover)measureshowlongittakesyoutopayyourbillstootherpeople.

Youneedtotrackthesethingsbecauselendingmoneytopeopledoeshaverisks,andifyou’reofferingcreditthat’sbasicallylendingpeoplemoney.Ifthey’retakinglongertopaytheirbillsthenyoucouldhavecashflowproblems.Again,ifyou’retakinglongertopayyourownbillsthenthatcouldbeasymptomofanumberofproblems.

Whilealltheseratiosarepotentiallysignificantandimportant,youasaBoardmemberonlyneedtobeawareofthemanddelegatetheresponsibilitytosomebodyelseinyourorganisation,usuallytheTreasureroranothermemberofstaff.AsaBoard,youonlyneedtobesatisfiedthatsomebodyiskeepingtrack(andyoumayhavetomakearrangementstocheckonthisperiodically).

Financial Ratios: Analysis and Questions to askOnceyou’veworkedoutaratioyouthenhavetoaskyourselfwhatitsignifies.There’snoautomatictickorcross,andeverycommunitygrouphastoworkoutitsneedsforitself.Evendeficitsaren’talwaysbad,andevenlargeassetbasesaren’talwaysgood.Financeisonlyanaidinachievingyourmission,andeverythinghastobemeasuredagainstwhetheritadvancesorretardsthemission.

Aratiodoesn’tstandalone,ofcourse.Youhavetocompareittopreviousyearsand,ifpossible,otherorganisationsworkinginthesamefield.Mapthetrend.Thetrendlineisprobablymoresignificantthananyonemeasurement.

Thetableonthenextpagesketchesthebroadestofoutlinesofthequestionsyoushouldaskyourselfdependingonhowthetrendslook.ItmightalsopromptalistofquestionsyoucouldaskyourTreasurer.

34

Ratio Analysis Ratio rising Ratio falling

Income/Expenditure

Didyoumakemoneyorlosemoneyovertheyear?Didyoumakemorethanlastyear?Youshouldbebecomingsteadilymoreefficientatwhatyoudo.

Ifyou’remakinglessmoneythanlastyeartheneithertimesaregettingtougheroryou’regettingslacker.Orboth,ofcourse.Enquiringmindswanttoknow.

Assets/Liabilities There’snopointinaccumulatingassetsfortheirownsake–theyhavetosupportthemission.Thatsaid,there’sneveraTreasurerwhowouldn’tthinkthatthey’dratherhavethemthannot.

Ifyourliabilitiesareinchingup,isthereanyriskthatthey’llcometoaffecttheviabilityandsustainabilityofyourenterprise?Nonot-for-profitgroupcanaffordtoignorethesizeoftheircushionagainsthardtimes.

Debt/Equity You’reincreasingyourleverage,takingondebttobuildyourcapacity–ideally,tobuildyourcapacitytopayitback.

You’rebecomingmoreconservativeinyourmanagementandslackingbackonyourambitionsforgrowth.

Net Surplus/ Total income

Inafor-profit,thismoneyisthepointoftheenterprise.Foryou,thesurplusrepresentsmoneyyouhaven’tyetmanagedtospendonachievingyourmission.Ifyourabilitytoemploythemoneyisfalling,thisisaproblem.Expandyourbudgetsothatyou’lldomorenextyear.

Yoursurplusistheonlythingthatcanhelpyougrowanddevelop,andthemorethereisofitthemoreyoucangrow.Ifyoursurplusisshrinking–orturningnegative–reviewbothyourcostsandyourfundraising.

Beneficiaries Surplus/Income

BeneficiariesSurplusisyournetsurpluslessyouradmincosts–themoneyyouhaveavailabletospendonyourmission.Ifyou’vegotmoreofyourmoneyavailabletospendonthemissionthatmeansyou’rebringinginmore,orspendingless–otherthingsbeingequal,that’sgood.

Areyoupushingyourstafftowardsburnoutbecauseyouwon’thiremorecapacity?

Areyouneglectingtobuildtheinfrastructurethatwouldenableyoutodomore?

Largest Funder/Total Income

Thismeasuresthedegreetowhichyourorganisationhasmanagedtodiversifyitsfunding.Ifasinglefundermakesupalargepartofyourtotalincome,you’revulnerable;andifthey’rebecomingevermoreimportant,youneedtolookaroundfornewsourcesoffunds.

Ifyourfundingismadeupofanumberofdifferentstreams,you’repartiallyinsuredagainstacrashinanyonearea.

Income/ Unit of Output

Areyoumanagingtowringmoreoutofyourmoney?Orareyouhavingtorunasfastasyoucanjusttostayinthesameplace?What’sthemarginalcostofyournextclient?

Greaterefficiencyistheequivalentoffreemoney.That’sonedonationyoudon’thavetohustlefor,oronegrantyoudon’thavetoget.

Overhead/ Unit of Output

It’softenbeenpointedoutthatadministrationcostshaveatendencytocreepup;inanyarmy,forexample,thenumberofsoldierstendstofallandthenumberofbureaucratstendstorise.It’syourjobasaBoardtokeepthistendencyundercontrol.

Ifyou’reactuallymanagingtokeepadministrativecostsdown,good.Remember,though,thatthattherearelimits;newdevelopmentsmayrequirelargeup-frontcosts.

Annual Income/Total Assets

Ifyourincomeisrisingandyourassetsarestayingthesame,yourfinancialproductivityisgoingupandyou’reabletodomorewithwhatyouhave.

Evenifyourfinancialproductivityisfallingthismaybebecauseit’snecessarytoassembletheresourcesthatareneededtoliftyourproductivityinotherareas,butit’sstillsomethingtowatch.

Employee Costs/Admin Costs

Initself,anygivenfigureforthisratiomaybeshowingyouthatyou’reunderstaffedoroverstaffed.Thesignificanceofthisfiguredependsonhowstaff-intensiveyourmissionis.

Ifadministrationcostsarerisingmorethanstaffingcoststhismaymeanthatyoushouldcheckoutyouradministrationside.Isyourcostcontrolslipping?

Employee Costs per Employee

Youmayberewardingyourfaithfulemployeesbetter,youmayhavetopayhighersalariestoattractcompetentstaff,oryoumaybesufferingfromsalarycreep,asthesamestaffmaketheirwayuptheaward.Checkitout.

Areyoudoingmorewithless?Orisitthatyourfunderwon’tcoverthesalariesofexperiencedstaff,forcingyoutorelyonnewgraduatesorshort-termappointments?Checkonyourproductivity.

Troubleshooting What to look for.(continued)

35

Financial Ratios: Policy DecisionsOfcourse,whenitcomesdowntoit,youdon’tjustwanttoknowwhat’shappening.Youwanttodosomethingaboutit.

Onceyouknowwhetheryou’reimprovingorgettingworse,youthenhavetobeabletolearnfromyourmistakes(andyoursuccesses)andfeedyournewunderstandingbackintopolicydecisions.

Troubleshooting – Disaster PlanningOneofthethingsthattheBoardneedstoknowishowvulnerableyouaretosuddenchangesinfundingpatterns.Anotherisyourorganisation’sturnaroundtime.

LookingatyourAnnualBudgetyouhavetoaskyourselfwhatwouldhappenifyoulostyourgovernmentcontract,oryourmajorsponsorship,oryourlargestdonor.Wouldyoubeplungedintothered?Howlongcouldyoukeepgoingifyouhadtoliveoffyourassets?

It’simportanttoknowjusthowvulnerableyouare,becausethepenaltiesforgoingoverthelinecanbeextreme.Oneofthefewthingsthatcangetyou,asaBoardmember,intotroubleistakingondebtsthattheorganisationcan’tpaywhentheyfalldue–intechnicalterms,trading while insolvent.Youhavetobeabletoseetheseproblemscominginadvance,soyoucanthrottlebackandonceagainbalanceexpenditurewithincome.

Ifyouwerehitbysuchacatastrophe,howlongwouldittakeyoutofixit,andhowmuchwouldthatcost?Wouldyouhaveanyrealprospectofraisingmatchingfundselsewhere?Areyouabletolayoffstaffquickly,ordotheyhavelong-termcontracts?Wouldyoubeabletomakequickdecisionsifthatwasnecessary?Ifyouhadtopayouttheirentitlementsinonelump,howwouldthataffectyourcashflow?

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The Board has to ●● setthedirectionoftheorganisation,throughthestrategicplan;

●● agreewiththewaysandmeans,throughthebusinessplan;

●● signoffonthespecifics,throughtheannualbudget;

and then through the year ●● askforexplanationsofanysignificantvariancefromthebudget;

●● askforexplanationsofanysignificantvariancefromprojectedoutcomes;

●● followupanyissueswheretheexplanationdoesn’tseemsatisfactory;and

●● requireremedialmeasurestobetakenwherethebudget’sgoingastray.

ABoardthat’sontopofthefinanceshastheabilitytomovetheorganisationtowardsitsmission.Getthatstarted–now.

Last Word: What the Board has to do.

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Accounts Receivable Moneyowedbycustomers(individualsorcorporations)toanotherentity inexchangeforgoodsorservicesthathavebeendeliveredorused,butnotyetpaidfor. Receivablesusuallycomeintheformofoperatinglines ofcreditandareusuallyduewithinarelativelyshorttimeperiod,rangingfromafewdaystoayear.

Accrual Accounting Anaccountingmethodthatmeasurestheperformanceandpositionofacompanybyrecognisingeconomiceventsregardlessofwhencashtransactionsoccur;theoppositeofCashAccounting.

Assets Anythingthathascommercialusefulnessorvalueifsold.Anassetmaybephysicalpropertyoritems,orenforceableclaimsagainstothers.Assetsincluderealestate,equipment,cash,investmentsinstocksandbonds,andanyotherresourcethatcanbeconvertedintocash.

Balance Sheet seeStatementofFinancialPosition.

Cash Accounting Amethodofaccountinginwhichincomeandexpenseitemsarerecordedandrecognisedwhencashisreceivedordisbursed;theoppositeofAccrualAccounting.

Cash Flow Analysis Countstheactualmovementofcash.Usedtomeasurecashinflowminuscashoutflow.Doesnotincludedepreciation,depletion,amortisation,andchargestoreserves.

Cash Flow Statement Anaccountingpresentationshowinghowmuchofthecashgeneratedbytheorganisationremainsafterbothexpenses(includinginterest)andprincipalrepaymentonfinancingarepaid.

Cash Flow from Financing Activities

ThissectionoftheCashFlowStatementmeasurestheflowofcashbetweenanorganisationanditscreditors.

Cash Flow from Investing Activities

AnitemontheCashFlowStatement thatreportstheaggregatechangeinanorganisation’scashpositionresultingfromanygains(orlosses)frominvestmentsinthefinancialmarketsandchangesresultingfrom amountsspentoninvestmentsincapitalassetssuchasplantandequipment.

Cash Flow from Operating Activities

Thecashthatanorganisationgeneratesthroughtherunningoftheorganisation.

Commercial Paper Negotiableinstrumentsusedincommerce:promissorynotesandwrittenagreementssettingforththetermsandconditionsunderwhichfundsareborrowedbyacorporationandpromisingtorepaythedebt.CommercialPaperisissuedbylargecorporationsofgoodcreditstandingtoborrowunsecuredfundsforashorttime,usually90days,butnomorethanninemonths.CommercialPaperisbought,sold,andtradedbyindividualandcorporateinvestors.

Current Assets Theseincludeallshiftingandchangeableassetsexceptmaterialandsupplies:

●● cashonhandanddeposit●● loansandbillsreceivable●● accountsreceivable●● duefromothercompaniesandindividuals●● advancestoothercompanies●● sundryassets.

Deficit Theamountbywhichsomething(money,forinstance)fallsshortoftherequiredorexpectedamount.Theamountbywhichliabilitiesexceedassets.Theamountbywhichexpendituresandobligationsexceedtheamountbudgetedforthem.

Glossary.

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Depreciation Thedeclineinthedollarvalueofanassetovertimeandthroughuse.

Income and Expenditure Statements

AlsoknownasanIncomeStatement,aProfit&Loss,oraStatementofFinancialPerformance,itisastatementthatreportsrevenues,gainsandexpenses,andtheresultingprofitorlossofanentity.

Liabilities Debtsowedbytheorganisationsuchasbankloansoraccountspayable.

Liquid Assets Fundsthatareintheformofcashorcanquicklybeconvertedtocash.Theseinclude

●● cash●● demanddeposits●● timeandsavingsdeposits●● investmentscapableofbeingquicklyconvertedintocashwithoutsignificantloss,eitherthroughtheirsaleorthroughthescheduledreturnofprincipalattheendofashorttimeremainingtomaturity.

Net Assets TotalAssetslessTotalLiabilities.

Outcome Reports Reportsonyourorganisation’ssuccessinachievingthegoalslistedinitsstrategicplan.

Statement of Financial Activities

IncomeandExpenditureStatements.

Statement of Financial Position

Afinancialstatementthatoutlinesthesourcesandusesoffundsandexplainsanychanges.

Surplus Amountsetasideafterpayingexpensesandafternecessarydeductions,asforinterest,dividends,rentals,taxes,etc.

Trading while Insolvent

Anentitythatisunabletopayallitsdebtswhentheyfalldue,includingpayinginterest.Directorsofentitiesthatareinsolvent,oratriskofinsolvency,haveadutytopreventtrading.Entity’sthateithertrade,orincurnewdebt,whileinsolventfaceseriouspenaltiesunderAustralianlaw.

Treasurer’s Report FinancialreporttotheBoard:deliveredmonthly,quarterly,orateverymeeting.

Glossary.(continued)

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Community Solutions for the not-for-profit sector.Westpac has developed a unique suite of products specifically for community organisations. We also have a dedicated team of not profit specialist bankers who can ensure that Westpac and your organisation create the most beneficial banking partnership for your needs.

Day-to-day banking solutions EverydaybankingsolutionsincludingtheCommunitySolutionsAccountwithnomonthlyservicefeeandinterestcalculateddaily,plusahostofproductsandservicesthatcanhelpyoumaketherightbusinesschoicestogetthemostoutofyournot-for-profitstatus.

Managing your cash Managingcashflowiscrucialtorunningyourorganisationsmoothly.Whetheritistheconvenienceofreconcilingyourcostsonlineorthepotentialtomaximiseyourearnings,wehavesolutionstohelpyougetontopofyourearnings.

Investment solutions Makethemostofyourcashreserveswithoursecureinvestmentsolutions.Theyofferhighinterest,similartoatermdepositwiththeaddedflexibilityofaday-to-dayaccountsoyoucanmaximiseyourorganisation’sresources.

Helping your organisation grow and expand Arangeoflendingsolutionswillhelpyoutogrowtoincreaseyourlocalimpact.Themoresuccessfulyourorganisationis,themorethecommunitybenefits–so,ifyouneedthefinancetogrowyourpurpose,wehavemanyoptionsavailabletosupportyourgrowthortransition.

Beyond banking Easyswitchingserviceaswellasfinancialplanningandadvicetosimplifyandpersonaliseyourorganisation’swealthstrategies.

Financial literacy and advice WestpacofferscommunityorganisationsfinancialliteracyandadviceforTreasurersofcommunityorganisations.

Throughworkwithcommunityorganisationsofallsizes–fromlocalsportsclubstoschoolsandnationalagedcarefacilities–we’velearnedthatthedemandsandopportunitiesofthissectorareenormouslydiverse.Strongbankingiskey;butweneedtooffermorethanthat.Afterall,youwanttomaximisetheimpactofeverydollarthatyourorganisationreceives,ensuringthatasmuchfundingaspossiblebenefitsyourcause.

Formoreinformationvisitwww.westpac.com.au/business-banking

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Notes.

This information has been prepared without taking into account your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Fees and charges apply. Terms and conditions available on request. These may be varied, or new terms and conditions introduced in the future. Westpac Banking Corporation ABN 33 007 457 141 is the issuer of the products in this brochure. The information in this Guide is current as at 4 January 2010 and is subject to change.

© 2010 Westpac Banking Corporation ABN 33 007 457 141. 175082 (01/10)