improving the financial health of your non-profit organization: monitoring with your ... ·...
TRANSCRIPT
Improving the Financial Health of Your
Non-Profit Organization: Monitoring
with Your Board—Part 2
Bob Kollar, CPA, CGMAAssistant Professor of Accounting, Duquesne University
Shareholder, KuhlemanKollar & Associates, CPAs
Email: [email protected], [email protected]
Workshop Description
Knowing how to monitor the financial health of your
organization is critical to its long-term survival. In Part One
earlier today, we discussed different methods of financing,
including borrowing and fund-raising.
This session will discuss some key financial and other
indicators, as well as cost analysis and other methods to
assist organizations in identifying financial issues before
they become major problems and to ensure long-term
financial sustainability.
Learning Objectives
At the conclusion of this session, participants should:
1. Have a basic understanding of the key indicators
(financial and non-financial) that non-profit
organizations can monitor to ensure their financial
viability.
2. Be alert to the external factors impacting non-profit
organizations including not only identifying potential
risks but also opportunities.
Learning Objectives (Cont’d)
3. Be able to utilize financial analysis and cost
accounting tools to analyze program profitability,
pricing, new ventures and other financial
management practices.
Current Issues Facing Non-
Profit Organizations
The current environment for non-profit
organizations is changing constantly and very
challenging!
If you are standing still, you have already fallen
behind! Will you be able to catch up?
Current Issues Facing Non-
Profit Organizations
Even though there has been some economic improvement, in many cases still an overwhelmingneed and demand for services
Significant competition for funding (from all sources: individual, businesses, government agencies and foundations)
Expectations of funders and donors: outcomes based giving!
Contribution and volunteerism trends
Current Trends Facing Non-
Profit Organizations
Non-profits will need to embrace more
partnerships, mergers and collaborative ventures
in order to survive
Changing demographics of the U.S. population
Increased operating costs, such as health care,
technology and cyber-security
Current Trends Facing Non-
Profit Organizations
Recent high profile failures of non-profits, such as:
Sweet Briar College; Antioch College
San Diego Opera; August Wilson Center
Government deficits at all levels—Federal, state and local
State of PA—without a budget since 7/1/16!
Illinois—no budget for three years!
Non-Profit Organizations
Have a “Dual Bottom Line*”
Bottom line #1—Mission Impact: ensuring that the purpose
and mission of the organization is achieved through its
activities (outcomes!)
Bottom line #2—Financial Sustainability: maintaining
adequate working capital to fund the day to day operations
of the organization, with sufficient funds for cash flow
disruptions, correcting mistakes and launching new
opportunities for the long-term (staying in business!)
*Source: Nonprofit Sustainability; Bell, Masaoka, and Zimmerman
Achieving the “Dual Bottom
Line*”
For non-profit organizations to achieve the dual bottom
line, they must have:
a) Adequate financial resources
b) Ability to measure the impact of their activities
c) Ability to determine if a particular program(s) is/are
profitable
d) Ability to make the tough decisions—discontinue
unprofitable programs
e) New products and services
Preventing Non-Profit
Failures
Specific issues to watch for:
Heavy dependence on one funding source, such as one government agency, one foundation, one significant donor, etc.
Steadily declining revenues
Steadily increasing operating costs without corresponding revenue increase
Preventing Non-Profit
FailuresSteadily increasing administrative expenses without justification
Borrowings on previously unused (or minimally used) lines of credit
Slowdown in payments on receivables (increased delinquencies)
Lack of timely financial information
Poor budgeting practices
Negative financial ratios (separate handout)
Preventing Non-Profit
FailuresNon-financial indicators to monitor:
Decline in enrollments, number of service visits, etc.
Increase in competition
Competitors providing the same service (or bundled with other services) at same or lower cost
Negative reviews via social media
High employee turnover rate
Low board turnover
Preventing Non-Profit
Failures
Lack of new products or service offerings
Internal resistance to increasing prices or amounts charged for services provided
Decline in number of donors supporting the organization; decline in number of new donors
Significant deferred maintenance—aging equipment not being replaced as needed and in accordance with a scheduled replacement plan
Preventing Non-Profit
Failures
Frequent monitoring and reporting
Unusual variances and trends should be communicated and analyzed quickly; appropriate action steps developed and implemented
Timely decision-making; don’t wait!
See separate handout of suggested financial ratios/indicators for monitoring
Group Exercise
In groups, identify the top three financial and/or
non-financial issues facing your organization
today.
Steps to Prevent Non-Profit
Failure
Some specific steps to make sure your non-profit organization is sustainable for the long-term:
1. Implement a zero-based budgeting approach.
2. Prepare the annual budget with a surplus each year! Save and invest actual surpluses into reserves.
3. Implement specific financial and non-financial targets and closely monitor them.
4. Make the tough decisions—discontinue the golf outing or other fundraiser(s) that are losing money (and consuming valuable management/board time).
Steps to Prevent Non-Profit
Failure
5. Develop and “stick to” a capital asset/equipment
replacement plan schedule. Pursue funding as
necessary (but in a financially effective manner).
6. Identify new service opportunities—with proper
analysis to ensure they can be offered profitably.
7. Experiment with “special” fund-raisers for specific
items. Utilize crowd-funding campaigns, etc.
Financial Analysis Tools
Utilize financial analysis tools to evaluate
existing services and new opportunities, such
as:
Break-even analysis
Zero-Based Budgeting
Program Profitability analysis
Financial Tools to Assist Non-
Profits
Analyze existing programs and new ventures in terms of program profitability
Allocate all expenses of the organization to each program to determine the financial viability of each program; include an allocation of general management and administrative costs
Must know the actual costs of products and service offerings!
Need to know the “break-even point”
Break-Even Analysis
What is the “break-even” point?
The point at which the total revenue generated is
sufficient to cover all of the actual costs of
producing the product or providing the service
(variable costs), plus any fixed costs, plus the
target amount of profit.
Can be used to determine selling price or quantity
needed to break even
Break-Even Analysis
Break-even formula:
Qty. x Price/unit = (Qty. x Var. Cost/unit) +
Fixed Costs + Target Profit
Definitions:
Variable costs—vary directly with level of output
Fixed costs—costs incurred without regard to level of output (stay constant within a given range of output)
Break-Even Example
Assume that an organization wants to sell its product for $35/unit. The variable costs per unit are $21, and the organization incurs $7,000 of fixed costs.
How many units must the organization sell in order to break-even?
Computation:
$35 x Qty. = $21 x Qty. + $7,000
Solve for Qty. (the number of units)
Group Exercise—Break-even
Analysis
See separate handout for break-even exercise
Zero-Based Budgeting
A very detailed budgeting technique
Don’t take last year’s numbers and simply add a %!
“Drill down” and build the budget from the bottom up
Challenge expenses and assumptions about revenues
Zero-Based Budgeting
Each expense or revenue item must be supported or
documented by reference to contracts, agreements, etc.
Examples:
Employee salaries, taxes, benefits
Insurance
Utilities (estimated using history, rates)
Contract reimbursement rates
Donation history
Zero-Based Budgeting
There is a significant time commitment in the initial year of adoption
However, results in very detailed knowledge of the organizations revenues and operating costs
Typically identifies areas for improvement and cost savings!
Don’t forget—budget for a surplus!
Analyzing Program
Profitability
Non-Profit Organizations need to know if their programs and services are profitable and self-supporting.
“Cost allocation” results in allocation of total revenues and total expenses to each specific program. This includes general and administrative costs.
The result is a better understanding of true program financial performance (see handout)
Group Exercise—Analyzing
Program Profitability
In groups, complete the program profitability
analysis exercise
Discuss the results of the analysis in your
groups
What are some potential issues of using this
technique?
Analyzing Program
Profitability
Very helpful information!
Can identify poor performing programs (effectively being subsidized by others)
Must determine a methodology to allocate common or general and administrative costs
Can pinpoint areas for improvement or strategic decisions (should we be doing this?)
Justifying a New Business
Venture
How do you justify adding or starting a new line of business for the organization?
Need to “make the business case” to be successful (i.e., get the approval of your board or funder) with such a request!
In order to do this, must research the opportunity, its costs, potential revenues, etc.
Building a Business Case
Elements the Business Case should include:
a. Executive Summary
b. Description of current state or situation
c. Proposal
d. Financial evidence—the quantitative analysis
that justifies the change, addition, etc.
e. Conclusion
f. Supporting materials
Building a Business Case
Make your Business Case as strong as possible with clear and understandable financial analysis based on sound assumptions.
Weak or limited financial benefits = guaranteed rejection (most of the time!)
Summary
Constant monitoring of the current environment and its effect on your organization
Implement steps to prevent non-profit failure now, not when its too late!
Utilize budgeting and other financial analysis tools to improve performance and provide long-term financial sustainability
References
Nonprofit Sustainability: Making Strategic Decisions for Financial
Viability. Bell, Masaoka, and Zimmerman. 2010. Jossey-Bass.
Giving USA 2017 Infographic (givingusa.org/tag/giving-usa-2017/)
“Using surplus budgeting to advance and sustain your mission,” Journal
of Accountancy, February 2017. Pgs. 40 – 43.
“Ten Ways to Kill Your Nonprofit,” Non-Profit Quarterly, January 2015.
(https://nonprofitquarterly.org/2015/01/01/10-ways-to-kill-your-nonprofit/
Contact informationBob Kollar, CPA, CGMA
Palumbo-Donahue School of Business
Duquesne University
600 Forbes Avenue
Pittsburgh, PA 15282
412-396-4906 or [email protected]
OR
KuhlemanKollar & Associates CPAs
300 Old Pond Road, Suite 206
Bridgeville, PA 15017
412-221-8185 or [email protected]
www.kkacpas.com