CAPITAL SOURCES. Dave Baker, CPA, CGMA Orlando, FL The Florida Housing Coalition Statewide Conference September 9, 2012

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1 CAPITAL SOURCES Dave Baker, CPA, CGMA Orlando, FL The Florida Housing Coalition Statewide Conference September 9,

2 Agenda Florida Housing Coalition Welcome - Overview: Strategies for Obtaining Funding How to Prepare your financial statements and other documents in order to Source capital Obtain or increase loans/lines of credit with banks Wrap up - 2

3 Creative Strategies for Obtaining Capital OVERALL THEMES Identify Potential Sources Obtain Funding Needed for Not-For-Profit 3

4 Nonprofit Funding Options Funding Impacts Success of Organization How to raise what is needed to Fulfill Organization Mission Specific Tactics/Strategies to accomplish funding 4

5 Raising Capital for Not For Profit Two Commandments for Raising Capital Simplify Message and aim of non profit has to be clear Danger (pursue too many opportunities diluting efforts and risk losing sight of entity mission) Focus Decide on programs that not for profit agency/entity plans to operate/run BEFORE soliciting funders. Develop strong business plan with specific personalized goals.

6 Raising Capital for Not For Profit Suggested Way to seek capital is asking for direct donations Ask for Funds from Government agencies and grants from corporations to support specific programs and/or projects. Research funding organizations - know their purpose and previous giving to know if your request is a good fit (before you submit)!

7 Specific Capital Funds Government Funding Grants ( SHIP Program Home Program (Note latest changes in program) CDBG (Community Development Block Grant) USDA Rural Development Private Funding Individuals Corporations and Corporate Foundations Private Family Foundations in communities Community Foundations

8 Nonprofit Funding Options Common Traditional Non Profit Initiatives Board Contributions Capital Campaigns Cause- Related Marketing E-Commerce Major gifts Gifts in kind Matching Gifts (from corporations) 8

9 Nonprofit Funding Options Specific Product Sales Proposal or Grant Writing Special Events (Fundraising or other) Tuition or User Fees Bank Loans/Lines of Credit CDFI Loans Private Loans 9

10 Bank Funding Bank Funding can be used for short term or long term capital. Short Term Bridge Loans for awarded grants or reimbursement grants Operating Lines of Credit Other Long Term Purchase Building (Offices or Residential Real Estate) Equipment/Vehicle Loans

11 How to prepare your financial statements and other documents in order to: Increase working capital Show sustainability to grant makers (potential funding sources) Obtain or increase business lines of credit with banks. Obtain long term credit with banks. 11

12 Objectives of Ratio Analysis Standardize financial information for comparisons Evaluate current operations Compare performance with past performance Compare performance against other firms or industry standards Study the efficiency of operations Study the risk of operations 12

13 Rationale Behind Ratio Analysis Determine the financial health of an entity How well a not for profit converts resources into reserves through Providing goods and services to support mission (at slightly above costs) Sales of goods and services (at slightly above costs) Ratios Ratio Analysis Shows Relationships Between Two Numbers Measure relationships between resources and financial flows Show ways in which entity s situation deviates from Its own past, other similar entities, in comparison to industry 13

14 Fundamentals of Financial Analysis 4 Categories of Ratios Profitability Ratios ability of the entity to earn an adequate return reserve and control costs. Asset Utilization Ratios How efficiently the entity s assets are being utilized. Liquidity Ratios focus on short term risk management. Solvency & Leverage Ratios focus on the capital structure and long-term risk management. 14

15 Fundamentals of Financial Analysis Classification of significant ratios into four primary categories A. Profitability Ratios. 1. Profit margin. 2. Return on assets 3. Return on equity. B. Asset utilization ratios. 4. Receivable turnover. 5. Average collection period. 6. Inventory turnover. 7. Fixed asset turnover. 8. Total asset turnover. C. Liquidity ratios. 9. Current ratio. 10. Quick ratio. D. Solvency & Leverage Ratios. 11. Debt to total assets. 12. Times interest earned. 13. Fixed charge coverage. 15

16 Limitations of Ratio Analysis An entity s industry category is often difficult to identify. Published industry averages are only guidelines. Sometimes difficult to interpret deviations in ratios. Industry ratios may not be desirable targets. 16

17 Fundamentals of Financial Analysis Profitability Ratios 17 (source: Ivey Business 257 Introduction to Ratios)

18 Fundamentals of Financial Analysis Profitability Ratios (source: Ivey Business 257 Introduction to Ratios) 18

19 Fundamentals of Financial Analysis Liquidity Ratios (source: Ivey Business 257 Introduction to Ratios) 19

20 Fundamentals of Financial Analysis Liquidity (& Activities) Ratios (source: Ivey Business 257 Introduction to Ratios) 20

21 Fundamentals of Financial Analysis Leverage & Solvency Ratios (source: Ivey Business 257 Introduction to Ratios) 21

22 Fundamentals of Financial Analysis Interrelationship of Financial Statements The financial statements are interrelated. The balance sheet is linked to the income statement by the retained earnings account in for profit entities, or net assets in not for profit entities. 22

23 Working capital requirements Net Working Capital = Current Assets - Current Liabilities Typically, net working capital is positive Assets must be financed by: liabilities or equity Typically, trade credit current liabilities will finance a part of a company s current assets without the need for short term bank credit (Source: 2003 Bank Management 5 th Ed. Kock - MacDonald) 23

24 Working capital cycle Compares the timing differences between converting current assets to cash and making cash payments on obligations Cash-to-cash cycle the difference, in days, required for a company to convert its current assets and current liabilities into cash The cash-to-cash cycle essentially measures how long a firm can receive interest free financing (trade credit) Working capital needs = Difference in the cash-tocash cycle times the average daily cost of goods (Source: 2003 Bank Management 5 sold th Ed. Koch - MacDonald) 24

25 Working capital cycle for ABC Non Profit Balance Sheet and Income Statement Data for ABC Non Profit Corportation Asssets Liabilities and Equity Selected Income Stat Data Cash 80 Acct Pay 400 Net Revenues 9,125 Accts Rec 700 Acc expenses 80 COGS 6,100 Inventory 500 Notes pay -bank 450 Oper exp. 2,550 Curr Assets 1,280 CM LTD 50 Purchases 6,430 Fixed Assets 1,220 Curr Liab 980 Avg Day Rev Total Assets 2,500 LTD 550 Avg Day COGS Net Assets 970 Avg Day Op. exp 6.99 Total Liab & Eq. 2,500 Avg Day pur Working Capital Cycle Current Assets Current Liabilities Days Cash 3.20 = 80 / Days AP = 400 / Days A/R = 700 / Days Acc = 80 / 6.99 Days Inv = 500 / Cash to Cash Liability Asset Cycle Cycle Difference in cash-to-cash cycles = Working Capital Needs = x = (Source: 2003 Bank Management 5 th Ed. Koch - MacDonald)

26 Fundamentals of Credit & Risk Analysis Basic Components of Credit Analysis: Quantitative: Financial Analysis Qualitative: Non-Financial Analysis Evaluate Financial Statements Examine the Industry & Management 5 C s of Credit Cash Flow Collateral Character Conditions Capacity In summary: Credit Analysis is an attempt to determine the ability to repay the loan and appraise the creditworthiness of the borrower. 26

27 Fundamentals of Credit & Risk Analysis 27

28 Credit Process at a Bank - Flow Input Credit Administration Credit Analysis Quality Review Approval Approval Sheet Commercial Real Estate Loans Pre-Discussion w/ Account Officer Relationship Overview Executive Summary Overview & Background Market/Industry Analysis Credit Log: Out Loan Approval Commercial Loans File Review / File Creation Financial Analysis: Borrower Financial Analysis: Guarantor Post-Discussion w/ Account Officer Repayment Analysis Residential Loans Credit Log: In Collateral Analysis Credit Investigation Quality Review Renewal/ Annual Review Summary of Strengths & Weaknesses Recommendations 28

29 Loan Structure The Client works with the Bank Identify the purpose and amount of the proposed loan, the expected source of repayment, and the value of collateral. The loan amount, maturity, and repayment schedule are negotiated to coincide with the projected usage. Short-term funding needs are financed by short-term loans, while long-term needs are financed by term loans with longer maturities. Match credit terms with a borrower's specific needs. Long term financing needs are financed with long term loans. Short term needs with short term loans? 29

30 Fundamentals of Credit & Risk Analysis Credit analysis involves the employment of quantitative and qualitative methods to perform financial and non-financial analysis to determine borrower s creditworthiness An entity s ability to repay 30

31 Fundamentals of Credit & Risk Analysis Credit analysis is essentially default risk analysis. Three areas of commercial risk analysis: 1.What risks are in the operations of the not for profit? 2.What have managers done or failed to do in mitigating those risks? 3.How can a lender structure and control its own risks in supplying funds to the not for profit? 31

32 What Goes On At The Bank HOW MUCH TIME Average Turn Times for Activities Listed Here! Name Search Average 20 minutes (website) or 1 3 business days if unable to obtain via website Real Estate Search Commercial Background Check Average 2 5 business days Average 2-5 business days Credit Request Evaluations Appraisals Flood determinations UCC Search Average business days depending on county and state Average 4 6 weeks Average 1 business day Average 2 5 business days (unless available on state website) 32

33 Questions???? 33

34 Wrap-Up 34

35 CAPITAL SOURCES The Florida Housing Coalition Annual Conference Orlando, FL - September 9, 2012 Community Development Banking Dave Baker, Development Advisor, (561) Lucy Carr, Community Consultant, (561) Michele Hartburg, Community Consultant (813)