BUSINESS DRIVERS: LINE OF BUSINESS PERFORMANCE ANALYSIS. May 25, 2017 Presented by Lisa Salaices of

Transcription

1 BUSINESS DRIVERS: LINE OF BUSINESS PERFORMANCE ANALYSIS May 25, 2017 Presented by Lisa Salaices of

2 AGENDA Introductions What is Financial Planning & Analysis and why is it important to me? Review of standard performance metrics Program-specific/specialized metrics Line of business analysis Level of authority vs. Level of detail Overhead allocation Case study: What would you do? 2

3 WHAT IS FINANCIAL PLANNING & ANALYSIS? From an FP&A job description: Supports management planning and decision making by identifying, maintaining, and evaluating information; recommending actions. In a large organization, there may be a team dedicated to Management Reporting Management reporting is a complex, multistage activity which takes place in the context of other business processes and makes use of the multiple information systems that may have been provided for other purposes -- general documentation, project management, financial control, communication and business presentation. Managers treat information from these sources as harvestable, contextualizable data'', which is combined, summarized, and reinterpreted in management reports. 3

4 FINANCIAL PLANNING & ANALYSIS Uses your existing accounting data Reports tailored to performance and analysis questions Utilizes standard measures of financial performance Unique/Customized metrics may also be developed Helps Executives, Management and Board understand business drivers and respond quickly to changes in performance. 4

5 ENVISIONING FP&A IN YOUR ORG Lisa s Rule: The level of authority in one s role is inversely related to the level of detail required to support decision-making. Systems need to support the reporting needed: Is chart of accounts adequate? Are Staff collecting details to summarize up the chain of command? FP&A should align with strategic plan, budgeting and support decision making. L Authority H Board of Directors Finance Committee of the BOD CEO/Execu tive Department Manager Program Manager Staff L Detail H 5

6 FP&A AND THE NONPROFIT Challenges: Finance team capacity enough time and talent Priority of GAAP/Audit and compliance Complexity of determining the appropriate reporting Opportunities: Existing data measurement tools Paperless office tools to move information quickly Sharing services What do your organizations do at the different levels of authority? 6

7 FP&A REPORTING BY ROLE Role Reporting Examples Staff Production/outcome reporting to managers and funders Program Manager Detailed reports on individual outcomes vs goals Summary reports on team outcomes vs goals Program budget reports from finance Department Manager Summary by program of outcomes vs goals Budget vs. Actual financial reports from finance Executive Summary by department of outcomes vs goals Budget vs. Actual financial reports by department and overall Dashboard of program outcomes vs goals with trends Finance Committee Budget vs. Actual financial reports by department and overall Dashboard of program outcomes vs goals with trends Line of business performance analysis Board of Directors Dashboard focused on outcomes vs goals identified as priorities by board or executive team. Summary financial statements for line of business and overall. 7

8 UNDERSTANDING THE BUSINESS MODEL Understanding the business model Name, size and industry segment of nonprofit Revenue sources and diversity Expenditure categories and allocation Lines of business, and relative size Story: What drives success? 8

9 SAMPLE BUSINESS MODEL NONPROFIT is an $2.4M affordable housing developer with 60% of of our revenue form earned income, primarily affordable housing developer fees and country service contracts. The remaining 40% of our revenue is public support: 20% contributions, 15% foundations and 5% fundraising events. Our primary expenditures are the staffing (80%) and office (7%) required to fulfill our mission through our core programs real estate development, property management, community building & organizing, the home ownership center, and policy advocacy of which real estate development is the largest at 40% of expenditures. Our success and sustainability are highly dependent on the skills of our staff and reputation for safe, healthy and affordable housing. 9

10 CASE STUDY: VETTING PROGRAMS AGAINST OUTCOMES PROGRAMS VS. OUTCOMES Fit Analysis Outcomes Increase Improve health Increase and funding and safety of maintain resources for affordable affordable affordable Increase housing and housing rental housing number of their units development home owners neighborhoods Programs E I E I E I E I Multi-Family RED H H H L L N/A H H Single Family RED L N/A M N/A L H L M Portfolio H H M N/A M N/A H H Community Building & M N/A L N/A M M H H Home Ownership Center L N/A M N/A H H M N/A Advocacy M H M H M L M M 10

11 FINANCIAL ANALYSIS Liquidity/Solvency Leverage Management efficiency Profitability Value Other metrics

12 LIQUIDITY/SOLVENCY RATIOS Current Ratio: Current Assets/Current Liabilities Quick Ratio: Unrestricted Cash/Accounts Payable Working Capital: Current Assets Current Liabilities Vs. Unrestricted Cash? Burn Rate AKA Days/Months Cash Available: Unrestricted Cash /Current Daily (or Monthly) Expense Rate

13 LEVERAGE RATIOS Interest Expense Ratio: Interest Expense PAID/Operating Income (EBITDA) Debt Service Coverage: Operating Income/Annualized Debt Service Debt to Equity Ratio: Total Debt/Net Assets Adjusted Debt to Equity Ratio: Subordinated debt/unrestricted Net Assets Leveraged Ratio: Total Debt/Total Fixed Assets Affordable housing assets: Hard Debt Leverage: Serviced Debt/Net Fixed Assets % of Subordinated Debt: Subordinated (unserviced) Debt/Total Debt

14 MANAGEMENT EFFICIENCY Asset Turnover Ratio: Net Income/Net Fixed Assets Accounts Receivables Turnover Ratio: Receivables/Annual Sales (i.e. tenant AR/GPR) Or convert to days Accounts Payable Turnover Ratio: Accounts Payable/Annual Operating Expenses Or convert to days

15 PROFITABILITY RATIOS Gross Profit Margin: (Revenue Cost of Goods Sold)/Revenue Operating Profit Margin: EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization AKA Operating Income)/Total Revenue Net Profit Margin: Net Income/Total Revenue Self-Sufficiency: Earned Revenue/Operating Expenses Earned Revenue: Earned Revenue/Total Revenue Return on Equity: Net Income/Net Assets

16 VALUE METRICS Total Assets Net Assets Net Asset Ratio: Net Assets/Total Assets Or =1 - Leverage Ratio Unrestricted Net Asset Ratio: Unrestricted Net Asset/Total Assets

17 OTHER MEASURES Financial and other measures, specific to funding sources, lines of business, strategic plan, etc. Program services as a % of total expenses Salaries as a % of revenue, or expenses Property Management Specific Measures (e.g. turnover, vacancy, etc) Program specific: # clients served, conversion rates, # units in pipeline, # of donors, # of events, average $ donation, % of goal, etc Trends: 12-month, rolling 12-months, Budget vs. Actual (or forecast, or prior year, or industry standards)

18 OTHER MEASURES What measures does your organization use? 18

19 CASE STUDY: METRICS PART I Liquidity Leverage Effic. Metrics Better/ (Worse) Quick Ratio Current Ratio Working Capital $537,423 $910,626 $373,203 Months Cash Available Interest Expense Ratio 19.6% 16.0% 3.6% Debt Service Coverage (0.35) Debt to Equity Ratio (0.21) Adjusted Debt to Equity Ratio (0.15) Leverage Ratio (0.09) Return on Assets/Asset Turnover Ratio -0.5% -1.7% -1.2% Rental Accounts Receivable Turnover Accounts Payable Turnover

20 CASE STUDY: METRICS PART II Other Value Profitability Metrics Better/ (Worse) Operating Profit Margin 32.4% 21.1% -11.3% Net Profit Margin -2.7% -8.4% -5.7% Self Sufficiency 95.5% 91.0% -4.4% Earned Revenue % 77.8% 81.6% 3.7% Return on Equity -1.0% -3.6% -2.6% Total Assets $28,820,321 $29,798,669 $978,348 Total Net Assets $11,066,449 $10,683,015 ($383,434) Net Asset Ratio 38.4% 35.9% -2.5% Unrestricted Net Asset Ratio 29.0% 26.5% -2.5% Salaries as a % of Revenue 24.7% 33.6% -8.9% Salaries as a % of Operating Expenses 36.5% 42.6% -6.1% Program Services as % of Operating Expenses 83.0% 85.0% 2.0% 20

21 LINE OF BUSINESS PERFORMANCE Income & Expenses by line of business Decide whether to adjust for non-cash income and expenses (i.e. depreciation, unpaid interest income accrued) Decide whether to adjust for non-income and non-expense cash flows, i.e. debt service Allocate shared expenses Performa profitability metrics by line of business Operating Margin Net Margin Operating Cash Flow Margin Perform Contribution Margin analysis Line of business $Profit(Loss)/TOTAL $Profit(Loss) * Overall Margin 21

22 ALLOCATION METHODOLOGY Direct Expenses: Program Specific Direct Expenses: Shared Core Mission Support: HR, Exec, Finance, etc. Core Mission Support: Fundraising, partners, SURPLUS 22

23 CONTRIBUTION MARGIN Program Total Revenue Operating Expenses Operating Income/ (Loss) EBITDA Op. Margin Operating Cash Flow OCF Margin Contrib. Margin Multi-Family RED $300, ,522 $51, % ($65,548) -21.8% -1.4% Single Family RED $590, ,951 ($84,651) -14.3% ($180,892) -30.6% -4.0% Portfolio $2,600,978 1,906,092 $694, % $76, % 1.7% Community Building & Organizing $75,000 76,947 ($1,947) -2.6% ($7,219) -9.6% -0.2% Home Ownership Center $650, ,839 $474, % $462, % 10.2% Advocacy $80,333 39,038 $41, % $38, % 0.8% Shared G&A Costs $260, ,601 ($213,849) -82.0% $0 0.0% 0.0% TOTAL $4,558,053 3,595,990 $962, % $323, % 7.1% 23

24 PROGRAMS VS. OUTCOMES Fit Analysis Programs Multi-Family RED % $ 266 Single Family RED % $ 721 Portfolio % $ 2,525 Community Building & % $ 82 Home Ownership Center % $ 188 Advocacy % $ 42 Impact Contrib. Margin OpEx + DS (in 000s) 24

25 Single Family RED $721 Multi-Family RED $ Community 2.0 Building & Organizing, $ Portfolio $2,525 Advocacy $42 Home Ownership Center $188-8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% Profitability MATRIX MAP Matrix Map Mission Impact

26 WHAT SHOULD BE DONE? Put on your board member hat What questions do you still have about performance? What else do you need to know? What suggestions for improvement come to mind from the report? Can you make the decision requested by staff with the information provided? 26

27 QUESTIONS? Thank You!!! Our purpose is to change the world by strengthening mission-driven organizations. Let us help you thrive! Lisa Salaices, CEO Focus and Flow, LLC Office: Call: th Street Suite 202 Sacramento, CA