Improving the Financial Health of Your Non-Profit Organization: Monitoring with Your Board Part 2

Transcription

1 Improving the Financial Health of Your Non-Profit Organization: Monitoring with Your Board Part 2 Bob Kollar, CPA, CGMA Assistant Professor of Accounting, Duquesne University Shareholder, KuhlemanKollar & Associates, CPAs kollar@duq.edu, bob@kkacpas.com

2 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.

3 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?

4 Current Issues Facing Non- Profit Organizations Even though there has been some economic improvement, in many cases still an overwhelming need 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

5 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

6 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

7 Preventing Non-Profit Failures Steadily 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 Failures Non-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

8 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

9 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).

10 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

11 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

12 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)

13 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

14 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!

15 Analyzing Program Profitability Non-Profit Organizations need to know if their programs and services are profitable and selfsupporting. 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?

16 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.

17 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!)

18 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 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 Pgs Ten Ways to Kill Your Nonprofit, Non-Profit Quarterly, January (

19 Contact information Bob Kollar, CPA, CGMA Palumbo-Donahue School of Business Duquesne University 600 Forbes Avenue Pittsburgh, PA or OR KuhlemanKollar & Associates CPAs 300 Old Pond Road, Suite 206 Bridgeville, PA or