improving-financial-health-of-non-profits-part-2---bob-kollar

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 m

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

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 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

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!)

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

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

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!)

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 information

Bob Kollar, CPA, CGMA

Palumbo-Donahue School of Business

Duquesne University

600 Forbes Avenue

Pittsburgh, PA 15282

412-396-4906 or kollar@duq.edu

OR

KuhlemanKollar & Associates CPAs

300 Old Pond Road, Suite 206

Bridgeville, PA 15017

412-221-8185 or bob@kkacpas.com

www.kkacpas.com