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Drug and Alcohol Office WANADA FORUM 2 May 2012 Sustainable Pricing Tonia Swetman and Jon Petelczyc.

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Presentation on theme: "Drug and Alcohol Office WANADA FORUM 2 May 2012 Sustainable Pricing Tonia Swetman and Jon Petelczyc."— Presentation transcript:

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2 Drug and Alcohol Office WANADA FORUM 2 May 2012 Sustainable Pricing Tonia Swetman and Jon Petelczyc

3 Presentation Aims To provide an awareness of organisational sustainability and pricing to: Develop your organisations capacity to determine a sustainable price for a community service. Assist you to prepare an offer as part of a request for tender process. 3

4 Objectives At the conclusion of the session, you should be able to: Understand the concept of organisational sustainability and factors that impact organisational sustainability. Apply financial governance principles to your own organisation and identify broad areas for improvement. Identify the key steps in responding to a tender with regard to sustainable pricing. Consider alternative frameworks for developing a pricing model for variable outputs. 4

5 Objectives At the conclusion of the session, you should be able to: Appreciate the importance of tracking and monitoring service delivery and costs to ensure sustainability. Appreciate the value in conducting internal and external audits. List major threats to organisational sustainability. 5

6 What is Sustainability? Sustainability is the ability to continue a defined behaviour indefinitely. Wikipedia Where a system is capable of being maintained at a steady level without exhausting natural resources or causing severe ecological damage to sustainable development. Collins English Dictionary – Complete and Unabridged© HarperCollins Publishers 1991, 1994, 1998, 2000,

7 Sustainability 7 Sustainability is the attribute of a system that has the internal capacity to: achieve the sustainability of its internal workings; catalyse the achievement of the sustainability of its external environment; and / or adapt and survive no matter how unsustainable the external environment might be (ie. it can always 'ride the waves' down as well as up). This is an attribute that can only be aspired to by 'living' systems - species, ecosystems and societies. Philip Sutton, Green Innovations Inc 7

8 Sustainability 8 8

9 Organisational Sustainability A sustainable state is one in which utility (for consumption) is non- declining through time. A sustainable state is one in which resources are managed so as to maintain production opportunities for the future. A sustainable state is one in which the (natural) capital stock is non- declining through time. A sustainable state is one in which resources are managed so as to maintain a sustainable yield of resource services. A sustainable state is one which satisfies minimum conditions of (eco) system stability and resilience through time. 9 9

10 Factors that impact on Organisational Sustainability 10 Economic or financial sustainability, while critical, is only one aspect of an organisation's overall sustainability. Organisations must also build a broad range of organisational, technical, and human capacities. Many factors influence the sustainability of an organisation including the operating environment, such as: national and local politics and policy, the activities of other organisations, the availability of skilled personnel, and so on. 10

11 11 Corporate Governance Authority, accountability, stewardship, leadership, direction and control Characterised by ongoing monitoring and evaluation Factors that impact on Organisational Sustainability

12 Corporate Governance Effective corporate governance helps an organisation to achieve its objectives and desired outcomes and fulfil its obligations through sound: strategic and business planning; risk management; financial management and reporting; human resource planning and control; and compliance and accountability systems. 12

13 Corporate Governance Conceptual representation of the four categories of good governance features. Corporate Governance Handbook for Company Directors and Committee Members 2nd Edition, June 2010 The Department of Families, Housing, Community Services and Indigenous Affairs, Australian Government. 13

14 Corporate Governance Principles ASX Guidelines Recognise clear roles and responsibilities; Structure the Board to add value; Ethical and responsible decision making; Integrity in financial reporting; Timely and balanced disclosure; Respect the rights of members; Recognise and manage risk; and Renumerate fairly and responsibly. 14

15 Financial Monitoring and Management 15 Budget Cycle Planning Develop goals, objectives Development Estimate cost of attaining each goal Project revenues Implementation Record budget in accounting system General Ledger Monitoring Compare budget to actual revenue, expenditure Investigate variance Control Take corrective action

16 The Challenge for a Not-for Profit Balancing the pursuit of community service objectives (the mission) with business objectives. A not-for-profit service provider organisation needs to achieve commercial outcomes as well as vocational, advocacy and other support outcomes for its clients / members. These dual roles can, however, create conflict when it comes to decision making. 16

17 The Financial Imperative A strong financial capacity provides the means to achieve a not-for- profits mission. The focus on vocational, advocacy and other support outcomes can sometimes be at the expense of business objectives of an organisation. In turn, pursuit of community service outcomes can then threaten the financial viability and sustainability of the organisation if the dual objectives are not properly balanced. Effective corporate governance can assist in achieving this balance. 17

18 18 What elements would you consider when determining a sustainable price? Consider

19 19 Sustainable Pricing

20 Definition of a Sustainable Price 20 A sustainable price for a community service includes all real and anticipated costs incurred from: delivering; administrating; monitoring; and evaluating the service at a pre-determined quality, for a specified time period plus a component for profit and contingencies, less any programme subsidies or grants to be received.

21 Definition of a Sustainable Price 21 A sustainable price also considers organisational strategic initiatives, current and planned, where relevant costs are allocated across relevant programmes.

22 Cost Analysis – Why? 22 To: Identify and prioritise cost saving initiatives. Fundraise from donors to cover the true costs of delivering a programme. Price the community service at a level that covers the true costs of providing the service. Report the true costs of a programme. Make adjustments to programme delivery, if necessary.

23 Costing Considerations 23 Before the costing exercise: Determine objective in costing (outcome / output). Define the service. Identify the processes associated with the service delivery. Determine the time period. Consider ALL cost components (inputs) in the accounting system. Understand the difference between cash and accrual accounting. Consider costs not identified in an accounting system.

24 Categories of Costs 24 Direct Indirect (or overhead costs) Capital related costs Depreciation Taxation Opportunity Cost Services and resources received free of charge

25 Cost Drivers: Allocating Indirect Costs 25 The building blocks for unit costs. A cost driver has an effect on costs. For example, in service provision, the number of hours for providing care is a cost driver for labour. You will need to determine your indirect costs allocation method, based on the cost driver. You must apply your model: Accurately Consistently

26 Calculating Costs 26 Total Cost Direct + Indirect + Other Costs + Other Factors = Total Cost Unit cost Total Cost divided by number of units Capturing Costs Historical Data Research Assumptions (based on trends and other factors)

27 27

28 Top-Down and Bottom-up 28

29 Pricing Schedules 29

30 Completing the Tender Document 30 Step 1 Consider the Request for Tender / Expression of Interest (Ask the nine questions) Step 2 Define the community service delivery programme to be costed Determine community service delivery scope Step 3 Consider and determine pricing options Identify / collect data for the relevant time period and modify source and format of data, where necessary Step 4 Allocate direct costs by community service programme Step 5 Identify cost drivers Allocate indirect cost

31 Completing the Tender Document 31 Step 6 Allocate 'other costs' (capital related, opportunity cost, depreciation, amortisation, taxation, outcomes measurement) Step 7 Check data - accuracy and logical soundness Assess results by conducting a bottom-up costing exercise and consider implications for the organisation Step 8 Consider market conditions and organisation objectives Finalise Pricing Step 9 Demonstrate value for money (include services and resources provided free of charge) Step 10 Consider the tender evaluation process to ensure you have allocated appropriate detail / emphasis relevant to the weightings.

32 Costing Model Example 32

33 Financial Reporting and Recording 33 Recording Costs Tracking Costs Monitoring Price Sustainability

34 Financial Information Tasks and ObjectivesAccounting 34 Collection Collection (in money terms) of information relating to transactions that have resulted from operations. Recording and Classifying Recording and classifying data into a permanent and logical form. This is usually referred to as Bookkeeping. Summarising Summarising data to produce statements and reports that will be useful to the various users of accounting information - both external and internal.

35 Financial Monitoring and Management 35 Interpreting and Communicating Interpreting and communicating the performance of the business to the management and its owner. Forecasting and Planning Forecasting and planning for future operation of the business by providing management with evaluations of the viability of proposed operations. The key forecasting and planning tool is the budget.

36 Accounting System Components 36 People Procedures and instructions Data Software Information Technology infrastructure Internal controls and security

37 Financial Monitoring and Management 37 Accounting Financial Accounting Management Accounting Internal Users Custom reports Internal Users Custom reports Government Agencies Customers Donors / Investors Other Stakeholders Directors and CEO Directors and CEO External Users Set Report External Users Set Report Line Managers Employees

38 What is an audit? 38 External Audit: For External Stakeholders The purpose of an external audit is to form an independent view on whether the information presented in a financial report, taken as a whole, reflects the financial position and performance of the organisation at a given date, for example: Are details of what is owned and what the organisation owes properly recorded in the balance sheet? Are profits or losses properly assessed?

39 What is an audit? 39 Internal Audit: For Internal Stakeholders Internal auditing is an independent and objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

40 Types of External Audit Opinions 40 x UnqualifiedQualifiedAdverseDisclaimer

41 41 Unrealistic service targets – trying to deliver more than is sustainable (quality and output) Under pricing Over pricing Inadequate / poor financial recording and reporting Inadequate / poor management and monitoring Failure to have regular independent audits External factors (competition, demand, reputation, etc) Financial Sustainability Threats

42 Costing and Pricing 42 Questions?


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