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Performance Measurement and Financial Statement Analysis Convery 2013.

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Presentation on theme: "Performance Measurement and Financial Statement Analysis Convery 2013."— Presentation transcript:

1 Performance Measurement and Financial Statement Analysis Convery 2013

2  Performance objectives and system  Documents for assessing whether objectives were met  Performance measures or indicators  Benchmarks and best practices  Caution: unfair or inappropriate measures of performance Convery 2013

3  Effective and efficient operations  Compliance with laws and regulations  Financial management (short and long-term)  Fiduciary responsibility  Sustainability of the organization over time  Making a difference Convery 2013

4 1. Get consensus from stakeholders on the organization’s mission, goals, objectives. 2. Develop qualitative and quantitative performance indicators. 3. Systematically collect data to assess performance. 4. Compare performance to benchmarks, both peer and “aspire to” organizations. 5. Assign clear responsibility for performance and reward it when achieved. 6. Report regularly on performance to a broad set of stakeholders with effective methods of presentation. 7. Listen to feedback and implement changes through a “continuous quality improvement” plan. Convery 2013

5 PROCESS MEASURES  Input Measures – effort expended on a program RESULTS MEASURES  Output Measures – level of service provided (often stated in nonfinancial terms)  Outcome Measures – effect the service has on the program’s stated objectives  Efficiency Measures – comparison of the level of inputs with outputs or outcomes, e.g., cost per persons who have achieved the goals. See GASB’s Performance Measurement Convery 2013

6  Timely financial information that fairly presents the position and results of operations  Level of service supplied adequate to meet the demand for services  Customer satisfaction (both expectations and perceptions)  Longevity and sustainable programs over time  Community impact Convery 2013

7  IRS Form 990 Return of Organization Exempt From Income Tax, with Schedule A, 990-T, 990- POL see  Audited annual financial statement and monthly unaudited statements  Application for tax-exempt status Form 1023  Annual report and website info  “Grades” of watchdog groups such as BBB Wise Giving Alliance, AIP, Guidestar Convery 2013

8  Focus on outcomes, not just outputs  Communicated clearly across the organization  Benchmarked against prior years’ or competitors  Easy to measure and interpret  Reliable and consistent over time  Based on data that is audited Convery 2013

9  Common size  Liquidity  Going concern or profitability  Capital structure ratio  Program effectiveness  Efficiency  Leverage and debt coverage  Fundraising efficiency  Investment performance Convery 2013

10  Each asset as a percent of total assets  Each revenue item as a percent of total revenues and support  East expense item as a percent of total expenses Then compare these to budgeted ratios. Convery 2013

11  Can the organization pay its current debts? ◦ Current ratio: current assets/current liabilities ◦ Working capital: current assets – current liabilities ◦ Acid test ratio: quick assets/current liabilities (disregard inventory) Convery 2013

12  Are revenues sufficient to cover expenses? ◦ Revenue/Expense ◦ Operating ratio: net income/revenue  How many months (or years) of operating expenses can be covered by current unrestricted net assets ◦ 3-6 months is a minimum cushion to “meet payroll” in times of declining revenue or difficulty collecting A/R ◦ The AIP considers 3 to 5 years to be a large amount, indicating the organization may not need additional resources  Are revenues growing over time?  What type of revenues? Convery 2013

13  Unrestricted Cash and Investments (current and long-term)/long-term debt  Debt to Total Assets  Debt to Net Assets (equity) Convery 2013

14  Is the NPO accomplishing its goals?  Is an appropriate amount spent on the organization's exempt purpose? ◦ Program expenses as a percent of total expenses ◦ Some say should be > 60% or 80%  Is a reasonable amount spent on administering the organizations? ◦ Support expenses as a percent of total expenses ◦ Some say should be < 40% or 20% Convery 2013

15  Is the cost per client per achieved outcome decreasing over time?  What is the “cost” to achieve the next level of quality?  Do the benefits exceed the costs of delivering services? ◦ Expenditures per capita ◦ Cost per client ◦ Required subsidy per consumer Convery 2013

16  Can the organization pay its total liabilities and continue to operate as a going concern? ◦ Total liabilities/Total assets  Are future years’ revenues needed to pay for current services? ◦ Total debt to net assets or total debt to current revenues  Is the debt service expense covered by income? ◦ Net income (adjusted for noncash items) or income before interest and depreciation) / annual debt service expenses Convery 2013

17  Are contributions received greater than fundraising expenses? ◦ Public support/Fundraising expenses ◦ Should be > 1:1 Target might be 8:1 ◦ Fundraising expense/related contributions ◦ Increase in public support over time  Are earnings on investments reasonable in light of market trends? ◦ Rate of return on investments ◦ Payout rate on endowments Convery 2013

18  Has the NPO complied with state laws? ◦ Uniform Management of Institutions Funds Act and Uniform Prudent Investors’ Act (updated) that describe standards of care, portfolio theory, and delegation of investment authority  Has the NPO conformed with its Investment Policy: ◦ Sample: “Goal is to optimize invested funds while maintaining a safe amount of risk and meeting the fiduciary responsibility assumed by the organization.”  Rate of return on investments; Risk/Return ratio; Payout rate on endowments; Total return/investments  Are variances between budget and actual reasonable for: ◦ Realized and unrealized gains/losses; investment income  Convery 2013

19  Not-for-profit health care organizations (HCO) must display a performance indicator and disclose in the notes, such as: ◦ Revenues over expenses ◦ Revenues and gains over expenses and losses ◦ Earned income ◦ Performance earnings  These items should be reported separately from the indicator ◦ Transactions with owners ◦ Equity transfers ◦ Receipts of restricted contributions ◦ Unrealized gains and losses on investments ◦ Investment returns restricted by donors ◦ Extraordinary items Convery 2013

20  BBB Wise Giving Alliance “Standards for Charitable Solicitations:  Charity Watch “Charity Rating Guide”  Guidestar’s Analyst Report at  Board Source  United Way  Maryland Association of Nonprofit Organizations “Standards of Excellence” at  Industry benchmarks compiled by accrediting agencies, e.g., CCAC Convery 2013

21 5 years agoToday2 years from now Public Support90%60%30% Fees for Service5%35%60% Other,e.g., investment income 5% 10% 100%

22 Convery 2013 FY05FY06Bench-markNPO Quartile # of months of expenses in net assets 3 mo.6 mo.12 mo.25% Current ratio1.862.52.050% Bond covenant ratio 5.621.921.5075% Fundraising ratio$5 to $1$8 to $1$3 to $175%

23 Convery 2013 Actual May Budget May Monthly Variance % Occupancy100%80%25% favorable FTE Staff40 0 # of clients8010020% unfavor-able

24  Some easy to calculate ratios may not be fair. e.g., the percentage of expenses spent on the “program” vs. “supporting” the program (i.e., G&A and fundraising)  Scenario: A relief organization that has gifts-in- kind of food and clothing can either drop them from an airplane in foreign countries (and have relatively low support expenses) or have a field staff on location trained in the logistics of distributing food and clothing  Managing for the short-term (meet the budget) and not the long-term. Convery 2013

25  “Bottom line” measures used for businesses don’t work since there are no “owners” of an NPO expecting a return on their investment.  Merely spending money on a program is not an indicator of having reached the program’s goals.  Allow more flexibility for NPOs less than 3 years old or with annual revenue less than $100,000. Convery 2013

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