1. Assessing your Organisation’s solvency and Creating a budget
Pan Pacific Hotel
19 September 2017
3pm to 4pm
Bob Campbell
Registered Auditor, Registered Tax Agent,
CA,CPA, MSW, MAICD
Director, Australian Audit Pty Ltd.

2. YOUR ANNUAL FINANCIAL STATEMENTS The Statement of Financial Position

3. Balance sheet Exercise
Organisation A : Net Assets $450,000 Working Capital $ 250,000
Organisation B : Net Assets $250,000 Working capital $10,000
Organisation C: Net Assets ($200,000) Working Capital ($100,000)

4. Four Ratios Model Altman’s Z Score Insolvency Prediction
Ratio 1 : Relative Uncommitted Funds (R1)
(Current Assets- Current Liabilities) / Total Assets
Ratio 2 : Relative Historical Profitability (R2)
Retained Earnings / Total Assets
Ratio 3: Current Relative Profitability (R3)
Current Profit / Total Assets
Ratio 4: Relative Strength of Net Assets (R4)
Net Assets/ Total Liabilities
Z Score = 6.56 R R R R4

5. Understanding your Risk of Insolvency

6. Some significant indicators of Insolvency
a net liability or net current liability position
negative operating cash flows in consecutive years
indicators of withdrawal of financial support by funders
Accumulating unpaid tax and superannuation liabilities
Very low bank balances and long term debtors
Inability to pay creditors on time

7. DEVELOPING A FINANCIAL GOAL OF YOUR ORGANISATION
To manage risk you need a FINANCIAL GOAL
How much money do you need?
ANSWER:
Enough to manage risk –
Commonly used measure is
90 days of budgeted annual expenditure excluding depreciation
Enough to meet your planned Property Plant & Equipment Spend
Common measure is
Three year planned Capital Expenditure Budget

8. DEVELOPING A FINANCIAL GOAL OF YOUR ORGANISATION
Risk Goal 90 days coverage
90 Days Cover = Annual budget expenditure x 90 divide by 365
Example : If Your Annual Budget is $400,556 excluding depreciation
Then 90 Days Cover = $ 400,556 X 90 / 365 = $100,000
Capital Expenditure Goal over three years
Your plans indicate over the next three years (say) $150,000 is needed
Therefore
YOUR FINANCIAL GOAL IS TO HAVE $250,000

9. TRANSLATING A FINANCIAL GOAL INTO A BUDGET SURPLUS GOAL
Uncommitted Funds = (Current Assets – Current Liabilities)
This should be greater than $250,000 to meet your Financial Goal
If there is less than $250,000 in Uncommitted Funds
Then you have to set your Budget Surplus Goal to achieve this
Example
Uncommitted Funds = $80,000
The Shortfall is (250,000 - $80,000) = $170,000
The Budget Goal is a surplus of $70,000 over one year or
Over Two years $50,000 per year.

10. DEVELOPING A FINANCIAL MODEL TO ACHIEVE YOUR BUDGET GOAL
Your Income is can be divided into :
Variable income : (eg: activity Fees, Service Outcome payments)
Fixed income: ( eg: Grants )
Your expenditure can be divided into
Variable Expenditure : ( eg: activity Expenses, Teaching costs, Program expenses)
Fixed Expenditure – Your Overheads
(eg: Rent, Admin Costs, Admin Salaries, Insurances etc)
Budget Surplus Goal
= (Variable Income – Variable expenses) + (Fixed Income –Fixed Expenses)

11. DEVELOPING A FINANCIAL MODEL TO ACHIEVE YOUR BUDGET GOAL
Budget Surplus Goal
= (Variable Income – Variable expenses) + (Fixed Income –Fixed Expenses)
Therefore
(Variable Income – Variable Expenses)
= Budget Surplus Goal – (Fixed Income –Fixed Expenses)
Your Variable Income – Your Variable expenses
is your Contribution Margin to cover
Your Budget Surplus Goal plus
Your Fixed Expenses less your Fixed Income

12. CONTRIBUTION MARGIN FROM A FEE GENERATING ACTIVITY
Example:
Your Budget Surplus Goal is $70,000
Your Fixed Expenses are $100,000
Your Fixed Income from Grants or other sources is $50,000
Therefore your Contribution Margin from Fee generating Activities must be
=$70,000 + $100,000- $50,000 = $120,000
You plan to run Fee generating Activities for 1200 people next year at minimum 10 people per activity = 120 activities
Each activity must contribute $1,000.

13. SETTING ACTIVITY FEES Activity Fees =
program Costs + staff Costs + activity Contribution Margin
Example ABC activity
activity Hours are 10 weeks for 2 hours per week = 20 Hours
activity activity costs $10 per student for minimum 10 students =$100
staff costs are $40 per hour for 20 Hours = $800
Total costs = $100+$800 = $900
Contribution margin = $1000
activity Fees must then cover $1900
activity Fee per person = $190
USE A FEES CALCULATOR TO ACHIEVE YOUR FINANCIAL GOAL

14. Open Excel first to use the calculator – then click on the calculator

15. Developing a budget summary

16. Questions