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Module 13

Module 13. Performance Measurement and Financial Statement Analysis. Outline. 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.

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Module 13

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  1. Module 13 Performance Measurement and Financial Statement Analysis Convery 2013

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

  5. Measuring service efforts and accomplishments (SEA) 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 www.gasb.org Convery 2013

  6. Measures of quality • 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. Documents • IRS Form 990 Return of Organization Exempt From Income Tax, with Schedule A, 990-T, 990-POL see www.guidestar.org • 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. Good Performance Indicators are: • 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. Types of financial ratios or measures • Common size • Liquidity • Going concern or profitability • Capital structure ratio • Program effectiveness • Efficiency • Leverage and debt coverage • Fundraising efficiency • Investment performance Convery 2013

  10. Common size measures • 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. Liquidity measures • 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. Going concern and “profitability” measures • 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. Capital structure ratios • Unrestricted Cash and Investments (current and long-term)/long-term debt • Debt to Total Assets • Debt to Net Assets (equity) Convery 2013

  14. Program effectiveness measures • 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. Efficiency measures • 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. Leverage and debt measures • 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. Fundraising efficiency measures • 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. Investment performance measurements • 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. Performance indicators for HCOs • 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. Benchmarks and Best Practices • BBB Wise Giving Alliance “Standards for Charitable Solicitations: www.give.org • Charity Watch www.charitywatch.org“Charity Rating Guide” • Guidestar’s Analyst Report at www.guidestar.org • Board Source www.boardsource.org • United Way www.uwa.org • Maryland Association of Nonprofit Organizations “Standards of Excellence” at www.standardsforexcellence.org • Industry benchmarks compiled by accrediting agencies, e.g., CCAC Convery 2013

  21. Monitor revenue sources over time Convery 2013

  22. Sample NPOfinancial ratios and trend analysis Convery 2013

  23. Sample NPO Key Indicators (nonfinancial) Convery 2013

  24. Caution • 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. Caution • “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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