FINANCIAL ANALYSIS. National Association for State Community Services Programs. November 2, 2011

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FINANCIAL ANALYSIS

National Association for State

Community Services Programs

November 2, 2011

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Agenda

What is effective financial analysis?

How can we use trend analysis?

How can we use ratio analysis?

What analytical procedures can assist us?

What are the OMB A-110 requirements?

What makes an effective budget?

How can Board reports be an effective

tool?

What are some key indicators?

Can IRS Form 990 assist us in our

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What is effective financial analysis?

Financial analysis is extracting financial

information to facilitate decision-making

What questions may we want to

answer?

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What is the firm’s ability to withstand setbacks?

Is this organization one that we want to fund?

Potential questions to answer

Is the organization able to meet its short-term

obligations?

Can the entity afford to pay off its long-term

debt commitments?

Is the organization using its resources

efficiently?

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Before we start…..

Financial analysis is a science and an art

There is no one right way to conduct it

Don’t analyze the numbers in a vacuum

 Numbers provide a ‘trigger’ for further questions

You must know the environment (i.e.

business, local economy, …)

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Two main types of analysis

TREND

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Trend Analysis

Look at results over time

Compare apples to apples

Make sure the time period is long enough for

a trend to be evident

Know what is happening in other similar

organizations

Know if there are extenuating circumstances

Use graphs to help analyze trends

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Trend Example

Grant Revenue $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2005 2006 2007 2008 2009 2010

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Trend Example

Percent of Statewide Total 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2005 2006 2007 2008 2009 2010

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Trend Example

2005 2006 2007 2008 2009 2010 $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00

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Trend Example

$160.00 2005 2006 2007 2008 2009 2010 $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00

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Ratio Analysis

Ratio is a relationship between two numbers

Comparisons:

 Ratios from previous years for internal trends

 Ratios from others in the same ‘industry’

Diagnostic tool to identify problems and

opportunities, related to:

 Liquidity

 Degree of financial leverage (Debt)

 Self-sufficiency

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Ratio Analysis

Limitations

 Based on the past to predict the future

 No absolute ‘correct’ number

 Financial statements based on cost (not value)

 Difficult to find true comparables

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Disclaimers

Using the past to predict the future

Kevin is not a lawyer, never has been, never

will be.

Rules of thumb

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Key Ratios

How do organizations get into trouble

Make bad decisions

Depend on an undiversified revenue stream

Fail to operate effectively and efficiently

Make short-term decisions – not long-term

Have a ‘bloated’ administrative structure

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Key Ratios

Operating results:

 1. Increase (Decrease) in Net Assets for the Year

○ Goal – Breakeven or positive

○ Mitigating – One time or planned result

 2. Actual vs. Budget

○ Goal – actual within 2 – 3% of budget

○ Mitigating – Emergency unplanned event or one time

revenue

 3. Administrative expenses as a percent of total

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Key Ratios

Cash Flow Management

 4. Cash flow from operations

○ Goal – Positive cash flow from operations

○ Mitigating – Strong plan in place

 5. Grants receivable as a percent of annual grant revenue

○ Goal – 30 days or less

○ Mitigating – Strong capital in place to allow

○ Mitigating – contracts in place that allow slow pay

 6. Payables as a percent of expenses

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Key Ratios

Cash Flow Management (continued)

 7. Available cash on hand

○ Goal – at least 10 days

○ Mitigating – a well managed cash flow system

 8. Current ratio

○ Goal – at least 1.25

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Key Ratios

Future oriented measures

 9. Unrestricted net assets as a percent of revenue

○ Goal – 5 – 10%

○ Mitigating – Strong planning systems in place

 10. Revenue dependency

○ Goal – Largest revenue source is less than 10% of

total revenue

○ Mitigating – Strong program operations with little

chance of funding disruption; program has strong political support

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Key Ratios

Future Oriented Measures (continued)

 11. Long-term debt to net assets

○ Goal – 50% or less

○ Mitigating – Direct relationship between

long-term assets and long-long-term debt is 1 to 1

 12. Debt service costs as a percent of expenditures

○ Goal – 5% or less

○ Mitigating – Long-term funding commitment is

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Key Ratios

Future Oriented Measures (continued)

 13. Future commitments (obligations) to revenue

○ Goal - ????????

○ Mitigating – Multi-year funding contracts in

place

 14. Net book value of fixed assets

○ Goal – at least 50%

○ Mitigating – Good maintenance and safety

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Financial Analysis Process

EXAMPLE COMMUNITY ACTION

Step 1 – Acquire financial statements

 3 to 7 years, if possible

Step 2 – Quick Scan

 Look for large changes

 Look for key numbers

Step 3 – Review the financial statement

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Required Footnote Disclosures

Nature of Operations

 Purpose – non-profit organization

 Geographic Region

 Major Funding Source

Summary of Significant Accounting Policies

 Definition of Cash

 Use of Estimates

 Basis of Accounting – Accrual

 Net Asset Classes – Unrestricted, Temp. Rest, & Perm. Rest.

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Required Footnote Disclosures

Property and Equipment

 Capitalization Policy

 Categories – Land/Building/Equipment

 Depreciation Basics – Lives/Method

Income Recognition

 Program Income

 Classifications of Contributions/Donations

 Grant Awards/Unearned Revenue

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Required Footnote Disclosures

Receivables

 Major Categories

 Timeframe – Current/Long-Term

 Allowance for Uncollectible

Investments

 Cost

 Fair Market Value

Inventories

Retirement Plans

Subsequent Events

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Required Footnote Disclosures

Long-term Debt

 Maturities  Security  Purpose 

Commitments

 Leases 

Concentrations

 Credit Risk – FDIC

Contingent Liabilities

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Financial Analysis Process

Step 4 – Examine the Balance Sheet

Step 5 – Examine the Income Statement

Step 6 – Examine the Cash Flow Statement

Step 7 – Calculate key financial ratios

Step 8 – Compare to comparables

Step 9 – Formulate your questions

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OMB A-110 Requirements

Subpart C (.21)

 “…recipients to relate financial data to performance data and develop unit cost information whenever practical.”

 “Accurate, current and complete disclosures of the financial results of each…project…”

 “…source and application of funds…”

 “Comparison of outlays with budget amounts for each award.”

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OMB A-110 Requirements

What does it mean?

 Fund accounting is required

 Minimum of an operating statement

 Budget vs. Actual reporting

 Some level of performance based reporting

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Budgeting

What makes budgeting a useful

management tool?

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Budgeting – Keys to Success

1. Realistic inputs (assumptions)

 GIGO – Garbage In Garbage Out

 Perhaps most important

2. Fund based

 Tie revenues to expenses

 Allocate costs

3. Flexibility

 Budget is dynamic, not static

4. Use the results

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Board Reports

MINIMUMS:

 Operating results

○ Revenues and Expenses

 Budget vs. Actual

SUGGESTED ADDITIONS:

 Budget by month

 Balance Sheet

 Management comments and plans

 Grant Status

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IRS Form 990

Part I…Mission and summary

Part III…Statement of Program Service

Accomplishments

Part IV…Related party transactions

Part VI – Section A…Governing Body

Part VI – Section B…Policies

 Conflict of Interest policy

 Whistleblower policy

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IRS Form 990

Part VIII…Compensation

 Officers  Directors  Employees  Contractors

Part IX…Functional Expenses

 Program

 Management and General

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Key Indicators - Financial

Cash Balance

 90 Days 

Fund Balance

 10% of annual expenses 

Diversified Revenue

Streams

Accounts Payable

 30 days or less

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Key Indicators - Systems

No or outdated policies and

procedures

Board that is not engaged

Untimely financial statements or

bank reconciliations

Unaddressed audit or monitoring

findings

Not current with tax or other filings

Poor or no budgeting or planning

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Just for fun……..

From the audit opinion….

 Material deficiencies in financial reporting…

 …did not maintain effective internal control over financial reporting and compliance with significant laws and regulations…

 …financial condition and long-term fiscal outlook is continuing to deteriorate.

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Figure

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References

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