FINANCIAL ANALYSIS
National Association for State
Community Services Programs
November 2, 2011
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
What is effective financial analysis?
Financial analysis is extracting financial
information to facilitate decision-making
What questions may we want to
answer?
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?
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, …)
Two main types of analysis
TREND
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
Trend Example
Grant Revenue $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2005 2006 2007 2008 2009 2010Trend 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
Trend Example
2005 2006 2007 2008 2009 2010 $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00Trend Example
$160.00 2005 2006 2007 2008 2009 2010 $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00Ratio 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
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
Disclaimers
Using the past to predict the future
Kevin is not a lawyer, never has been, never
will be.
Rules of thumb
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
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
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
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
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
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
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
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
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.
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
Required Footnote Disclosures
Receivables
Major Categories
Timeframe – Current/Long-Term
Allowance for Uncollectible
Investments
Cost
Fair Market Value
Inventories
Retirement Plans
Subsequent Events
Required Footnote Disclosures
Long-term Debt
Maturities Security Purpose Commitments
Leases Concentrations
Credit Risk – FDIC
Contingent Liabilities
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
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.”
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
Budgeting
What makes budgeting a useful
management tool?
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
Board Reports
MINIMUMS:
Operating results
○ Revenues and Expenses
Budget vs. Actual
SUGGESTED ADDITIONS:
Budget by month
Balance Sheet
Management comments and plans
Grant Status
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
IRS Form 990
Part VIII…Compensation
Officers Directors Employees Contractors
Part IX…Functional Expenses
Program
Management and General
Key Indicators - Financial
Cash Balance
90 Days Fund Balance
10% of annual expenses Diversified Revenue
Streams
Accounts Payable
30 days or lessKey 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
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.
