GuideStar Webinar (05/03/12) - Nonprofit Financial Health: New Tools for Analysis

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Nonprofit Financial Health:

New Tools for Analysis

3 May 2012

© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.

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Rebecca Thomas

Vice President and Product Manager, NFF

Scott Menzel

Product and Customer Experience Manager, GuideStar

Pamela Jowdy

Senior Product Manager, GuideStar

Today’s Facilitators

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Participant Poll

#financialscan

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1. The Challenge: Uncovering a nonprofit’s comprehensive financial story

Why it matters

Why now?

2. Nonprofit Financial Analysis 101: Considerations and best practices

Assessing nonprofit financial health in five steps

Income Statement and Balance Sheet demystified

Profitability and Liquidity guidelines

Financial Health Checklist

3. Financial SCAN: Anatomy of a Solution

4. Q & A

Today’s Objectives

#financialscan

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The Challenge:Uncovering a nonprofit’s comprehensive financial story

#financialscan

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Nonprofit Financial Analysis 101:Considerations and Best Practices

#financialscan

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Five Steps to Assessing a Nonprofit’s Financial Health

1. Profitability

2. Revenue Dynamics

3. Expense Dynamics

4. Composition of Balance Sheet

5. Liquidity

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Revenue Dynamics

Where does the organization’s money come from? Is it reasonably diversified? Is it at risk? Do revenue streams appear reliable / consistent?

Expense Dynamics

How have expenses fluctuated over time? Are expenses adjusted in line with changes in

revenue?

Profitability Does the organization regularly cover its full costs

with unrestricted revenue? Is the agency saving? If so, is it enough

Understanding Operating Performance: Statement of Activities/Income Statement

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ABC Center Statement of ActivitiesYears ended June 30, 2008 ($ in thousands)

Unrestricted Temp.Restricted

Perm.Restricted

Total

Revenues, Gains and Other SupportSupportFoundations 113 58 – 171Government 57 – – 57Corporations 49 – – 49Individuals 248 – – 248Total Support 467 58 – 525Investment Income 7 – – 7Tickets, Dues, Other 484 – – 484Net Assets Released from Restriction 749 -749 – –Total Revenue, Gains and Other Support 1,707 -691 – 1,016

Operating ExpensesProgram Services 1,004 – – 1,004Supporting Services Administrative 209 – – 209Development 49 – – 49Total Supporting Services 258 – – 258Total Expenses 1,262 – – 1,262

Change in Net Assets 445 -691 – -246

Operating Activity

Where Do I Find the Bottom Line? (Audits & Internals)

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Where Do I Find the Bottom Line? (Form 990: Not on the Income Statement!)

Statement of Revenue: Sample Form 990

Statement of Functional Expenses: Sample Form 990

Total revenue $4,106,969

Total expense $4,157,997

Surplus/(Deficit)

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($51,028)

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Balance Sheet from Sample Form 990B.O.Y. E.O.Y.

Change in unrestricted net assets

Unrestricted net assets (end of year) $3,527,235

Unrestricted net assets (beginning of year) $3,770,516

($243,281)

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Where Do I Find the Bottom Line? (Form 990: On the Balance Sheet!)

B.O.Y.

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Beware! Unusual Large Surpluses May Reflect Capital

Audits rarely, and 990s never, segregate capital (i.e., for fixed asset purchases) from revenue. The unrestricted surplus may be inflated by these capital flows.

Unrestricted Revenue & Expenses (including non-operating)($ in thousands)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2008 2009 2010 2011 2012 2013

Revenue, including non-operating Expenses (before depreciation)

Operating Revenue & Expenses($ in thousands)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2008 2009 2010 2011 2012 2013

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Surplus Size Matters:Breaking Even is Never Enough

Like any organization, nonprofits need to cover the ‘full cost’ of delivering programsTax Status is NOT a Business ModelFull costs > Operating Expenses

Full costs include:

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1

1010

0

10

Operating Expenses

Fixed Asset Additions

Debt Principal

Working Capital Reserves

Depreciation

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Financial Indicator Healthy Moderately

Healthy

Requires Immediate Attention

UnrestrictedSurplus/Deficit

(as % of expenses)

Surpluses consistently cover

full costs, contributing to healthy balance

sheet and savings(3%+)

Breakeven results or periodic

surpluses insufficient to

cover full costs(-3% to +3%)

Consistent and/or growing deficits(-3%+)

METRIC - Operating Results: A Guideline

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Understanding Balance Sheet Health: Statement of Position

Balance Sheet

Assets

LiabilitiesNet Assets

Assets Cash – How much? How “liquid?” Receivables – Are they slow to collect? Fixed Assets – Are fixed assets being maintained?

Liabilities Line of Credit – Is cash flow being managed through a line of credit? Appropriately?

Debt – Is there a plan for repayment?

Net Assets & Reserves

Unrestricted Net Assets – Does the nonprofit own more than it owes? How much is liquid?

Temporarily Restricted Net Assets – Do they fully support core programs?

Reserves – Any reserves? Suitable to needs?

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Months of Cash =Total Cash

(Total Expenses / 12)

Months of Unrestricted Liquid Net Assets =

portion of net assets available for operations

Unrestricted Net Assets –(PPE – PPE Debt)

(Total Expenses / 12)

Working Capital = Current Assets – Current Liabilities

Measuring Liquidity (Take-Home)

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Financial Indicator Healthy Moderately

Healthy

Requires Immediate Attention

Months of Liquidity

3+ months cash and working capital

One ore more board designated reserves

for risk or opportunity

Sufficient to cover cyclicality

of cash flow (aim for 3 months)

Less than one month and declining

METRICS - Liquidity: A Guideline

Risk – Cash = Crisis

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A Financial Health Checklist

Operating results are consistently positive (surpluses!)

Full costs are regularly covered by reliable revenue

Reinvestment in fixed assets to offset depreciation

Evidence of ability to manage debt

Liquidity is sufficient to withstand riskand pursue new opportunities

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Is there a “right” answer?

#financialscan

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Financial SCANSM:Anatomy of a solution

#financialscan

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An annual financial “check-up” for review at management and board levels

Visual and compelling report for communicating financial story and funding requirements

Historical context to inform the annual budgeting process and strategic/business planning

A quick way to inform consultants engaged for financial planning and other capacity-building efforts

A training resource for new executives and board members

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An annual financial “check-up” before fund allocation

Grantee and potential grantee peer benchmarking

Clear visual representation of financial trends with a guide for interpreting results: program officer education

Engage grantees in dialogue about their financial health and resource needs

Documentation to support recommendations to boards

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Charitable Giving Planning: Wealth Managers can use Financial SCAN to present grantee recommendations to individual clients in a consistent, sophisticated way.

NPO Asset Management: Inform the development of income generation strategies and investment policy statement development for existing nonprofit clients.

New Business Acquisition: Identify new nonprofit clients and use the comprehensive report as part of a pitch book to prospective nonprofit and high net worth individual clients.

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31-Page PDF Report

Financial Health Dashboard

13 Graphs with accompanying narrative and questions to consider

Peer Comparables Dashboard

Glossary and Definitions

Date and time stamped

All data sourced directly from Forms 990

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Financial SCAN DemonstrationOnline Report Generation

#financialscan

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Recap

Financial Health Dashboard

13 Graphs with accompanying narrative and questions to consider

Peer Comparables Dashboard

Glossary and Definitions

Date and time stamped

All data sourced directly from Forms 990

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1. I am a nonprofit and only want to run a report on my own organization once or

twice per year. Is there a Financial SCAN product for nonprofits?

2. How big is the Financial SCAN universe?

3. How does Financial SCAN handle cases where a target organization does not

have 5 years of data?

4. Does Financial SCAN include mission and impact data?

Common Questions

#financialscan

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webinars@guidestar.org

Product Information and Questions

#financialscan

www.guidestar.org/financialscan

“This innovative new tool builds the financial management capacity of nonprofits and helps grantmakers engage with their grantees about financial health and funding needs. By creating a new standard for nonprofit financial analysis, the Financial SCAN underscores the relationship between strong finances and effective programs.”

-- Kathy Reich, Director or Organizational Effectiveness GrantmakingDavid & Lucile Packard Foundation

Financial SCAN Funder

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The BackupAppendix

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www.guidestar.orgGuideStar USA

Founded in 1994

Offices: Washington, DC and Williamsburg, VA

1.8 million organizations in the GuideStar database

18,554 nonprofits voluntarily provide information via GuideStar Exchange

More than 6 million Form 990 images in the GuideStar database

8.3 million annual visitors to the GuideStar website

803,256 newsletter subscribers

$11 million operating budget

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Financial Health Dashboard

#financialscan

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Graphs, Narrative and Questions to Consider

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Peer Comparables Dashboard

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Nonprofit Financial Health:

New Tools for Analysis

3 May 2012

© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.