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MLD-401M - Financial Management in Public and Nonprofit
Organizations
Kennedy School of Government - Harvard University
Fall 2015
Domain: Finance
Method: Financial Management
Professor: Ann Thornburg
Belfer BL-2A
Phone 617-721-7413 (cell)
Faculty Assistant: Catherine Kearns, Belfer 117, 617-495-7573,
Teacher Fellow: Nikola Ilic ([email protected])
Course Assistant: Katharine D’Hondt ([email protected])
Classroom: Land
Schedule of Classes: Tuesdays and Thursdays, 11:45-1:00PM, Land
Review Sessions: Friday, 11:45-1:00PM, Litauer 280
Overview
In this module, students will be exposed to the key accounting concepts, basic financial
statements and analytical techniques required for effective financial management. Using cases,
problem sets and lectures, students will gain experience with the language and tools to
understand nonprofit and public sector financial reports as managers. In addition, we will
discuss basic working capital, fixed asset and debt management concepts. The course will also
provide students with basic financial management tools including cost accounting, ratio analysis
and integrated financial planning/budgeting. The goal is to provide general managers with a
working knowledge of essential financial management concepts and tools as well as the ability to
understand and analyze financial statements of many types of organizations.
This course assumes no knowledge of financial management and reporting and there are no
prerequisites for this course. If you already have experience in reading and understanding
financial statements and accounting, this course is not appropriate for you. Accounting does not
require mathematical skill – though students who enjoy quantitative and analytical problem
solving will find the course content more rewarding
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NOTE: Course syllabus may be revised depending upon the actual flow of the course in
the classroom. All changes will be posted in announcements on Canvas.
Syllabus and Course Materials
We have developed a compendium of course readings, cases and financial statement examples
that available on Canvas. In addition, each class will include a powerpoint presentation slide
deck which will be posted on Canvas before each class. You are encouraged to bring a hard
copy of this material to each class – this is particularly important for the financial
statement examples since they will be referred to in the class presentation.
Canvas is organized as follows for each class:
Class outline – powerpoint slide deck of materials for class discussion
Required readings – additional required reading material
Optional readings – for those who would like to learn more about the topic
Problem sets/case analysis and the Case Study are included in a separate folder on the
course website and also for each class.
The syllabus provides the entire outline for the class including reading assignments, problem
sets, case studies and in class discussions. The timing of certain items and specifics may change
during the course depending on the individual needs of the students. Canvas is the major
source of communication for the Course – it is essential that you use it as such to ensure
that you have current and complete information for the classes.
Optional Friday Review Session
Optional review sessions will be held on Fridays. No new material will be introduced in these
sessions; rather, they will be opportunities to clarify what has already covered that week in class.
They are designed for students who feel they need more time to assimilate the concepts already
taught, who are confused about material presented in class, or who have fallen behind for some
reason. The discussion in the review sessions will be based on questions from students and also
will include additional examples and problem sets for further review of the materials. While the
sessions are optional, all students who enroll in the class should ensure that their schedule
permits them to attend the Friday review sessions as necessary. Attendance at Review Sessions
is factored into Class Participation and will be used when the course grade is on the
“bubble”. Generally 1/3 of the students attend the review sessions.
Seeking Help Outside of Class
We encourage you to actively interact with classmates, our teaching fellow or the professor in
order to learn the material. The first three classes are particularly critical to the entire course – so
make sure you have those basics in place. If you feel you do not understand a set of concepts
either before or after the class session, you are strongly encouraged to attend review
sessions. The review sessions are the major source of assistance for this module.
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Alternatively, you may set up an office appointment or e-mail the professor or teaching fellow
and course assistant with your questions, comments and concerns.
The goal of these interactions is to raise questions and work through the material so that at the
end of the interaction you have a better understanding of the key course concepts, reading and
understanding financial statements, financial analysis tools and financial management
terminology
Other Course Materials
All readings are available on Canvas.
Note: Materials used in this class, including, but not limited to handouts, exercises, cases,
discussion questions, charts, and graphs are copyrighted and may not be used for purposes other
than the educational experience of this class without the written consent of the instructor.
Other Reference Materials
Thomas A. McLaughlin, Streetsmart Financial Basics for Nonprofit Managers, New
York, John Wiley and Sons, 2007
Warren Ruppel, Not-for-Profit Accounting Made Easy (second edition), New York, John
Wiley and Sons, 2007
Warren Ruppel, Governmental Accounting Made Easy, New York, John Wiley and Sons,
2005
Michael H. Granof, Government and Nor-For Profit Accounting – Concepts and
Practices (fifth edition), New York, John Wiley and Sons, 2007
Wilson, Kattelus and Reck, Accounting for Governmental and Nonprofit Entities (14th
Edition), New York, McGraw Hill Irwin, 2007
Jeanne Bell Peters and Elizabeth Schaffer, Financial Leadership for Nonprofit
Executives, Amherst R Wilder Foundation, Saint Paul, Minnesota, 2005
Cold Calling and Class Participation
Cold calling will be used during the class to keep discussions lively. Students may stand out
either as having made valuable contributions to the learning environment or by being poorly
prepared. Contributions to the learning environment include but are not limited to insightful
comments or constructive questions in the classroom or by working with or assisting their peers
outside of class. This includes participation in review sessions as well. Class participation will
be used in determining grades for the course – especially for grades “on the margin”.
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Problem Sets and Case Studies
Problem sets have three objectives: (1) to reinforce concepts introduced through the readings and
class, and (2) to practice reading and interpreting financial statements. We have prepared two
case analyses and four problem sets for grading in the course. Each student can elect
which three of the four problem sets they wish to prepare. The two case analyses are
required of all students. We have done this to balance student course work load with other
classes and also allow students to select their areas of greater interest. Problem set and case
analyses discussions (not calculations) should be typewritten since handwritten submissions can
be difficult to understand or read. Students may wish to do all four case analyses to gain greater
facility with the course materials and can submit for “extra credit” in grading. We will use the
highest 3 grades if all case analyses are submitted. All problem sets/case analyses will be
discussed in class or in the review sessions.
Problem sets and case studies are due at the beginning of the class on the date indicated in the
syllabus. Any changes in due dates will be posted to the course website and announced in class..
Late assignments will not be accepted unless an extension is granted prior to the due date and
time. In the past, extensions have been granted due to illness and family-related matters.
Group Work
Collaboration and working with other students is one of the hallmarks at KSG that we encourage.
This collaboration and peer “tutoring” can be a valuable part of the learning process. Students
are encouraged to work together in small work groups (2-4 students – maximum of 4 per group)
on the problem sets and case analysis. However, it is expected that each student will
independently prepare their own submission and work product to demonstrate their individual
effort and contribution. The problem set or case study should also identify clearly the
collaboration with other students with their names indicated. All papers or problem solutions
you submit must be written by you alone. Any copying in whole or in part of another student’s
work is a violation of academic policy with penalties in accordance with KSG policy. If you
have any questions concerning this, please talk to Professor Thornburg.
Course Grading
Final grades for the course will utilize the guidelines and policies of KSG for grade distribution..
Each case and problem set will be graded with a numerical grade. Class participation will be
graded in three categories – attendance in class, attendance at review sessions and actual class
participation. The grades will be determined based on the following allocation of effort:
30% for Problem Sets (3 of 4 at 10% each))
50% for Case Analyses (20% and 30% each for a total of 50%)
20% class participation
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COURSE OUTLINE AND SYLLABUS
C – posted to Canvas
Class Day Date Topic Assignment
1 Thu 9/3 Introduction to Accounting and Financial
Management
Readings
Discussion of Sleep Apnea Financial
Statements
2 Tues 9/8 Basic Accounting Concepts and Principles Readings
3 Thu 9/10 Understanding Nonprofit Financial
Statements
Readings
Discussion of Road Map: Pilgrim
Services Financials
Problem Set 1 – Basic Accounting
Concepts DUE
4 Tues 9/15 More on Understanding Financial Statements –
Working Capital, Fixed Assets and Debt
Management
Readings
5
Thu 9/17 Further Discussion of Nonprofit Financial
Statements
Investments and Endowment Funds
Readings
SanJo University Financial
Statements
Problem Set 2– Family Services of
Peru DUE
6 Tues 9/22 Governmental Accounting and Financial
Statements
Readings
City of Cambridge Road Map
7 Thu 9/24 Governmental Financial Statements and
Analysis – CAFR and More
Readings
8 Tues 9/29 CLASS DISCUSSION OF COMPARATIVE
CAFRS – Tale of Two Cities – Cambridge
(MA) and Pittsburgh (PA)
Case Analysis 1– Tale of Two Cities
Comparisons DUE (20%)
9 Thu 10/1 Introduction to Financial Analysis and Ratios Readings
10 Tues 10/6 Benchmarking and Cost Allocation
Readings
Problem Set 3 PSS Ratio Analysis
DUE
11 Thu 10/8 CLASS DISCUSSION – CHARITY
NAVIGATOR (GUIDESTAR)
COMPARISONS OF HABITAT FOR
HUMANITY
Readings
Problem Set 4– Charity Navigator
Benchmarking DUE
12 Tues 10/13 Financial Planning: Budgeting Readings
13 Thu 10/15 CLASS DISCUSSION -
Integrated financial plan – Pilgrim Services
Case Study
Case Analysis 2 Pilgrim Financial
Services DUE (30%)
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COURSE DESCRIPTION
Class 1: Introduction to Accounting and Financial Management CLASS OBJECTIVES:
Provide a course overview emphasizing expectations and the nature of assignments.
Understanding nonprofit and governmental organizations – define and differentiate
Financial reporting for nonprofits – IRS, regulatory and other requirements
Understand the basic structure of financial statements and how they relate to each other
Read:
Granof and Khumawala, Government and Nonprofit Accounting 5th
edition, “Chapter 1
– The Government and Not-for-Profit Environment” pages 1-23 (C)
Warren Ruppel, Not-for-Profit Accounting Made Easy, “Chapter 2 – Basic Financial
Statements of a Not-for- Profit Organization” pages 43-63 (C)
Optional Reading:
Keating and McCarthy – “An Overview of Financial Stewardship” (C)
For discussion in class:
Sleep Apnea financial statements (C)
o What were your first impressions of these financial statements?
o What questions did you have based on reading these statements?
Class 2: Basics Accounting Principles and Concepts CLASS OBJECTIVES
Understand the key principles used by accountants to prepare financial reports
Be able to distinguish between the cash and accrual accounting methods
Become familiar with basic accounting terminology and concepts
Read:
Blazek, Jody, Nonprofit Financial Planning Made Easy, “Chapter 6 – Nonprofit
Accounting”, pages 137-149 (C)
Mayers, Raymond Sanchez, Financial Management for Nonprofit Service
Organizations (2nd
edition), “Chapter 10 – Basics of Accounting Principles, pages 216-
222. (C)
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Optional Reading:
Thornburg, Ann – “The NonAccountants Glossary for Nonprofit Financial Statements
(C)
Granof and Khumawala, Government and Not-for Profit Accounting (5th
edition),
“Glossary”, pages 765-781 (C)
Overview of International Accounting Standards – http://en.wikipedia.org/wiki/International_Public_Sector_Accounting_Standards
http://www.iasplus.com/en/resources/global-organisations/ipsasb
Prepare for next class:
Problem Set 1 – Basic Accounting Concepts
Class 3: Understanding of Nonprofit Financial Statements
CLASS OBJECTIVES:
Examine other formats and types of nonprofit financial statements
Accounting for major balance sheet, revenue and expense items
Footnote disclosures
Read
“Road Map” for Pilgrim Services Financial Statements (2 parts) (C)
Warren Ruppel, Not-for-Profit Accounting Made Easy, “Chapter 1 – Understanding the
Basics of Not-for-Profit Accounting” pages 1-42 (C)
Optional Reading:
“Hints in Analyzing Financial Statements” – (C)
Discuss in Class:
Pilgrim Services Financial Statements – be prepared to discuss major concerns you
would have as a potential donor to PSS – what are the strengths and weaknesses of PSS
based on your review of the financial statements. (Course Page also includes full
financial statements for Pilgrim Services that will be used throughout the rest of the
course.)
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Class 4: Understanding Nonprofit Financial Statements
CLASS OBJECTIVES:
Further discussion of Nonprofit Financial Statement formats and presentation
Accounting for fixed assets and debt
Begin to understand working capital and balance sheet management
Read:
McLaughlin, Thomas A, Financial Basics for Nonprofit Managers, “Chapter 10 – Cash
Flow Management – Cash is King” pages 123-136; “Chapter 11 – Why Capital is Not a
Four Letter Word”, pages 141-155 (C)
Zietlow, Hankin and Seidner, Financial Management for Nonprofit Organizations,
“Chapter 2.3-2.7 Liquidity Management”, pages 26-43 (C)
Prepare for next class:
Problem Set 2 – Family Services of Peru (see course website)
Class 5: Understanding Nonprofit Financial Statements CLASS OBJECTIVES:
Review and discussion of financial statements for a University
Understand endowments and investment accounting for nonprofit organizations
Discuss the accounting for various types of contributions
Complete financial statement analysis of nonprofit financial statements
Read:
Blazek, Jody, Nonprofit Financial Planning Made Easy, “Chapter 5, Asset
Management – Prudent Investment Management”, Pages 118-132 (C)
Warren Ruppel, Not-for-Profit Accounting Made Easy, “Chapter 3 – Accounting for
Contributions, pages 65-76 (C)
McCarthy, Understanding Financial Statements (San Jo University Example) (C)
SanJo University Financial Statements (C)
Optional Reading:
N.J. hospitals monitor effects of tax-court ruling in Morristown (Wall Street Journal)
http://on.wsj.com/1ewzbyJ
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Discuss in Class:
SanJo University Financial Statements
Class 6: Introduction to Understanding Governmental Financial
Statements and Accounting Principles
CLASS OBJECTIVES:
Understand governmental financial reporting
Gain an understanding of the fund accounting groups used by governmental entities
Understand the accounting principles followed by governmental entities
Develop the ability to analyze and read governmental financial statements
Read:
Wilson, Kattelus and Reck, Accounting for Governmental and Nonprofit Entities,
“Chapter 2 – Principles of Accounting and Financial Reporting for State and Local
Governments”, pages 33-50 (C)
Ruppel, Warren, Governmental Accounting Made Easy, “Chapter 4 – Basics of
Governmental Financial Statements”, pages 86-142 (Not including pages 112-126) (C)
Read City of Cambridge Financial Statement “Road Map” (2 parts) (C)
Interpreting Local Government Financial Statements – Stephen Gauthier
Optional Reading:
“Europe slow to adopt new accounting standards despite Greek crisis” WSJ
http://on.wsj.com/1NwnJTy
Optional Problem Set: Complete for discussion in next class (can also be
submitted for extra credit)
Governmental accounting and financial statements concepts and disclosures (on Canvas)
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Class 7: Understanding Governmental Financial Statements cont’d
CLASS OBJECTIVES:
Read and understand actual governmental financial statements
Analyze and understand comprehensive financial reporting requirements for
governmental organizations
Discuss the concept of “transparency”
Understand the importance of pensions and OPEBs in governmental entities
Read:
City of Cambridge Financial Statements and CAFR for the most recent year on file (on
City of Cambridge Website www.cambridgema.gov/publications.cfm )
Granof, Government and Not for Profit Accounting, “Chapter 11 – What Other Elements
Make Up the Comprehensive Annual Financial Report”, pages 444-468 (C)
Granof , Government and Not for Profit Accounting, “Chapter 10 – How Should the
Pension Plan Be Accounted For? pages 405-412. (C)
Ives, Razek, Hosch, Introduction to Governmental and Not-for-Profit Accounting,
“Chapter 14 – Analysis of Financial Statements and Financial Condition, pages 607-633.
(C)
Biggs, Andrew, “Public Pensions”, Wall Street Journal, May 15, 2015 (C)
Complete the following for discussion in Class 8 (Case Analysis 1):
Using the CAFR for Cambridge and Pittsburgh, PAFR (for Pittsburgh only) and other relevant
data from the websites for the City of Cambridge (MA) and the City of Pittsburgh (PA),
comment on the following:
What are the strengths and weaknesses of each city?
Which City provides the most meaningful financial information for the average
citizen concerning the financial stability and issues of the City?
What information was most helpful in making your assessment?
What information was difficult to find or missing from the financial reporting?
Class 8: Discussion of Governmental Public Reporting – CAFR,
PAFR and more
CLASS OBJECTIVES:
This class will be devoted to a class discussion of the public financial reporting (audited
financials, CAFR, PAFR and other disclosures made by the cities of Pittsburgh and Cambridge.
Participation in the class discussion will be a contributing factor to the “class participation”
component of the grade for the course.
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Class 9: Ratio Analysis - Basic Financial Ratios CLASS OBJECTIVES:
Introduce the ratios and other tools used to analyze NGO financial statements
Examine the categories of ratios: Liquidity, Profitability, Capital Structure,
Efficiency,Debt service ability
Become familiar with other analytical tools used to asses performance
Provide practical examples of how ratios are used in the evaluative process
Read:
Steven Berger, Understanding Nonprofit Financial Statements, “Using Financial
Information to Evaluate Organizational Performance” pages 45-51 (C)
Coe, Charles, Governmental and Nonprofit Financial Management, “Chapter 8 – Use
of Audit Information”, pages 282-289 (C)
“Why Ratios Aren’t the Last Word”, Guidestar – (C)
Prepare FOR SUBMISSION IN CLASS 10 (Problem Set 3):
Pilgrim Services Society Financial Ratio analysis – ( complete PSS financial
statements including footnotes and functional expense statement from Class 3 on
Canvas).
Class 10: Financial Analysis - Benchmarking
CLASS OBJECTIVES:
Become familiar with the types of benchmarking analysis performed – internal and
external `sources
Statement of Functional Expenses – and its importance to efficiency benchmarking
Review the importance of Form 990 for Nonprofit organizations – and its use in
benchmarking
Read:
Berger, Steven, Understanding Nonprofit Financial Statements (3rd
edition), “Chapter 8
– Advanced Methods of Measuring Organizational Performance”, pages 53-61. (C)
“Governance in Form 990”, Board Source (C)
Thomas McLaughlin, Financial Basics for Nonprofit Managers (3rd
edition), “Chapter
8 – Cost Accounting: How Much Does It Cost” pages 99-106; and “Chapter 13
Indirect Costs and Other Despised Items” pages 171-177 (C)
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Prepare FOR SUBMISSION IN CLASS 11 Problem Set 4:
Commentary on Charity Navigator tools and evaluation of Habitat for Humanity – the New
Orleans and Houston Chapters (with a limit of two single spaced pages)
- What are the strengths and weaknesses of CN’s evaluation of NFPs
- Do you agree with the ratings assigned to the two Habitat for Humanity chapters
- What did the ratings not capture based on your reading of the financial statements
- What could be done to improve the rating methodology
Extra credit: Review the “Guidestar” web site – what are the noticeable differences between
Charity Navigator and Guidestar benchmarking services. Comment on the advantages and
disadvantages of each. (No more than one page summary single spaced)
Class 11– Class Discussion – Value of Benchmarking and Ratio
Analysis – practical applications
CLASS OBJECTIVES:
Understand pros and cons of benchmarking for Nonprofit organizations – using Charity
Navigator (class discussion)
Comparison of Charity Navigator and Guidestar benchmarking services
Class 12: Introduction to Financial Planning: Budgeting CLASS OBJECTIVES:
Understand importance of budgeting in nonprofit organizations
Understand key budgets: operating, cash and capital.
Understanding the importance of cash management
Identify techniques used to balance annual budgets.
Assessing the impact of budgetary techniques on current and future periods.
Read:
Zietlow, Hankin and Seidner, Financial Management for Nonprofit Organizations,
“Chapter 8 – Developing Operating and Cash Budgets”, pages 253-289. (C)
Peters and Schaffer, Financial Leadership for Nonprofit Executives, “Chapter 4 –
Financial Planning” pages 65-91 (C)
Optional Reading
Blackbaud White Paper, “Financial Management of Nonprofit Organizations (C)
Fundamentals of Sound State Budgeting (C)
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Class 13: Class Discussion of Integrated Financial Plan for PSS
CLASS OBJECTIVES:
Understand importance of long term financial planning to overall financial strategy and
organizational success
Review and discuss actual examples of long term integrated financial plans of
nonprofit organizations
Complete Case Analysis 2 for Pilgrim Services Society Integrated Financial
Plan for submission in class (on course website)
Answer the questions in the case study after reading the budget and financial modeling
discussion for Pilgrim Services. Your case analysis should also include all previous discussion
on the financial statements of Pilgrim Services:
What are the major issues in the financial plan for PSS
What changes would you recommend in the financial plan for Pilgrim Services?
What other actions would you encourage if you were the Executive Director of Pilgrim
Services?
The excel spreadsheet model has been provided to enable you to make the proposed adjustments
to the budget and the projected financial statements (see separate instructions with the integrated
financial model). Your analysis should be no more than 2-3 typewritten pages (single spaced)
not including any charts or additional financial analysis. Bulleted analysis of key factors and
conclusions will enhance focus and concise presentation of your case.
