KEY FINANCIAL INDICATORS FOR EFFECTIVE LEADERSHIP
Presented by Vanessa Wilkins Seed Strategies, LLC/Partners in [email protected] +1-503-702-4800
The Nonprofit Association of OregonApril 18, 2013
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Review basics Identify key indicator’s of your
organization’s financial health Align financial oversight with your
organization’s business model and risks
Target questions, data and analysis on work already being done
GOALS FOR THE DAY
©2013 Partners in Scale
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Role with your organization? Type of organization? Size? Any issues you want to
discuss?
WHAT BROUGHT YOU HERE?
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4©2011 Seed Strategies, LLC
GOOD FINANCIAL MANAGEMENT HELPS US: Achieve your mission (and stay in business!) Track sources/uses of funds Plan Tell the world how we are doing (donors, IRS,
others) Be good stewards of our organization’s
resources and assets Compliance
WHAT’S THE POINT?
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I. REVIEW BASICS AND IDENTIFY THE MOST REVEALING AREAS OF FINANCIAL REPORTS
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3 Main Financial Statements Statement of Financial Position/Condition
(Balance Sheet) Statement of Activities (Income Statement) Statement of Cash Flows Statement of Functional Expenses –
Optional for most
FIRST, THE BASICS
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Snapshot in time Assets – Liabilities =
Net Assets• Net Assets Increase
when funds are pledged
• Net Assets Decrease when expenses are made
Listed in order of liquidity
STATEMENT OF FINANCIAL POSITION
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Source: Nonprofit Association of Oregon, http://www.nonprofitoregon.org/sites/default/files/uploads/file/faq_Sample_NP_Statement_of_Financial_Position_GAAP_Format.pdf
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Statement of Financial Position (Balance Sheet)
Size? Any issues you want to discuss?
STATEMENT OF ACTIVITIES
Source: Nonprofit Association of Oregon, http://www.nonprofitoregon.org/sites/default/files/uploads/file/faq_Sample_Statement_of_Activities_GAAP_Format.pdf
Sources and uses of funds over period of time
Cash or accrual Restricted/
unrestricted Revenue booked
when pledged Can do cash basis
monthly and accrual at year-end
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STATEMENT OF FUNCTIONAL EXPENSES
Source: Elizabeth K. Keating, CPA and Peter Frumkin, “How to Assess Nonprofit Financial Performance,” http://www.nasaa-arts.org/Learning-Services/Past-Meetings/Reading-5-Understanding-Financial-Statements.pdf
Divides expenses into:
Program Fundraising General/
Admin Relates to 990 Many donors
recognizing limitations
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STATEMENT OF CASH FLOWS
Source: Elizabeth K. Keating, CPA and Peter Frumkin, “How to Assess Nonprofit Financial Performance,” http://www.nasaa-arts.org/Learning-Services/Past-Meetings/Reading-5-Understanding-Financial-Statements.pdf
Way to reconcile cash
Can be very different from income statement
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IRS Form 990 Summary of:
• Statement of Activities• Functional Expenses• Balance Sheet
Includes public support test Full board should review Makes compensation
information public
IRS REQUIRES INFORMATIONAL RETURN
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Source: American Red Cross IRS 990 from Guidestar, March, 2012
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Revenue booked when pledged• No matching principle • 3 year grant booked up front even though:
• $’s not received• Expenses not yet incurred• $’s not guaranteed (i.e.
milestones/metrics that must be met) Restricted funds add complexity Maximize impact NOT income
DIFFERENCES BETWEEN FOR PROFIT AND NONPROFIT
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II. IDENTIFY KEY INDICATORS OF YOUR ORGANIZATION’S FINANCIAL HEALTH
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How are we doing:• Against budget?• Compared to prior years/months?
How are key financial ratios trending? Peers/competitors? Keep abreast of
market through:• ED contacts• Industry groups• National associations or networks• 990’s of similar orgs
WHAT DON’T THESE STATEMENTS TELL YOU?
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HISTORICAL TRENDS, BUDGET & RATIOS PROVIDE CONTEXT (BUT CAN BE DAUNTING)
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A PICTURE IS WORTH A THOUSAND WORDS
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Total Revenue Total Expenses Net Income Total Net Income-$200,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
YTD + PROJECTION 2012
2011
44%
26%
7%
6%
17%0% Foundation and corporate
grants
Government grants and con-tracts
Individual contributions
Earned income
Events income
Investment income
Key Financials 2011-2013 (Projected)
Sources of Revenue
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MUST CLOSELY MONITOR CASH
©2013 Partners in Scale
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Watch unrestricted funds carefully Can still go broke with restricted funds in
bank Orgs often rely on boards (give and get) for a
significant portion of operating budget Nonprofits like Christmas trees – everybody
wants to buy you an ornament, but nobody wants to pay for the tree
UNRESTRICTED “CASH IS KING”
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Highlights from ED Balance Sheet and Income Statement (Cash or Accrual)
• Comparison to Budget• Projection to Year End• Comparison to Prior Years
Key ratios prepared for board Charts/visuals of key info Assumptions noted Ties to strategic plan goals/milestones or organizational
dashboard
EFFECTIVE LEADERSHIP REQUIRES MORE INFO
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BEST PRACTICE BOARD MATERIALS INCLUDE:
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Surplus/Deficit • Absolute $’s and % of
Budget• Comparison to prior
year/periods• Profit margin = (Revenue –
Expenses)/Revenue
Revenue • % Increase/decrease over
last year• Composition (sources %)• Concentration (too reliant
on one source or one donor?)
YOU MANAGE WHAT YOU MEASURE - RATIOS
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SOME EXAMPLES:
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Fundraising Efficiency• % Fundraising Exp/Revenue • ROI on fundraising activities
(% return on $ invested in campaign, event, or staff)
• # of Donors vs. prior period• Average donation size
Operating Efficiency• Cost per beneficiary • Program expense/Total
expenses• Line item % of Total Exp. • Revenue per employee
Liquidity• Days/weeks cash on hand• Burn Rate • Working Capital = Current
Assets – Current Liabilities
COMPARE AGAINST PRIOR YEARS OR BENCHMARKS
©2013 Partners in Scale
SOME EXAMPLES:
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Remember the Hedgehog?
• Focus on intersection of mission, strength, and what brings in $’s
Measures different for every organization
Take 10 minutes now to compile your key ratios/measures
HOW DO YOU CHOOSE WHAT TO MEASURE?
MISSION
CORE PROGRAM BRINGS
IN $’S
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HEDGEHOG PRINCIPLE
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MENTORING EXAMPLE – POSSIBLE METRICS
MISSION
CORE BUSINESS
BRINGS IN $’S
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HEDGEHOG PRINCIPLE Mission: Mentoring Org
• # matches• # of graduates
Core Program: Mentoring • Relationship quality• Duration of relationship• Mentor turnover
Revenue Drivers:• Average donation• Number of Donors• Cost per match• # of sponsorships
MISSION
CORE PROGRAM BRINGS
IN $’S
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III. ALIGN FINANCIAL OVERSIGHT WITH YOUR ORGANIZATION’S BUSINESS MODEL AND RISKS
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Design for audience Remember your hedgehog Must match strategy Must be easily trackable!
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DO YOU HAVE A DASHBOARD?
Source: Lawrence M. Butler, The Nonprofit Dashboard: A Tool for Tracking Progress, Boardscource, 2007
26©2013 Partners in Scale
WAIT! THESE AREN’T FINANCIAL INDICATORS!
Source: Lawrence M. Butler, The Nonprofit Dashboard: A Tool for Tracking Progress, Boardscource, 2007
EFFECTIVE GOVERNANCE ENSURES ORGANIZATIONAL ACTIVITIES AND FINANCIAL
OUTCOMES ALIGN WITH MISSION AND STRATEGY
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CHOOSE FORMAT AND METRICS THAT SUIT YOU
Source: Bridgespan, Living into your Strategic Plan: Tools and Templates, http://www.bridgespan.org/Publications-and-Tools/Strategy-Development/Living-Into-Your-Strategic-Plan/Living-Into-Your-Strategic-Plan-Tools-and-Template.aspx#.UWYFsr9emaI
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CULTIVATE SOLID STUDENT PIPELINE
5.0
2.5
5.25.7
6.5 6.5
4.7
3.3
3.9 4.0
2.0
4.0
6.0
8.0
Jan '07 Jul '07 Jan '08
Graduation Month/Year
MA RI DC NY
G
Metric:
Rules: G
Y
R
Comments: Consistent referrals suggest both student satisfaction and high need for Year Up services
• Interested : Accepted >= 3:1•Ratio of Interested to
Accepted between 2:1 and 3:1
• Interested : Accepted <= 2:1
•Alumni referral >= 30%•20% < Alumni referral < 30%
•Alumni referral <= 20%
Student Yield
(Interested: Accepted Ratio)G Admissions Referrals
(% Referred by Alumni/Students)G
57%
49%
60%
44%
18%
56%
47%
17%13%
0%
10%
20%
30%
40%
50%
60%
J an '07 J ul '07 J an '08
Graduation Month/Year
MA RI DC NY
Ratios across all four sites indicate high interest & deep outreach
Consistently lower yield for January classes expected
ANOTHER VERSION… WITH PICTURES!
Source: nonprofitfinancefund.org/files/docs/Year_Up.pdf
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NGO
Board of Directors
Partners
Potential Donors Need/Beneficiaries
Mission
Regulation & Economic Environment
Com
petit
ors
SubstitutesCom
petitors
Strategic Funding Model
Clear Value Proposition Theory of Change
Clearly defined target market
Evaluate ImpactEvaluate ROI
UNDERSTAND YOUR BUSINESS MODEL
©2013 Partners in Scale
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Is this program in our hedgehog sweet spot? Does this grant cover ALL costs for the new
programs?• If not, how will we pay for the rest?
Scale often depends on large “capacity building” grants
• Crucial need• Careful not to over promise in too short a
timeframe• Just enough money to “hang yourself”
Will this throw off our program expense ratio? Does that matter?
WATCH FOR MISSION CREEP OR TOO MUCH FUNDER INFLUENCE ON THE REVENUE SIDE (LEFT ON PREVIOUS)
©2013 Partners in Scale
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EVALUATE FUNDERS/OPPORTUNITIES AS YOU WOULD ANY NEW PROGRAM
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Know when to say “no” Be clear about funding
model from beginning Beware of cannibalizing
donors from one program or fundraising effort to another
• Are you really bringing in new $’s or new donors?
Source: Susan Colby and Abigail Rubin, Costs are Cool: The Strategic Value of Economic Clarity, The BridgeSpan Group
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If you have multiple programs, understand who’s subsidizing whom
Know your cost per participant or beneficiary Understand how staff allocates time (cost
driver) Be realistic about what success will cost
• What resources does the organization need to accomplish these goals?
• What investments are needed in staff, IT, programs, or infrastructure to accomplish these goals?
UNDERSTAND COST DRIVERS ON THE EXPENSE SIDE (RIGHT SIDE OF BUSINESS MODEL)
©2013 Partners in Scale
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Governance as Leadership
Type
I:
Fiduc
iary
Type II:
Strategic
Type III: Generative
“OVERSEERS”
“SENSE-MAKERS & FRAMERS”
“STRATEGISTS”
Source: Richard P. Chait, William P. Ryan, Barbara E. Taylor, Governance as Leadership, Boardsource, 2005.
BOARDS FUNCTION IN 3 MODES
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IV. TARGET QUESTIONS, DATA, AND ANALYSIS DRAWING ON WORK ALREADY BEING DONE WITHIN YOUR ORGANIZATION.
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Timely, accurate financial statements Short, high level narrative Time to review materials before the board
meeting (one week best practice, but at least 2-3 days)
Realistic assessment of organization’s opportunities, threats
WHAT YOU CAN/SHOULD EXPECT AS A BOARD MEMBER
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Don’t make your board do math • If a ratio is important, put it in materials
Don’t gloss over real problems No whining
• Explain the problem • Solicit input• Suggest a resolution• Monitor its success
NO-NO’S FOR ED/CFO
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WHAT’S REALISTIC DEPENDS ON SIZE AND STAFF
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Size of NGO
All Volunteer Small (5 FT Staff)
Medium (15+ FT Staff)
Large (30+ FT Staff)
Books kept by volunteer treasurer
Monthly accounting work outsourced; budget & grants might be in-house, clerical
At least full-time Bookeeper on staff (often jack of all trades)
CFO/Finance Manager + Bookkeeper + Clerical assistant
• Check writing & data entry• Bookkeeping • Compliance• Grant budgeting and reporting• Planning• Financial Reports (monthly and yearly)• Audit and Form 990
Tasks to be completed
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How can your organization better align financial management with strategic goals?
• What information do you need that you aren’t getting?
What’s holding you back?• Is it realistic for your staff/volunteers to
track this?• What “proxies” could we track? • How can we simplify for our
organizational size/stage? What can you do personally?
FINAL EXERCISE
©2013 Partners in Scale
SPEND 5 MINUTES NOW
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IV. APPENDIX
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MANAGEMENT DASHBOARD BY STRATEGIC PRIORITY
Source: Bridgespan, Living into your Strategic Plan: Tools and Templates, http://www.bridgespan.org/Publications-and-Tools/Strategy-Development/Living-Into-Your-Strategic-Plan/Living-Into-Your-Strategic-Plan-Tools-and-Template.aspx#.UWYFsr9emaI
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TEACH MARKETABLE SKILLS
91%88%
87%
100%
83%
93%
100%
90%
95%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Jul '06 Jan '07 Jul '07Graduation Month/Year
MA RI DC NY
G
Metric:
Rules:G
Y
R
Comments:
•Met or Exceeded Expectations > = 85%
•80% < Met or Exceeded < 85%
•Met or Exceeded Expectations <= 80%
Professional Skills
(% Met/Exceeded Expectations) G Technical Skills
(% Met/Exceeded Expectations) G Communication Skills
(%Met/Exceeded Expectations) G
•Met or Exceeded Expectations > = 85%
•80% < Met or Exceeded < 85%
•Met or Exceeded Expectations <= 80%
•Met or Exceeded Expectations <= 80%
•80% < Met or Exceeded < 85%
•Met or Exceeded Expectations > = 85%
Current apprenticeship partners remain satisfied with our students’ professionalism.
Current apprenticeship partners remain satisfied with our students’ technical abilities.
Current apprenticeship partners remain satisfied with our students’ communication skills.
87% 88%
96%
90%
83%
95%
100%
85%
95%
60%
65%
70%
75%
80%
85%
90%
95%
100%
J ul '06 J an '07 J ul '07G r aduati on M onth/ Y ear
MA RI DC NY
93%
81%
93% 92%
100%
91%
100%
80%
95%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Jul '06 Jan '07 Jul '07Graduation Month/Year
MA RI DC NY
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PROVIDE CONSISTENT SUPPORT AND GUIDANCE
67%
59%55%
77%74%
59%
71%
89% 86%83%
74%
0%10%20%30%40%50%60%70%80%90%
J an '07 J ul '07 J an '08
Graduation Month/YearMA RI DC NY
Y
Metric:
Rules: G
Y
R
Comments: Company wide focus on improving lower-than-target retention rates
Several initiatives in place to reduce attrition, including in-program support and admissions screening.
•Apprenticeship Departures <= 5% of class
•5% < Apprenticeship Departures <10%
• Apprenticeship Departures >= 10% of class
Apprenticeship Departures
(% Fired in Apprenticeship Phase)YStudent Retention
•>=80% Retention
•75% < Retention < 80%
•Retention <= 75%
Improvement noted with July ’07 class.
Strong focus on client service has helped to retain partners
13%
19%
14%14%
27%
7%6%
4%
7%
0%
5%
10%
15%
20%
25%
30%
J ul '06 J an '07 J ul '07
Graduation Month/YearMA RI DC NY
G
Source: nonprofitfinancefund.org/files/docs/Year_Up.pdf
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PROVIDE SUSTAINABLE PROGRAM INFRASTRUCTURE
$4.3M
$7.5M
0
2,000,000
4,000,000
6,000,000
8,000,000
Nov '06 Mar '07 May '07
Target Actual
Y
Metric:
Rules:
Comments:Current position (5/07) = $7.5M
Exceeded target cash position by $3.2M. Getting closer to Board goal of 6 months of working capital on hand
•Cash >= 100% of target
•90% < Cash < 100% of target
•Cash <= 90% of target
Cash PositionG
Continued improvement in Days Sales Outstanding.
•Time to collect <= 60 days
•60 days < Time to collect < 90 days
•Time to collect >= 90 days
Days Sales OutstandingY
6566
64
7373
58
60
62
64
66
68
70
72
74
May '06 Aug '06 Nov'06 March ' 07 May '07
Day
s
Strong focus on increasing apprentice rates across all sites.
•Apprentice pay >= $725/wk
•$650/wk < Apprentice pay < $725/wk
•Apprentice pay <= $650/wk
Average Apprentice RateY
$698
$703
$766$724
$694$683
$709$719
$785
600
650
700
750
800
Jul '06 Jan '07 Jul '07
Graduation Month/Year
$/w
eek
Boston ProvidenceWashington NY
G
Y
R
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PROVIDE SUSTAINABLE PROGRAM INFRASTRUCTURE (CONTINUED)
Metric:
Rules: G
Y
R
Comments:
Y
$14,755 $14,482 $14,912
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
2005 (Actual) 2006 (Actual) 2007(Projected)
Each site focused on achieving a long term cost per head of $14,500
While current projections include all sites, future metrics will separate by site
•Cost per student in current year lower than previous year
•Cost per student in current year same as previous year
•Cost per student in current year higher than previous year
60%
32%
0%
59%
32%
9%0%
30%
48%
10%
12%
0%
20%
40%
60%
80%
100%
2005 2006 2007
Foundations Internship Government Individuals
Split “Foundations” bar into “Foundations” and “Individuals” for 2007.Increased government presence. Apprentice revenue increasing as a percentage of total as planned
• Intern & gov’t funding >= 45%•35% < Intern & gov’t funding <
45%
• Intern & gov’t funding <= 35%
Funding MixG Y Cost per Student
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INCOME STATEMENT SUMMARY
Revenue Expenses
Indiv. Contributions $ 493,552 Program $2,898,508
Found, Corp, Pub., Misc $1,860,946 Fundraising $ 172,530
Internships $1,680,572 Mgt. & Gen $ 379,566
Total Revenue $4,035,070 Total Expenses $3,450,604
Budget to Actual
YTD Actual YTD Budget Variance
Revenue $4,035,070 $ 4,107,112 ($72,042)
Expenses $3,450,604 $ 3,911,905 ($461,301)
ADDITIONAL CASH DETAIL (not reflected on Income Statement)
YTD Cash Receipts Received from Previous Year Pledges: $ 1,547,633
Previous Year Pledges Expected to be received in 2007: $ 420,366
BALANCE SHEET
YTD Actual Beg. of Year Change
Total Assets $ 18,962,518 $ 12,443,395 $6,519,123
Total Liabilities
& Net Assets $ 18,962,518 $ 12,443,395 $6,519,123
Cash on 5/31/07 = $7,507,887
AppendixFinancial Summary (through April 30, 2007)