KEY FINANCIAL INDICATORS FOR EFFECTIVE LEADERSHIP Presented by Vanessa Wilkins Seed Strategies,...

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

2

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?


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?

5

I. REVIEW BASICS AND IDENTIFY THE MOST REVEALING AREAS OF FINANCIAL REPORTS

6

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


7

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


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


9

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


10

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


11

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


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)


16

A PICTURE IS WORTH A THOUSAND WORDS


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


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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


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


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


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


HEDGEHOG PRINCIPLE

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MENTORING EXAMPLE – POSSIBLE METRICS

MISSION

CORE BUSINESS

BRINGS IN $’S


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!


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


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


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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)


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EVALUATE FUNDERS/OPPORTUNITIES AS YOU WOULD ANY NEW PROGRAM


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)


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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


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


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







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


$/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)

KEY FINANCIAL INDICATORS FOR EFFECTIVE LEADERSHIP Presented by Vanessa Wilkins Seed Strategies,...

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