KEY FINANCIAL INDICATORS FOR EFFECTIVE LEADERSHIP

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Nov 10, 2013 (3 years and 9 months ago)

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KEY FINANCIAL INDICATORS
FOR EFFECTIVE LEADERSHIP

Presented by Vanessa Wilkins

Seed Strategies, LLC/Partners in Scale

vanessa@seed
-
strategies.com


+1
-
503
-
702
-
4800

The Nonprofit Association of Oregon

April 18, 2013


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

2


Role with your
organization?


Type of organization?


Size?


Any issues you want to
discuss?

WHAT BROUGHT YOU HERE?

3

©2013 Partners in Scale

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?

©2011 Seed Strategies, LLC

4

5

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

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

6

©2013 Partners in Scale


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

7

©2013 Partners in Scale

Source: Nonprofit Association of Oregon,
http://www.nonprofitoregon.org/sites/default/files/uploads/file/faq_Sample_NP_Statement_of_Financial_Position_GAAP_Format.pdf


Statement of Financial Position
(Balance Sheet)


Size?


Any issues you want to discuss?

STATEMENT OF ACTIVITIES

8

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/unrestricte
d


Revenue booked
when pledged


Can do cash basis
monthly and accrual
at year
-
end

©2013 Partners in Scale

STATEMENT OF FUNCTIONAL EXPENSES

9

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/Ad
min


Relates to 990


Many donors
recognizing
limitations


©2013 Partners in Scale

STATEMENT OF CASH FLOWS

10

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


©2013 Partners in Scale

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

11

©2013 Partners in Scale

Source: American Red Cross IRS 990 from
Guidestar
, March, 2012


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

12

©2013 Partners in Scale

13

II. IDENTIFY KEY INDICATORS OF YOUR ORGANIZATION’S
FINANCIAL HEALTH


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?

14

©2013 Partners in Scale

HISTORICAL TRENDS, BUDGET & RATIOS PROVIDE
CONTEXT (BUT CAN BE DAUNTING)

15

©2013 Partners in Scale

A PICTURE IS WORTH A THOUSAND WORDS

16

©2013 Partners in Scale

-$100,000
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Total Revenue
Total Expenses
Net Income
Total Net Income
YTD + PROJECTION
2012
2011
44%

26%

7%

6%

17%

0%

Foundation and corporate
grants
Government grants and
contracts
Individual contributions
Earned income
Events income
Investment income
Key Financials 2011
-
2013 (Projected)

Sources of Revenue

17

MUST CLOSELY MONITOR CASH

©2013 Partners in Scale


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”

18

©2013 Partners in Scale

19


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

©2013 Partners in Scale

BEST PRACTICE BOARD MATERIALS INCLUDE:


20


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

©2013 Partners in Scale

SOME EXAMPLES:

21


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:

22


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

©2013 Partners in Scale

HEDGEHOG PRINCIPLE

23

MENTORING EXAMPLE


POSSIBLE METRICS

MISSION

CORE
BUSINESS

BRINGS
IN $’
S

©2013 Partners in Scale

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

24

III. ALIGN FINANCIAL OVERSIGHT WITH YOUR
ORGANIZATION’S BUSINESS MODEL AND RISKS

25


Design for audience


Remember your hedgehog


Must match strategy


Must be easily
trackable
!


©2013 Partners in Scale

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

27

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/Li
ving
-
Into
-
Your
-
Strategic
-
Plan/Living
-
Into
-
Your
-
Strategic
-
Plan
-
Tools
-
and
-
Template.aspx#.UWYFsr9emaI

28

CULTIVATE SOLID STUDENT PIPELINE

5.0
2.5
5.2
5.7
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%
Jan '07
Jul '07
Jan '08
Graduat ion M ont h/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

29

NGO

Board of Directors

Partners

Potential Donors

Need/Beneficiaries

Mission

Regulation & Economic
Environment

Competitors

Substitutes

Competitors

Evaluate Impact

Evaluate ROI

UNDERSTAND YOUR BUSINESS MODEL

©2013 Partners in Scale


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)

30

©2013 Partners in Scale

EVALUATE FUNDERS/OPPORTUNITIES AS YOU WOULD
ANY NEW PROGRAM

31

©2013 Partners in Scale


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


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)

32

©2013 Partners in Scale

33

Governance as
Leadership

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

34

IV. TARGET QUESTIONS, DATA, AND ANALYSIS DRAWING
ON WORK ALREADY BEING DONE WITHIN YOUR
ORGANIZATION.


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

35

©2013 Partners in Scale


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

36

©2013 Partners in Scale

WHAT’S REALISTIC DEPENDS ON SIZE AND STAFF

37

©2013 Partners in Scale

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


Book
keeping


Compliance


Grant budgeting and reporting


Planning


Financial

Reports (monthly and yearly)


Audit and

Form 990

Tasks to be
completed


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

38

©2013 Partners in Scale

SPEND 5 MINUTES NOW

39

IV. APPENDIX

40

MANAGEMENT DASHBOARD BY STRATEGIC PRIORITY

Source:
Bridgespan
, Living into your Strategic Plan: Tools and Templates, http://www.bridgespan.org/Publications
-
and
-
Tools/Strategy
-
Development/Li
ving
-
Into
-
Your
-
Strategic
-
Plan/Living
-
Into
-
Your
-
Strategic
-
Plan
-
Tools
-
and
-
Template.aspx#.UWYFsr9emaI

41

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 '07
Graduat i on M ont h/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%
Jul '06
Jan '07
Jul '07
Gr a dua t i on M ont h/Y e a r
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 '07
Graduat i on M ont h/Year
MA
RI
DC
NY
42

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%
Jan '07
Jul '07
Jan '08
Graduation Month/Year
MA
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)

Y

Student 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%
Jul '06
Jan '07
Jul '07
Graduation Month/Year
MA
RI
DC
NY
G

Source:
nonprofitfinancefund.org/files/docs/
Year_Up.pdf

43

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 Position

G

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 Outstanding

Y

65
66
64
73
73
58
60
62
64
66
68
70
72
74
May '06
Aug '06
Nov'06
March ' 07
May '07
Days

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 Rate

Y

$698
$703
$766
$724
$694
$683
$709
$719
$785
600
650
700
750
800
Jul '06
Jan '07
Jul '07
Graduat i on M ont h/Year
$/week
Boston
Providence
Washingt on
NY
G

Y

R

44

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

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 Mix

G

Y

Cost per Student

45


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



Appendix

Financial Summary (through April 30, 2007)