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Module 13

Performance Measurementand

Financial Statement Analysis

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Performance objectives and system

Documents for assessing whether objectives were met

Performance measures or indicators

Benchmarks and best practices

Caution: unfair or inappropriate measures of performance

Outline

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Effective and efficient operations

Compliance with laws and regulations

Financial management (short and long-term)

Fiduciary responsibility

Sustainability of the organization over time

Making a difference

Demonstrate ACCOUNTABILITY for

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1. Get consensus from stakeholders on the organization’s mission, goals, objectives.

2. Develop qualitative and quantitative performance indicators.

3. Systematically collect data to assess performance.

4. Compare performance to benchmarks, both peer and “aspire to” organizations.

5. Assign clear responsibility for performance and reward it when achieved.

6. Report regularly on performance to a broad set of stakeholders with effective methods of presentation.

7. Listen to feedback and implement changes through a “continuous quality improvement” plan.

Performance measurement system

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PROCESS MEASURES Input Measures – effort expended on a

programRESULTS MEASURES Output Measures – level of service provided

(often stated in nonfinancial terms) Outcome Measures – effect the service has

on the program’s stated objectives Efficiency Measures – comparison of the

level of inputs with outputs or outcomes, e.g., cost per persons who have achieved the goals.

See GASB’s Performance Measurement www.gasb.org

Measuring service efforts and accomplishments (SEA)

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Timely financial information that fairly presents the position and results of operations

Level of service supplied adequate to meet the demand for services

Customer satisfaction (both expectations and perceptions)

Longevity and sustainable programs over time

Community impact

Measures of quality

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IRS Form 990 Return of Organization Exempt From Income Tax, with Schedule A, 990-T, 990-POL see www.guidestar.org

Audited annual financial statement and monthly unaudited statements

Application for tax-exempt status Form 1023

Annual report and website info “Grades” of watchdog groups such

as BBB Wise Giving Alliance, AIP, Guidestar

Documents

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Focus on outcomes, not just outputs Communicated clearly across the

organization Benchmarked against prior years’ or

competitors Easy to measure and interpret Reliable and consistent over time Based on data that is audited

Good Performance Indicators are:

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Common size Liquidity Going concern or profitability Capital structure ratio Program effectiveness Efficiency Leverage and debt coverage Fundraising efficiency Investment performance

Types of financial ratios or measures

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Each asset as a percent of total assets

Each revenue item as a percent of total revenues and support

East expense item as a percent of total expenses

Then compare these to budgeted ratios.

Common size measures

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Can the organization pay its current debts?◦ Current ratio:

current assets/current liabilities

◦ Working capital: current assets – current liabilities

◦ Acid test ratio: quick assets/current liabilities (disregard inventory)

Liquidity measures

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Are revenues sufficient to cover expenses?◦ Revenue/Expense◦ Operating ratio: net income/revenue

How many months (or years) of operating expenses can be covered by current unrestricted net assets◦ 3-6 months is a minimum cushion to

“meet payroll” in times of declining revenue or difficulty collecting A/R

◦ The AIP considers 3 to 5 years to be a large amount, indicating the organization may not need additional resources

Are revenues growing over time? What type of revenues?

Going concern and “profitability” measures

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Unrestricted Cash and Investments (current and long-term)/long-term debt

Debt to Total Assets

Debt to Net Assets (equity)

Capital structure ratios

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Is the NPO accomplishing its goals?

Is an appropriate amount spent on the organization's exempt purpose?◦ Program expenses as a percent of total

expenses◦ Some say should be > 60% or 80%

Is a reasonable amount spent on administering the organizations?◦ Support expenses as a percent of total

expenses◦ Some say should be < 40% or 20%

Program effectiveness measures

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Is the cost per client per achieved outcome decreasing over time?

What is the “cost” to achieve the next level of quality?

Do the benefits exceed the costs of delivering services?

◦ Expenditures per capita◦ Cost per client◦ Required subsidy per consumer

Efficiency measures

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Can the organization pay its total liabilities and continue to operate as a going concern?◦ Total liabilities/Total assets

Are future years’ revenues needed to pay for current services?◦ Total debt to net assets or total debt to current

revenues Is the debt service expense covered by

income?◦ Net income (adjusted for noncash items) or

income before interest and depreciation) / annual debt service expenses

Leverage and debt measures

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Are contributions received greater than fundraising expenses?◦ Public support/Fundraising expenses◦ Should be > 1:1 Target might be 8:1◦ Fundraising expense/related contributions◦ Increase in public support over time

Are earnings on investments reasonable in light of market trends?◦ Rate of return on investments◦ Payout rate on endowments

Fundraising efficiency measures

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Has the NPO complied with state laws?◦ Uniform Management of Institutions Funds Act and Uniform

Prudent Investors’ Act (updated) that describe standards of care, portfolio theory, and delegation of investment authority

Has the NPO conformed with its Investment Policy: ◦ Sample: “Goal is to optimize invested funds while

maintaining a safe amount of risk and meeting the fiduciary responsibility assumed by the organization.” Rate of return on investments; Risk/Return ratio; Payout

rate on endowments; Total return/investments

Are variances between budget and actual reasonable for:◦ Realized and unrealized gains/losses; investment income

Investment performance measurements

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Not-for-profit health care organizations (HCO) must display a performance indicator and disclose in the notes, such as:◦ Revenues over expenses◦ Revenues and gains over expenses and losses◦ Earned income◦ Performance earnings

These items should be reported separately from the indicator◦ Transactions with owners◦ Equity transfers◦ Receipts of restricted contributions◦ Unrealized gains and losses on investments◦ Investment returns restricted by donors◦ Extraordinary items

Performance indicators for HCOs

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BBB Wise Giving Alliance “Standards for Charitable Solicitations: www.give.org

Charity Watch www.charitywatch.org “Charity Rating Guide”

Guidestar’s Analyst Report at www.guidestar.org Board Source www.boardsource.org United Way www.uwa.org Maryland Association of Nonprofit Organizations

“Standards of Excellence” at www.standardsforexcellence.org

Industry benchmarks compiled by accrediting agencies, e.g., CCAC

Benchmarks and Best Practices

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Monitor revenue sources over time

5 years ago Today 2 years from now

Public Support 90% 60% 30%

Fees for Service 5% 35% 60%

Other,e.g., investment income

5% 5% 10%

100% 100% 100%

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Sample NPOfinancial ratios and trend analysis

FY05 FY06 Bench-mark NPO Quartile

# of months of expenses in net assets

3 mo. 6 mo. 12 mo. 25%

Current ratio 1.86 2.5 2.0 50%

Bond covenant ratio

5.62 1.92 1.50 75%

Fundraising ratio $5 to $1 $8 to $1 $3 to $1 75%

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Sample NPO Key Indicators (nonfinancial)

ActualMay

BudgetMay

Monthly Variance

% Occupancy 100% 80% 25% favorable

FTE Staff 40 40 0

# of clients 80 100 20% unfavor-able

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Some easy to calculate ratios may not be fair. e.g., the percentage of expenses spent on the “program” vs. “supporting” the program (i.e., G&A and fundraising)

Scenario: A relief organization that has gifts-in-kind of food and clothing can either drop them from an airplane in foreign countries (and have relatively low support expenses) or have a field staff on location trained in the logistics of distributing food and clothing

Managing for the short-term (meet the budget) and not the long-term.

Caution

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“Bottom line” measures used for businesses don’t work since there are no “owners” of an NPO expecting a return on their investment.

Merely spending money on a program is not an indicator of having reached the program’s goals.

Allow more flexibility for NPOs less than 3 years old or with annual revenue less than $100,000.

Caution