Enhance sales performance evaluation for non-profit organizations

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hello and welcome to the session this is Professor Farhad and the session will get a look at performance evaluation and performance evaluation also could be called financial statement analysis just to find out how well an entity is doing now in our situation were going to be dealing not-for-profit organization because this is not for profit and governmental course hopefully you know how to prepare financial statement analysis from your financial accounting course because the same type of analysis that we do we're going to be using again in not-for-profit organization how do you prefer how do we prefer financial statement analysis one way mr. prepared was called common stock common size analysis or the other way is to use ratio and what is a ratio ratio is two numbers divide them by each other this is where the ratio is X divided by Y but let's talk about common size analysis and what does that mean okay financial statement ratios are used to convert information to more understandable form what do we mean how does common size help us convert information and ratios into more understandable forms let's take a look at this let's assume or comparing company a or not-for-profit a and not-for-profit B not-for-profit a could have contribution up to a million dollar and contribution and not-for-profit organization B could only have contribution up to $2,000 that's the basically your contribution or their income that they're receiving now when you look at your program expenses obviously we can tell immediately that a is much larger than B basically they're generating five times their contribution a they have prog program service revenue how much they spend on the program revenue or prog program services whatever they do they spend $400,000 that you say that's the case and they spent one hundred and sixty thousand dollars this is the program service expense how much do they provide of the revenue on the program now what we can do now we can compare a and B but not from a dollar amount prosper the weekend CA is larger than B but if we compute the percentages if we say we can say that 40% another I get to the 40% if we look at the expenses divide them by the revenue for not-for-profit a we can say that they spent 40 percent of their income on of the revenue or of their contribution on the program that they that they undertake while organization B not-for-profit B they spend 80 percent on the program service revenue well if I want contribute money and if they both have the same cause I would go with B because b whatever dollar I give them for every dollar I give them they're spending 80 pennies of that dollar or what I want them to do whatever that is and the feeding the hungry sheltering the homeless finding housing for low-income family so on and so forth so this is how we what we can do by using ratios we factored the size out we don't care about the size of a and B we're looking at more relevant information to us it's it makes the information more understandable and specifically to be to be more specific more compatible now I can compare a 2 B so an open comment size analysis all items on the financial statement are scaled typically by the largest amount appearing on that statement so usually what we do when we're looking at the income statement we compare everything to revenue who would look at advertising compared to revenue we look at operating expenses or administrative expenses as relationship to revenue we would look at fundraising expense in relationship to revenue on the balance sheet we look everything in terms of assets so we look at our current assets in total in relationship to total assets we look at inventory or supplies and relationship to total asset our cash in relationship to total asset our our if we have any contribution receivable in relationship to total assets so on and so forth so this is on the balance sheet on the income statement once again usually we divide everything by revenue to find that percentage so why are these helpful because once you have those percentages you can compare them to earlier years how well you are how much of your income was spent on advertisement versus how much of your income is in here one versus year two that's assuming he had one you spend 300 out of your $1,000 on advertisement in year two you spent 400 out of 2,000 okay so notice you can say I spent more on he in year two but he did not really spend more than year - because your advertising expense was 30% in year one in here - that's actually 20% so what happened is once he have percentages at factors the size it shows you the true increase or decrease in the nd activity or you can compare these ratios to other entities or other government if you're comparing two governments you compare to government maybe it makes it basically the next village the next city the city next door to you or a city of similar size and similar economic background to you just to see how well you are doing these are the other cities not-for-profit you can also look at similar not-for-profit organization so this is the why the common size analysis are good now if you are interested in this I have plenty of lectures of common sight Kappa not plenty I have one or two lectures on my YouTube but that that deals with for-profit so I assume if you're taking this course you already know what common size analysis is now we're gonna be focusing on few ratios that deals with not-for-profit so once again to compare entities of varying sizes it's useful to compute ratios that's the debts the importance of ratio at factor is the size out I don't care how big is your company give me the current ratio and I can compare company a to Company B okay so the relevance of financial ratio depends on the type of the organization not-for-profit vs. governmental so when we compute not-for-profit vs. governmental versus private companies they don't have three different types of ratios because the purpose of a private company is profit the purpose of the not-for-profit serve the patrons were whoever that or serve the cause and this is serve the citizens so each one of them will have a different different different objective therefore you have to use different ratios in this session I'm gonna focus on that for profit and maybe look at two or three just give us an idea how we can evaluate not-for-profit organization using the numbers that we've been accumulating throughout this course so the first ratio I'm gonna look at is program expense ratio now the first thing you want to know is how do i compute the program service ratio well I'm gonna look at my program surface expenses and I'm gonna use here the number 600 and I'm gonna divide this by my total expenses of a thousand so my total expenses I'm just using rounded numbers that's easy for you to see so if I take 600 divided by a thousand and usually when you're working with ratio start with easy numbers even like 6/10 just as easy as possible then you know for you that gives us 60% what does the 60% tells us well it tells us what proportion of each dollar is used under programs what is their programs whatever they are serving okay now if you believe in that not-for-profit you want this number to be high because the higher this number the more they are they are they are spending on the cause okay and this we can compare this number to for example how much they spent on administration how much they spent on fundraising and membership available so if the program service is 60% the other three is 40% then obviously we can break down administration how much they're spending on administration will be just basically how do we compute the administration let's keep the thousand down here how much they spend on administration just take out the program service expense and put the admin number and the admin number is fifty five percent on administration fundraising the same thing so on and so forth but this is what it tells us so for looking at 600 divided by 100 it means 60 now the Better Business Bureau recommend ratio not less than 65 so the Better Business Bureau said based on data that they accumulated from different from different organization they said well if you are a ratio of less than 65 is no good it means you are spending money on administration fundraising and membership development which is not good and remember specially when we spend a lot of money on compensation expenses as we saw the IRS might might look into your into your company now it's gonna give you some realistic approach to this we're gonna look at this website called .gifboard.com national charity report list a-to-z and this is basically a lot of them are national let's take a look at some we are familiar with maybe you are familiar with the American Red Cross let's take a look at American Red Cross so just um we're gonna look at some snapshot of the information again you could do this by your own you could look look up your own favorite charity if you'd like let's look at your financial and this is their net income okay the 2.6 billion in income and this is what that income is coming from sources of funds okay so it's that's that's that's that's your income let's see what they're spending this money we can we can see here with their spending total program expenses 2.4 billion 2.4 billion and he could you could read more about the program and this is a snapshot if you really wanna examine the Red Cross you got a polder 990 this is their purpose okay and this is basically a conclusion about them fundraising fundraising fundraising cost 28% of related contribution so this is one of the ratios we're gonna be looking at so to raise from the revenue to raise a dollar if they spent twenty eight twenty eight ten is basically your tax status is 501c3 and this is governance and staff compensation the highest individual is making five hundred and fifty fifty six thousand that's a lot of money for a not-for-profit but again this is a large corporation they have twenty three thousand seven hundred and four staff size and this is as of 2014 and they're telling you who's the chief executive officer is so on and so forth let's take a look at another organization again you might be familiar with and that's the Salvation Army and the Salvation Army again you can look at some snapshot this is the combined financial national office and Salvation Army and all its affiliates so this is not only the Nash and Salvation Army they have many affiliates this is the information but let's look at the Nash Salvation Army specifically the total income 42 million the total income is 42 million fundraising they spend 2% so notice that you can compare for example when I was I wasn't sure how how much is their fundraising cause it's 2% of the related contribution versus the American Red Cross is 28% okay so tells you that Red Cross spend more money okay now let's look at the corporate staff for example their CEO is making only one hundred and thirty one thousand they only have 76 paid staff but this is the National this is the National the National Organization here's the program whether they spend money on okay so again once again it just gives you an idea and this is the Salvation Army combined financial statement which is all of them so hopefully you got an idea and if you look again for any not-for-profit this is the site to look for or you can go to their website and download their 990 and do your own analysis as we're gonna show you briefly additional ratio so you could do program expense ratio you can work another ratio you can work with this fundraising is an efficiency ratio which is kind of in a sense I showed you the Red Cross versus the Salvation Army it's the fundraising expense divided by contribution revenue so how much you are spending in fundraising versus your versus your income let's assume let's assume anything you already have the Red Cross or C versus the Salvation Army the Red Cross we said they spend 28% and the Salvation Army spend two pennies so he sickly for every $100 that the Red Cross makes they spent $28 or two for fundraising expense versus the Salvation Army they spend $2 therefore they have more money to spend on their program so basically this ratio tells us how much does it cost to raise a dollar of contribution okay and usually when this when this when this number is computed membership is usually combined with fundraising expenses now you can also have the fundraising expense sub membership separately compute the membership separately it's up to you let's assume an organization it's four thousand five hundred in fundraising expense and they have revenue of 100,000 because they spent 4.5% okay what is a good number again it all depends because different organization they might have higher expenditure just a reach in order to reach more people and the larger the organization maybe the larger is the fundraising expense but again you have to look at the big picture another another ratio we can look at for not-for-profit is something called working capital ratio now hopefully all know what working capital is without the ratio working capital hopefully you remember this is current assets and you should know this this is the second ratio this is the second computation you do after you compute your current ratio minus current liabilities so the capital ratios current assets minus current liability this is gives us I'm sorry to work in capital now we're going to be looking at the working capital ratio don't confuse the working capital with the working capital ratio working capital is current assets minus current liabilities see a minus CL so the working capital is a dollar amount so if I said 100 and current assets versus seventy in current liabilities I have thirty dollars in working capital this is working capital now what can we add to it the word ratio what does that mean well we're gonna take the working capital and if its ratio we're gonna divide it by something else and we're going to divide us by expenses our total expenses and that's gonna give us a figure so let's take a look at some numbers let's assume the current ratio that the current assets is 100 we have 100 of current assets current liabilities of 60 okay and it's show total expenses as 100 okay so total assets minus total liabilities equal to 40 or equal to 40 40 divided by 100 equal 2.4 now what do we do at this point 4 so what we do we're gonna take this point 4 to make more sense because it doesn't really tell us much point 4 and we're gonna multiply it by 12 why 12 it's 12 months and it's gonna give us four point eight four point eight months what does that mean it means we can survive or we can operate with our current working capital for an additional four point eight let's say five almost five months without raising any new capital so simply put so if we take this is 40 divided by 100 equal to 0.4 times 12 if you multiply by 12 how many tell us how many month of operating expenses are available on working capital now do we want this number to be high or low obviously the higher the better let's assume working capital was point six if you take point six let me just do this it's gonna show you how it works point six times twelve will give us seven point two so if your working capital is higher okay then you can you can operate for four seven point two months without restoring to any cut cutting expenses or laying off people or anything like this now how can you increase this or this ratio well you could increase your asset reduce your liabilities and reduce your expenses this way you can increase this ratio and you want it to be as high as possible so high working capital means how long does the not-for-profit can sustain its operation without restoring to layoffs and cutting it in cutting expenses so the higher your working capital the more you can go without cutting down on expenses again once again what do you do you increase your current assets you bring more cash you have less liabilities and obviously you reduce your when you reduce your expenses your current ratio will increase therefore it's good if you have any questions any comments by all means email me or see me in class so we looked at those three ratios in the next session I would look at governmental ratios because again we're looking at two different things yes they're both not for profit but the not-for-profit organization serve a specific group therefore they will look at specific ratios government serve the citizen and as a whole therefore we have to look at different sets of ratio just like when we evaluator a for-profit company we look at a different set of ratios the ratio should tell us should be relevant to what you are doing if it's relevant you compute them you compare them you keep track of them otherwise if they're not relevant to you you don't use them if you have any questions any comments by all means email me or see me in class and if you're studying for your CPA exam always always always study hard it's worth it