Assessing your Organisation’s solvency and Creating a budget Pan Pacific Hotel 19 September 2017 3pm to 4pm Bob Campbell Registered Auditor, Registered Tax Agent, CA,CPA, MSW, MAICD Director, Australian Audit Pty Ltd.

YOUR ANNUAL FINANCIAL STATEMENTS The Statement of Financial Position

Balance sheet Exercise Organisation A : Net Assets $450,000 Working Capital $ 250,000 Organisation B : Net Assets $250,000 Working capital $10,000 Organisation C: Net Assets ($200,000) Working Capital ($100,000)

Four Ratios Model Altman’s Z Score Insolvency Prediction Ratio 1 : Relative Uncommitted Funds (R1) (Current Assets- Current Liabilities) / Total Assets Ratio 2 : Relative Historical Profitability (R2) Retained Earnings / Total Assets Ratio 3: Current Relative Profitability (R3) Current Profit / Total Assets Ratio 4: Relative Strength of Net Assets (R4) Net Assets/ Total Liabilities Z Score = 6.56 R1 + 3.26 R2 + 6.72 R3 + 1.05 R4

Understanding your Risk of Insolvency

Some significant indicators of Insolvency a net liability or net current liability position negative operating cash flows in consecutive years indicators of withdrawal of financial support by funders Accumulating unpaid tax and superannuation liabilities Very low bank balances and long term debtors Inability to pay creditors on time

DEVELOPING A FINANCIAL GOAL OF YOUR ORGANISATION To manage risk you need a FINANCIAL GOAL How much money do you need? ANSWER: Enough to manage risk – Commonly used measure is 90 days of budgeted annual expenditure excluding depreciation Enough to meet your planned Property Plant & Equipment Spend Common measure is Three year planned Capital Expenditure Budget

DEVELOPING A FINANCIAL GOAL OF YOUR ORGANISATION Risk Goal 90 days coverage 90 Days Cover = Annual budget expenditure x 90 divide by 365 Example : If Your Annual Budget is $400,556 excluding depreciation Then 90 Days Cover = $ 400,556 X 90 / 365 = $100,000 Capital Expenditure Goal over three years Your plans indicate over the next three years (say) $150,000 is needed Therefore YOUR FINANCIAL GOAL IS TO HAVE $250,000

TRANSLATING A FINANCIAL GOAL INTO A BUDGET SURPLUS GOAL Uncommitted Funds = (Current Assets – Current Liabilities) This should be greater than $250,000 to meet your Financial Goal If there is less than $250,000 in Uncommitted Funds Then you have to set your Budget Surplus Goal to achieve this Example Uncommitted Funds = $80,000 The Shortfall is (250,000 - $80,000) = $170,000 The Budget Goal is a surplus of $70,000 over one year or Over Two years $50,000 per year.

DEVELOPING A FINANCIAL MODEL TO ACHIEVE YOUR BUDGET GOAL Your Income is can be divided into : Variable income : (eg: activity Fees, Service Outcome payments) Fixed income: ( eg: Grants ) Your expenditure can be divided into Variable Expenditure : ( eg: activity Expenses, Teaching costs, Program expenses) Fixed Expenditure – Your Overheads (eg: Rent, Admin Costs, Admin Salaries, Insurances etc) Budget Surplus Goal = (Variable Income – Variable expenses) + (Fixed Income –Fixed Expenses)

DEVELOPING A FINANCIAL MODEL TO ACHIEVE YOUR BUDGET GOAL Budget Surplus Goal = (Variable Income – Variable expenses) + (Fixed Income –Fixed Expenses) Therefore (Variable Income – Variable Expenses) = Budget Surplus Goal – (Fixed Income –Fixed Expenses) Your Variable Income – Your Variable expenses is your Contribution Margin to cover Your Budget Surplus Goal plus Your Fixed Expenses less your Fixed Income

CONTRIBUTION MARGIN FROM A FEE GENERATING ACTIVITY Example: Your Budget Surplus Goal is $70,000 Your Fixed Expenses are $100,000 Your Fixed Income from Grants or other sources is $50,000 Therefore your Contribution Margin from Fee generating Activities must be =$70,000 + $100,000- $50,000 = $120,000 You plan to run Fee generating Activities for 1200 people next year at minimum 10 people per activity = 120 activities Each activity must contribute $1,000.

SETTING ACTIVITY FEES Activity Fees = program Costs + staff Costs + activity Contribution Margin Example ABC activity activity Hours are 10 weeks for 2 hours per week = 20 Hours activity activity costs $10 per student for minimum 10 students =$100 staff costs are $40 per hour for 20 Hours = $800 Total costs = $100+$800 = $900 Contribution margin = $1000 activity Fees must then cover $1900 activity Fee per person = $190 USE A FEES CALCULATOR TO ACHIEVE YOUR FINANCIAL GOAL

Open Excel first to use the calculator – then click on the calculator

Developing a budget summary

Questions