Financial Audits, Analysis & Ratios Short Term Resource Management March 29, 2010

Review What are the parts of a budget – macro and micro? What order are they listed in? What is the relationship between budgets and financial statements?

Audits & Analysis Readings Examining the numbers and related articles An Overview of Financial Statement Auditing Illustrative Auditors’ Reports Under GAS Financial Ratio Analysis Truth or Consequences: The Implications of Financial Decisions

Questions from Readings Examining the Numbers etc. What do measurement exercises allow nonprofits to do? What are internal auditors and what does this article say about their role? What is the goal of comparison analysis and what are its limitations? An Overview of Financial Statement Auditing Why audit and what is GAAP? What (5) judgments are made by auditors? What is simple v. complex auditing? What are some common misconceptions about auditing? Three fundamental concepts

Questions from Readings Illustrative Auditors’ Reports Under GAS: What are the types of opinions expressed in these examples? Note disclaimers and language and how they relate to concepts that have been reviewed in class. Financial Ratio Analysis: Define financial analysis, and ratios. What are ratios good for? Which are most useful to non-profits?

Analysis and Ratios Financial Analysis: selection, evaluation and interpretation of data. Helpful in evaluating performance, risk, and organizational health. Ratios: comparisons of financial information.

Ratios – why? Relative - no across the board standards Classification of ratios: coverage – ability to meet obligations return – net benefit : resources expended turnover – gross benefit: resources expended component – part of item : item

Liquidity Ratios Generally, the larger the better, but no real good or bad. Current current assets/current liabilities Quick assets-inventory/liabilities Net working capital to sales assets-liabilities/sales

Financial Leverage Ratios: assess risk Total debt to assets total debt/total assets Long-term debt to assets long-term debt/total assets

Audits Authority - GAAP/GAAS Misconceptions Questions (skeptically) 1. Are accounting principals in line with GAAP? 2. Are they appropriate? 3. Do financials contain adequate information? 4. Are they presented in a reasonable manner? 5. Do they reflect the financial position of the organization?

Management Assertions Existence/occurrence Completeness Ownership Valuation or measurement and allocation Statement presentation

Audit Fundamentals Materiality: individual judgment of auditor as professional; based on reason Audit Risk: based on reasonable assurance and related to amount of time and effort Evidence: that supports financial statements; relevance and reliability Audit Process involves seven steps

Audit Reporting (Figure 2-3 in Overview) Immaterial: unqualified Material: qualified – adverse or denial Format Why opinion?

Short Term Resource Management Readings A New Kind of Grant Beating The Death Spiral Building is Not Buying Grant Away Market Magic

Questions from Readings Truth or Consequences: Does a diverse revenue base improve financial health? How many funding sources do most nonprofits have and which are the most “profitable”? A New Kind of Grant: What is this article advocating and why? What is the example organization? Beating the Death Spiral: How do nonprofits usually go out of business? What makes it difficult to forecast when nonprofits will go under?

Questions from Readings Building is Not Buying: What is the difference between building and buying and which is better? What is “burn rate” and “take off”? What are investors looking for and why? Grant Away: What is venture philanthropy and why is it important? What private sector concept does this article discuss? Why is this a good idea, or is it?

Revenue Sources by “Profitability” Diversity: 90% have one or two major sources Sources include: private contributions earned income government Cash and liquidity

Funders as Investors Insolvency Start-Ups Venture Philanthropy

CLASS EXERCISE #1 Auditing and Analysis Break into pairs and select one of the following audit scenarios. Develop questions for the audit and a list of documentation you might request. 1. Public art program of a municipal parks department 2. Lunchtime feeding program of a homeless shelter 3. Wound care clinic for community health center

CLASS EXERCISE #2 Short Term Resource Management Using the organization from your group project, develop two pie charts – one that shows your current revenue strategy, and one that shows an ideal revenue strategy given your potential funders.

CLASS EXERCISE #3 Budgeting Exercise – College Group You are the President of a student group at your college/university. Build an annual budget based on the following : Revenues include the following: an annual $5,500 payoff from an endowment, membership dues of $200 per current student (154), alumni support fund contributions of $3,500, total $18,000 from the college student services division, $1,200 each donation from 15 anonymous alums for general operating, $40 each for every attendee at the annual lecture. Expenditures include the following: an annual lecture at $4,500 for speaker and $850 for refreshments and marketing (not including $600 for in-kind CEU’s), $1,200 per student for attendance at national conference (you may require students to pay part), $500 for two annual events, $1,000 for recruitment activities, $800 national dues, 10% of ED salary of $84,000, two annual stipends to student officers of $600 each, $300 for three annual celebrations/gatherings, $900 annual retreat, $4,000 supplies.