Drug and Alcohol Office WANADA FORUM 2 May 2012 Sustainable Pricing Tonia Swetman and Jon Petelczyc.

Drug and Alcohol OfficeWANADA FORUM

2 May 2012

Sustainable Pricing

Tonia Swetman and Jon Petelczyc

Presentation Aims

To provide an awareness of organisational sustainability and pricing to:

Develop your organisation’s capacity to determine a sustainable price for a community service.

Assist you to prepare an offer as part of a request for tender process.

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Objectives

At the conclusion of the session, you should be able to:

Understand the concept of organisational sustainability and factors that impact organisational sustainability.

Apply financial governance principles to your own organisation and identify broad areas for improvement.

Identify the key steps in responding to a tender with regard to sustainable pricing.

Consider alternative frameworks for developing a pricing model for variable outputs.

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Objectives

At the conclusion of the session, you should be able to:

Appreciate the importance of tracking and monitoring service delivery and costs to ensure sustainability.

Appreciate the value in conducting internal and external audits.

List major threats to organisational sustainability.

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What is Sustainability?

Sustainability is the ability to continue a defined behaviour indefinitely.

Wikipedia

Where a system is capable of being maintained at a steady level without exhausting natural resources or causing severe ecological damage to sustainable development.

Collins English Dictionary – Complete and Unabridged© HarperCollins Publishers1991, 1994, 1998, 2000, 2003

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Sustainability

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Sustainability is the attribute of a system that has the internal capacity to:

achieve the sustainability of its internal workings;

catalyse the achievement of the sustainability of its external environment; and / or

adapt and survive no matter how unsustainable the external environment might be (ie. it can always 'ride the waves' down as well as up).

This is an attribute that can only be aspired to by 'living' systems - species, ecosystems and societies.

Philip Sutton, Green Innovations Inc

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Sustainability

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People

Profit

Planet

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Organisational Sustainability

A sustainable state is one in which utility (for consumption) is non- declining through time.

A sustainable state is one in which resources are managed so as to maintain production opportunities for the future.

A sustainable state is one in which the (natural) capital stock is non- declining through time.

A sustainable state is one in which resources are managed so as to maintain a sustainable yield of resource services.

A sustainable state is one which satisfies minimum conditions of (eco) system stability and resilience through time.

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Factors that impact on Organisational Sustainability

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Economic or financial sustainability, while critical, is only one aspect of an organisation's overall sustainability.

Organisations must also build a broad range of organisational, technical, and human capacities.

Many factors influence the sustainability of an organisation including the operating environment, such as:

national and local politics and policy,

the activities of other organisations,

the availability of skilled personnel, and so on.

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Corporate Governance

Authority, accountability, stewardship, leadership, direction and control

Characterised by ongoing monitoring and evaluation

Factors that impact on Organisational Sustainability

Corporate Governance

Effective corporate governance helps an organisation to achieve its objectives and desired outcomes and fulfil its obligations through sound:

strategic and business planning;

risk management;

financial management and reporting;

human resource planning and control; and

compliance and accountability systems.

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Corporate Governance

Conceptual representation of the four categories of good governance features.

Corporate Governance Handbook for Company Directors and Committee Members 2nd Edition, June 2010 The Department of Families, Housing, Community Services and Indigenous Affairs, Australian Government.

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Corporate Governance Principles ASX Guidelines

Recognise clear roles and responsibilities;

Structure the Board to add value;

Ethical and responsible decision making;

Integrity in financial reporting;

Timely and balanced disclosure;

Respect the rights of members;

Recognise and manage risk; and

Renumerate fairly and responsibly.

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Financial Monitoring and Management

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Budget Cycle

Planning• Develop goals, objectives

Development• Estimate cost of attaining each goal

• Project revenues

Implementation• Record budget in accounting system General Ledger

Monitoring• Compare budget to actual revenue, expenditure

• Investigate variance

Control• Take corrective action

PLAN

NIN

G

PHASE

CO

NTR

OL P

HA

SE

The Challenge for a Not-for Profit

Balancing the pursuit of community service objectives (the mission) with business objectives.

A not-for-profit service provider organisation needs to achieve commercial outcomes as well as vocational, advocacy and other support outcomes for its clients / members.

These dual roles can, however, create conflict when it comes to decision making.

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The Financial Imperative

A strong financial capacity provides the means to achieve a not-for-profit’s mission.

The focus on vocational, advocacy and other support outcomes can sometimes be at the expense of business objectives of an organisation.

In turn, pursuit of community service outcomes can then threaten the financial viability and sustainability of the organisation if the dual objectives are not properly balanced.

Effective corporate governance can assist in achieving this balance.

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What elements would you consider when

determining a sustainable price?

Consider

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Sustainable Pricing

Definition of a Sustainable Price

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A sustainable price for a community service includes all real and anticipated costs incurred from:

delivering;

administrating;

monitoring; and

evaluating the service

at a pre-determined quality, for a specified time period plus a component for profit and contingencies, less any programme subsidies or grants to be received.

Definition of a Sustainable Price

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A sustainable price also considers organisational strategic initiatives, current and planned, where relevant costs are allocated across relevant programmes.

Cost Analysis – Why?

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To:

Identify and prioritise cost saving initiatives.

Fundraise from donors to cover the true costs of delivering a programme.

Price the community service at a level that covers the true costs of providing the service.

Report the true costs of a programme.

Make adjustments to programme delivery, if necessary.

Costing Considerations

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Before the costing exercise:

Determine objective in costing (outcome / output).

Define the service.

Identify the processes associated with the service delivery.

Determine the time period.

Consider ALL cost components (inputs) in the accounting system.

Understand the difference between cash and accrual accounting.

Consider costs not identified in an accounting system.

Categories of Costs

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Direct

Indirect (or overhead costs)

Capital related costs

Depreciation

Taxation

Opportunity Cost

Services and resources received free of charge

Cost Drivers: Allocating Indirect Costs

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The building blocks for unit costs.

A cost driver has an effect on costs.

For example, in service provision, the number of hours for providing care is a cost driver for labour.

You will need to determine your indirect costs allocation method, based on the cost driver.

You must apply your model:

Accurately

Consistently

Calculating Costs

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Total Cost

Direct + Indirect + Other Costs + Other Factors = Total Cost

Unit cost

Total Cost divided by number of units

Capturing Costs

Historical Data

Research

Assumptions (based on trends and other factors)

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Top-Down and Bottom-up

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Pricing Schedules

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EXAMPLE 1 : LUMP SUM

SERVICE DESCRIPTION

UNIT (e .g. hourly, daily,

weekly)

ESTIMATED USAGE

PRICE/RATE (Inc GST)

Total Cost (Inc GST)

(insert rows as necessary)

TOTAL (Lump Sum)

EXAMPLE 2 : SCHEDULE OF RATES

SERVICE DESCRIPTION UNIT (e .g. hourly, daily, weekly)

PRICE/RATE (Inc GST)

(insert rows as necessary)

Completing the Tender Document

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Step 1

• Consider the Request for Tender / Expression of Interest (Ask the nine questions)

Step 2

• Define the community service delivery programme to be costed

• Determine community service delivery scope

Step 3

• Consider and determine pricing options

• Identify / collect data for the relevant time period and modify source and format of data, where necessary

Step 4

• Allocate direct costs by community service programme

Step 5• Identify cost drivers

• Allocate indirect cost

Completing the Tender Document

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Step 6

• Allocate 'other costs' (capital related, opportunity cost, depreciation, amortisation, taxation, outcomes measurement)

Step 7

• Check data - accuracy and logical soundness

• Assess results by conducting a bottom-up costing exercise and consider implications for the organisation

Step 8

• Consider market conditions and organisation objectives

• Finalise Pricing

Step 9

• Demonstrate value for money (include services and resources provided free of charge)

Step 10

• Consider the tender evaluation process to ensure you have allocated appropriate detail / emphasis relevant to the weightings.

Costing Model Example

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Financial Reporting and Recording

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Recording Costs

Tracking Costs

Monitoring Price Sustainability

Financial Information Tasks and Objectives‘Accounting’

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Collection

Collection (in money terms) of information relating to transactions that have resulted from operations.

Recording and Classifying

Recording and classifying data into a permanent and logical form. This is usually referred to as “Bookkeeping”.

Summarising

Summarising data to produce statements and reports that will be useful to the various users of accounting information - both external and internal.

Financial Monitoring and Management

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Interpreting and Communicating

Interpreting and communicating the performance of the business to the management and its owner.

Forecasting and Planning

Forecasting and planning for future operation of the business by providing management with evaluations of the viability of proposed operations.

The key forecasting and planning tool is the budget.

Accounting System Components

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People

Procedures and instructions

Data

Software

Information Technology infrastructure

Internal controls and security

Financial Monitoring and Management

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Accounting

Financial Accounting

Management Accounting

Internal UsersCustom reports

Government Agencies

Customers

Donors / Investors

Other Stakeholders

Directors and CEO

External UsersSet Report

Line Managers

Employees

What is an audit?

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External Audit: For External StakeholdersThe purpose of an external audit is to form an independent view on whether the information presented in a financial report, taken as a whole, reflects the financial position and performance of the organisation at a given date, for example:

Are details of what is owned and what the organisation owes properly recorded in the balance sheet?

Are profits or losses properly assessed?

What is an audit?

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Internal Audit: For Internal Stakeholders

Internal auditing is an independent and objective assurance and consulting activity designed to add value and improve an organisation's operations.

It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Types of External Audit Opinions

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√ xUnqualified Qualified Adverse

Disclaimer

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Unrealistic service targets – trying to deliver more than is sustainable (quality and output)

Under pricing

Over pricing

Inadequate / poor financial recording and reporting

Inadequate / poor management and monitoring

Failure to have regular independent audits

External factors (competition, demand, reputation, etc)

Financial Sustainability Threats

Costing and Pricing

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Questions?