Ratio Analysis & Financial Benchmarking-Bob Prill & Tori Bryson

Ratio Analysis & Financial Benchmarking

Ratio Analysis & Financial BenchmarkingPresented by: Bob Prill, CPA and Tori Bryson, CPAHoffman, Stewart & Schmidt, P.C.AgendaRatio Analysis

Benchmarking

Dashboards

Ratio AnalysisUsed to evaluate relationships among financial statement itemsUsed to identify trends over time for one entity or to compare two or more entities at one point in timeThree key types of ratios:LiquidityProfitabilitySolvencyLiquidity RatiosMeasure the ability of the entity to repay its short-term debts and meet unexpected cash needsCurrent ratio Measures the entitys ability to pay its current obligations using current assets. Calculated by dividing current assets by current liabilities.

Quick ratio of less than 1:1 may indicate entity needs to look at A/R collections (turns) or get a line of credit to cover short term cash needs.4Liquidity RatiosQuick ratio Quick assets are defined as cash, marketable securities and accounts receivable (very liquid assets). Calculated by dividing the quick assets by current liabilities. Rule of thumb for this ratio is 1:1.

A downward trend in these ratios could indicate cash flow troubles.

Liquidity RatiosReceivables turnover Measures the number of times in a year an entity collects its receivables. Calculated by dividing net credit sales by average net receivables. A downward trend it this ratio could indicate billing or collection problems with accounts receivable.

Average net receivables net receivables at beginning of year plus net receivables at end of year divided by 26Liquidity RatiosAverage collection period Measures the number of days it takes to collect the average receivable balance. A good rule of thumb is the average collection period should not be significantly greater than the entitys credit term period. Calculated by dividing 365 days by the receivables turnover. Lower is favorable.

Liquidity RatiosDefensive Interval Ratio Measures the adequacy of the resources of the entity to support its mission. Calculated by dividing quick assets by average monthly expenses.

Profitability RatiosProfitability ratios measure an entitys operating efficiency, including its ability to generate income and cash flow.Profit margin ratio Measures the entitys ability to turn its revenue into net income. Calculated by dividing net income by net sales.

These ratios may not be the most applicable to nonprofits, but even nonprofits need to make some profit.9Profitability RatiosAsset turnover ratio Measures how efficiently an entity is using its assets. Calculated by dividing net sales by average total assets.

Both these ratios need to be compared to industry statistics to be evaluated.

Profitability RatiosReturn on assets ratio Overall measure of profitability. Measures how much net income was generated for each $1 of assets the entity has. Calculated by dividing net income by average total assets or multiplying the profit margin ratio by the asset turnover ratio.

Solvency RatioMeasure long-term risk.Debt to total assets ratio Measures the percentage of assets provided by creditors. Calculated by dividing total debt (liabilities) by total assets.

Nonprofit Specific RatiosFundraising Efficiency Measures the relative cost to produce voluntary contributions from the general public. Calculated by dividing total contributions by fundraising expense.

Nonprofit Specific RatiosProgram Service Expense Ratio Measures the efficiency in the funds spent on the nonprofits mission. Calculated by dividing total program service expense by total expenses.

Nonprofit Specific RatiosSupporting Service Expense Ratio Measures the percentage of funds spent on supporting services (management & general and fundraising).

Nonprofit Specific RatiosUnrestricted Net Asset Ratio Measures the amount of unrestricted, spendable net assets in relation to the nonprofits annual operating expenses.

Nonprofit Specific RatiosNet Temporarily Restricted Asset Ratio Indicates if the nonprofit is borrowing from the future or from net assets intended for future periods. Calculated by dividing temporarily restricted net assets (plus deferred revenue) by cash and cash equivalents.

BenchmarkingBenchmarking is the use of nonfinancial information and ratio analysis to identify trends over time in one entity or to compare to competitors at a point in time.

Used to establish internal goals, pinpoint opportunities, identify strengths and weaknesses.BenchmarkingBefore beginning with benchmarking each entity should answer the following questions:

Why benchmark?

Who is going to use the results?

What are you going to measure?BenchmarkingWhy benchmark?Save time by reviewing highlightsTrack progress toward goalsSpot potential problemsIdentify patternsProvide meaningful informationBenchmarkingWho is going to use the results?Knowing who is going to use the information is key to determining what to measure. Groups that may benefit from benchmarking are the Board of Directors, senior leadership, and program managers.Each of these groups will measure different metrics.BenchmarkingWhat to measure?Knowing what to measure and why is the key to effective benchmarking. Below are five areas to consider when selecting appropriate benchmarks.Mission related outcomesStrategic initiativesDrivers of successRisk factorsServices and resources

BenchmarkingMission related outcomesA common nonprofit mission is to produce some sort of beneficial change in a defined population. These nonprofits measure success of the mission by defining and measuring the programs outcomes. An example of an outcome would be improved health of the un-insured population of a community. Incremental improvements in health might be hard to measure, so the nonprofit would define the outcome in terms of outputs, activities or inputs.BenchmarkingOutputs are the direct products of program activities.Examples include:Number of patient visitsNumber of classes taughtNumber of counseling sessions conductedNumber of participants served

BenchmarkingInputs are the resources that are dedicated to or consumed by the program.Examples include:MoneyStaff timeVolunteer timeFacilitiesBenchmarkingActivities are what the program does with inputs to fulfill the mission.Examples include:Feed homeless familiesProvide job trainingEducate public about signs of child abuseMentor youthBenchmarkingStrategic InitiativesStrategic initiatives tie into the strategic plans major themes, directions or initiatives and should define the benchmarking metrics.BenchmarkingDrivers of SuccessDrivers of success are the key performance indicators, outcomes, goals or activities that are essential for fulfilling the mission.

Risks FactorsRisks factors negatively affect the success of the organization. They include regulatory noncompliance, potential litigation, and financial risk factors such as default on debt obligations.BenchmarkingServices and resourcesService responsiveness is the degree to which existing services are responsive to existing needs. It can be gauged by trends in clients served, client satisfaction scores, retention rates.

Service quality can be gauged by measures of repeat business, complaints or referrals.BenchmarkingServices and resourcesResource acquisition measures how effective the organization is in getting necessary resources such as contributions or required staff.

Resource management includes a broad range of financial indicators that manage financial efficiency and budget adherence.DashboardsDashboards are user-friendly tools for displaying performance measures (benchmarks) to the Board or management.

The dashboard displays several key indicators that can demonstrate progress toward a goal or warning signs of a pending problem.DashboardsOnce an organization has determined what to benchmark, they can present the information in a dashboard format.

Dashboard typically come in two formats:Scorecard format presents the key performance indicators and whether they are trending up or down.Graphical format presents the key performance indicators as graphs and charts.DashboardsExample of a simple scorecard

DashboardsExample of graphical presentation

DashboardsComparison to industry standards

DashboardsComparison to Peers

Questions?

Thank You!Bob Prill, [email protected]

Tori Bryson, [email protected]

Hoffman, Stewart & Schmidt, P.C.4900 Meadows Road, Suite 200Lake Oswego, Oregon 97035(503) 220-5900Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

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Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsCurrent LiabilitiesAverage Monthly ExpensesQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsFundraising Efficiency =Total ContributionsCurrent LiabilitiesAverage Monthly ExpensesFundraising ExpenseQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesCurrent LiabilitiesAverage Net ReceivablesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsFundraising Efficiency =Total ContributionsCurrent LiabilitiesAverage Monthly ExpensesFundraising ExpenseQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesProgram Svc Exp Ratio =Program Service ExpCurrent LiabilitiesAverage Net ReceivablesTotal ExpensesProfit Margin =Net IncomeAverage Collection Period =365Net RevenueReceivables TurnoverAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal Assets

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsFundraising Efficiency =Total ContributionsCurrent LiabilitiesAverage Monthly ExpensesFundraising ExpenseQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesProgram Svc Exp Ratio =Program Service ExpCurrent LiabilitiesAverage Net ReceivablesTotal ExpensesProfit Margin =Net IncomeAverage Collection Period =365Support Svc Exp Ratio =(M&G + Fundraising)Net RevenueReceivables TurnoverTotal ExpensesAsset Turnover Ratio =Net RevenueAverage Total AssetsReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal AssetsSupporting Svc Exp Ratio =(M&G + Fundraising)Total Expenses

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsFundraising Efficiency =Total ContributionsCurrent LiabilitiesAverage Monthly ExpensesFundraising ExpenseQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesProgram Svc Exp Ratio =Program Service ExpCurrent LiabilitiesAverage Net ReceivablesTotal ExpensesProfit Margin =Net IncomeAverage Collection Period =365Support Svc Exp Ratio =(M&G + Fundraising)Net RevenueReceivables TurnoverTotal ExpensesAsset Turnover Ratio =Net RevenueUnrest Net Asset Ratio =Unrest Net AssetsAverage Total AssetsTotal Annual ExpensesReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal AssetsSupporting Svc Exp Ratio =(M&G + Fundraising)Total Expenses

Sheet2

Sheet3

Sheet1Current Ratio =Current AssetsDefensive Interval Ratio =Quick AssetsFundraising Efficiency =Total ContributionsCurrent LiabilitiesAverage Monthly ExpensesFundraising ExpenseQuick Ratio =Quick AssetsReceivables Turnover =Net Credit SalesProgram Svc Exp Ratio =Program Service ExpCurrent LiabilitiesAverage Net ReceivablesTotal ExpensesProfit Margin =Net IncomeAverage Collection Period =365Support Svc Exp Ratio =(M&G + Fundraising)Net RevenueReceivables TurnoverTotal ExpensesAsset Turnover Ratio =Net RevenueUnrest Net Asset Ratio =Unrest Net AssetsAverage Total AssetsTotal Annual ExpensesReturn on Assets Ratio =Net IncomeAverage Total AssetsDebt to Total Assets Ratio =Total LiabilitiesTotal AssetsSupporting Svc Exp Ratio =(M&G + Fundraising)Total ExpensesNet Temp Rest Asset Ratio =Temp Rest Net AssetsCash and Cash Equivalents

Sheet2

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