Financial Management for Mature Organizations

Sponsored by: A Service

Of:

Financial Management for Mature Organizations

Anthony Reese

October 17, 2012


Of:

Advising nonprofits in:

• Strategy

• Planning

• Organizational Development

www.synthesispartnership.com

(617) 969-1881

[email protected]

INTEGRATED PLANNING


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www.mission.do


Of:

Today’s Speaker

Anthony Reese CFO and Vice President of Financial

Management Practice

Olive Grove Consulting Assisting with chat questions: Jamie Maloney, Nonprofit Webinars

Hosting:

Sam Frank, Synthesis Partnership

FINANCIAL MANAGEMENT IN

MATURE ORGANIZATIONS

Presented by:

Anthony Reese

CFO/Vice-President: Financial Management Practice

Anthony Reese

• 23 years of experience as a consultant and senior manager

in non-profit organizations

• Vice-President for Financial Management Practice Area at

Olive Grove Consulting

• Specializing in building financial infrastructure, growth

modeling, scenario planning, financial consolidations and

capitalization

ORGANIZATIONAL DEVELOPMENT

LIFE CYCLES

Entrepreneurial

Institutional

Mature/Reorganizing

Failure to build financial infrastructure to support needs of

the maturing organization

7

WHAT’S NEXT?

You’ve built the initial finance structure.

You're keeping funders, donors and regulatory agencies happy.

You’d really like a firmer understanding of the financial dynamics of the

organization.

You’re making crucial decisions about expansion/contraction.

You’re creating the next five-year strategic plan.

Are we sustainable? Could we be more efficient?

FINANCIAL MANAGEMENT DIVISION OF

LABOR

TRANSACTIONAL – Processing, Classifying and Cataloguing

Financial Transactions

ANALYTICAL – Aggregation and Interpretation of Financial Data and

Trends

STRATEGIC– Systems, Personnel, Program Impact,

Marketing/Development Interface, Capital and Long-term Financial

Arrangements

KEY INDICATORS OF A FINANCIAL

INFRASTRUCTURE THAT HASN’T MATURED:

• Primarily transactional (vs. analytical and strategic)

• Designed with funders and IRS in mind

• Delivers stock financial statements that are unreadable, not

customized for executive, board, and program staff

• Not used to support budgeting or long-term planning

• Does not engage program staff or consider their needs

• Puts most financial information into the hands of a precious few

• Places finance staff on an island by themselves, and isolates them

from the mission of the organization

CREATING A MATURE FINANCIAL

INFRASTRUCTURE

Turn finance function outside in

Engage finance in analytical and strategic projects


INFRASTRUCTURE: Turn Finance Outside In

Create a shadow system for managerial purposes

Shift finance from purely audit to managerial

Integrate finance into strategic and programmatic decision-

making


INFRASTRUCTURE: Deploy Finance on Analytical and Strategic Projects

1. Fully integrated into strategic planning and budgeting

processes

2. Engage in projects that integrate finance and create a leap

forward in organizational financial dynamics

• financial modeling

• growth planning

• capitalization planning

EXAMPLE 1: Financial Modeling

Organization: An afterschool arts program trying to increase earned

income as a resource to expand one line of its programs (business lines)

Challenge:

• Model Expenses

• Fully allocate overhead to determine true cost of programs

• Examine business line profitability

Operating Assumptions

Light/Moderate Residency Weeks 12 Artistic Director $73,552

Intensive Residency Weeks 30 Executive Director $75,000

Professional Dev % Artists' Time 20% Program & Comm. Mgr $42,000

Program Director Salary $53,000 Program & Admin. Asst. $33,000

Program Staff Salary $42,000

FT Staff Fringe % 21%

Artists Fringe % 16%

Indirect Cost Rate 11%

Variable Assumptions

FY2011 YR1 YR2 YR3

% of Sessions by Level I Artist 52% 52% 52% 52%

% of Sessions by Level II Artist 5% 5% 5% 5%

% of Sessions by Level III Artist 25% 25% 25% 25%

% of Sessions by Level IV Artist 18% 18% 18% 18%

Level I Artist Rate $30 $30 $30 $30

Level II Artist Rate $33 $33 $33 $33

Level III Artist Rate $36 $36 $36 $36

Level IV (Mentor) Artist Rate $40 $40 $40 $40

Growth Rate - 0% 0% 0%

% of Light/Moderate Sites 91% 91% 91% 91%

# of Light/Moderate Sessions 4,302 4,302 4,302 4,302

# of Intensive Sessions 1,064 1,064 1,064 1,064

Total # of Sessions 5,366 5,366 5,366 5,366

Additional Program Staff Required 0 0 0 0

Residency Based Pricing (Light Partnerships) 696 696 696 696

Residency Based Pricing (Deep and Focused) 1,750 1,750 1,750 1,750

Assumption Inputs (Total) FY2011 YR1 YR2 YR3

# Residencies 394 394 394 394 % of pro-bono sessions 22% 22% 22% 22% Number of Sites 105 105 105 105 % of Intensive 9% 9% 9% 9%

Assumption Inputs (government contract) FY2011 YR1 YR2 YR3

Contracted Residencies (Light) 91 91 91 91 Contracted Residencies (Intensive) 31 31 31 31 Total Contract Amount 340,721 340,721 340,721 340,721

Sessions by Category FY2011 YR1 YR2 YR3

Pro-bono Sessions 747 747 747 747 Pro-bono Sessions Light 714 714 714 714 Pro-bono Sessions Intensive 33 33 33 33

Government Contract Sessions 2,010 2,010 2,010 2,010 Government Contract Sessions Light 1,094 1,094 1,094 1,094 Government Contract Sessions Intensive 916 916 916 916

Earned Revenue 2,610 2,610 2,610 2,610 Earned Income Sessions Light 2,495 2,495 2,495 2,495 Earned Income Sessions Intensive 115 115 115 115

Total 5,366 5,366 5,366 5,366

Modifiable Assumptions

Input Cells

Calculated Cell - Do Not Modify

…model input

Financial Projection Baseline (FY2011) YR1 YR2 YR3 Earned Revenue

Light Residency Revenue 144,686 144,686 144,686 144,686 Intensive Residency Revenue 6,703 6,703 6,703 6,703

Total Earned Revenue 151,390 151,390 151,390 151,390

Government Revenue 340,721 340,721 340,721 340,721 Total Revenue 643,501 643,501 643,501 643,501 Program Expenses

Artists Sessions 179,502 179,502 179,502 179,502 Artist Professional Dev 35,900 35,900 35,900 35,900 Artists Fringe 28,720 28,720 28,720 28,720 Total Artists 244,123 244,123 244,123 244,123

Program Personnel 95,000 95,000 95,000 95,000 Program Fringe 19,950 19,950 19,950 19,950 Total Program Personnel 114,950 114,950 114,950 114,950 Direct Program Costs 359,073 359,073 359,073 359,073

Overhead and Indirect

Personnel (incl fringe) 233,290 233,290 233,290 233,290

Contracted Services 169,966 169,966 169,966 169,966 OTPS 96,938 96,938 96,938 96,938 Total Overhead Costs 500,194 500,194 500,194 500,194

Indirect Costs (Management & General) 94,519 94,519 94,519 94,519

Total Program Expenses 953,786 953,786 953,786 953,786

…model output

17

Current Operating Scenario Revenue

SUMMARY REVENUE-EXPENSE PROJECTION by BLOCK (Baseline)

REVENUE 2012 2013 2014 2015 2016 Contributed

Program 1 $238,868 $261,000 $265,000 $300,632 $300,632 Program 2 - - - - - Program 3 98,258 105,000 105,000 116,842 116,842 Program 4 203,763 225,000 225,000 194,737 194,737 Program 5 13,652 15,000 15,000 17,368 17,368 General Operations/Fundraising 213,509 230,250 242,000 270,421 270,421

Total Contributed Revenue $768,050 $836,250 $852,000 $900,000 $900,000

Earned Program 1 $137,200 $109,200 $109,140 $115,480 $117,820 Program 2 158,200 200,050 199,905 199,250 199,250 Program 3 92,000 149,000 156,450 183,700 192,050 Program 4 8,000 14,000 19,000 21,000 21,000 Program 5 - - - - - General Operations/Fundraising 41,300 50,596 53,004 59,424 59,857 Interest Income 2,798 15,154 29,104 36,809 42,694

Total Earned Revenue $439,498 $538,000 $566,602 $615,663 $632,671

TOTAL REVENUE Program 1 $376,068 $370,200 $374,140 $416,112 $418,452 Program 2 $158,200 $200,050 $199,905 $199,250 $199,250 Program 3 $190,258 $254,000 $261,450 $300,542 $308,892 Program 4 $211,763 $239,000 $244,000 $215,737 $215,737 Program 5 $13,652 $15,000 $15,000 $17,368 $17,368 General Operations/Fundraising $254,809 $280,846 $295,004 $329,845 $330,278

Total Revenue $1,204,750 $1,359,096 $1,389,499 $1,478,854 $1,489,977

18

Current Operating Scenario Expenses and Net Income

SUMMARY REVENUE-EXPENSE PROJECTION by BLOCK EXPENSES

Program 1 $493,422 $406,715 $457,503 $481,222 $492,677 Program 2 75,906 84,223 93,022 98,312 100,906 Program 3 370,277 481,528 535,613 615,800 624,686 Program 4 235,000 262,946 332,096 353,881 362,520 Program 5 10,957 11,168 11,326 11,438 11,500

Total Expenses $1,185,561 $1,246,580 $1,429,561 $1,560,652 $1,592,289

NET INCOME Program 1 $(117,353) $(36,515) $(83,363) $(65,110) $(74,226) Program 2 82,294 115,827 106,883 100,938 98,344 Program 3 (180,019) (227,528) (274,163) (315,258) (315,794) Program 4 (23,237) (23,946) (88,096) (138,144) (146,783) Program 5 2,695 3,832 3,674 5,931 5,868 General Operations/Fundraising 254,809 280,846 295,004 329,845 330,278

NET INCOME $19,189 $112,516 $(40,062) $(81,798) $(102,312)

19

Current Operating Scenario Capital, Reserve Funds, and Accumulated

Surplus/Deficits

NET INCOME $19,189 $112,516 $(40,062) $(81,798) $(102,312)

CAPITAL EXPENSES and CONTRIBUTIONS Capital Expenditures $5,000 $10,000 $10,000 $15,000 $15,000 Contributions to Facility/Equipment Reserve 25,000 25,000 25,000 25,000 25,000 Contribution to Operating Reserve 79,614 79,614 79,614 79,614 79,614 Contributions to Endowment (New Works Fund) 100,000 100,000 100,000 100,000 100,000

Total Capital Expenses and Contributions $209,614 $214,614 $214,614 $219,614 $219,614

ANNUAL CAPITALIZATION SURPLUS (GAP) $(190,426) $(102,099) $(254,677) $(301,412) $(321,927)

ACCUMULATED CAPITAL SURPLUS (NEED) $(190,426) $(292,524) $(547,201) $(848,613) $(1,170,540)

Reserve Fund Balances Operating Reserve $79,614 $159,229 $238,843 $318,458 $398,072 Facility/Equipment Reserve $25,000 $50,000 $75,000 $100,000 $125,000 Endowment $100,000 $200,000 $300,000 $400,000 $500,000

$204,614 $409,229 $613,843 $818,458 $1,023,072

$(117,353)

$(36,515)

$(83,363)$(65,110) $(74,226)

82,294

115,827 106,883

100,938

98,344

(180,019)

(227,528)

(274,163)

(315,258)(315,794)

(23,237)

(23,946)

(88,096)

(138,144)

(146,783)

$(350,000)

$(300,000)

$(250,000)

$(200,000)

$(150,000)

$(100,000)

$(50,000)

$-

$50,000

$100,000

$150,000

BUSINESSLINEPROFITABILITY2012-2016

Program1 Program2 Program3 Program4 Program5

20

EXAMPLE 2: Growth planning and scenario analysis

Organization: A highly successful international program for young adults

exploring the implications of programmatic growth and organizational expansion

Challenge:

• Model current program

• Model various growth scenarios

• Project revenue required under various scenarios

EXAMPLE 2: …modeling expenditures

2009

2010

2011

2833

37

$37,150

$42,096

$52,834

ACTUALCOSTperHOUSE2008-2011

TotalHouses

CostperHouse $21,435,65%

$5,193,16%

$844,2%

$738,2%

$2,000,6%

$900,3%

$1,917,6%

MAJORCONTRIBUTORStoHOUSECOSTS2012

RentSubsidy ProgramBudget SavingsBudget

Scholarship JewishContentandResources SiteVisits

Retreats

EXAMPLE 2: …modeling revenue

$861,149

$1,291,450$1,235,573

$111,212

$363,231

$1,167,512

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

FY09 FY10 FY11

LOCALvs.GENERALFUNDINGasaPERCENTAGEofTOTALREVENUE2008-2011

GENERAL

LOCAL

EXAMPLE: …projecting revenue

Total Funding by Type 2012 2013 2014 2015 2016 2012-2016

General Operating GO $1,055,000 $955,000 $862,500 $412,500 $412,500 $3,697,500 Program Specific - House PSH $1,450,550 $935,800 $668,000 $561,000 $561,000 $4,176,350 Program Specific - Other PSO $555,525 $435,000 $105,000 $105,000 $105,000 $1,305,525 Growth Capital/Growth Related GR $100,000 $518,000 $518,000 $418,000 $418,000 $1,972,000

Total $3,161,075 $2,843,800 $2,153,500 $1,496,500 $1,496,500 $11,151,375 TRUE

Funding by Source National Foundations NF $1,610,525 $1,862,500 $1,470,000 $1,020,000 $1,020,000 $6,983,025 $- National - Individuals NI $53,000 $40,500 $40,500 $40,500 $40,500 $215,000 Local Foundations LF $796,500 $349,500 $294,500 $99,500 $99,500 $1,639,500 Local Federations LFED $428,800 $384,300 $289,500 $277,500 $277,500 $1,657,600 Local Individuals LI $272,250 $207,000 $59,000 $59,000 $59,000 $656,250 Other Individuals OI $- $- $- $- $- $-

Total $3,161,075 $2,843,800 $2,153,500 $1,496,500 $1,496,500 $11,151,375

Total Annual Funding Gap Analysis 2012 2013 2014 2015 2016 2012-2016

Ongoing Revenue $3,061,075 $2,325,800 $1,635,500 $1,078,500 $1,078,500 $9,179,375 Ongoing Expenses (plus reserve addition) $2,080,747 $2,145,152 $2,199,828 $2,248,873 $2,295,125 $10,969,724

Total Operating Surplus/(Gap) $980,328 $180,648 $(564,328) $(1,170,373) $(1,216,625) $(1,790,349) Total Ongoing Capital remaining to raise

Growth Revenue $100,000 $518,000 $518,000 $418,000 $418,000 $1,972,000 Growth Expenses $898,515 $1,626,154 $2,052,102 $2,337,447 $2,351,172 $9,265,390

Total Growth Plan Surplus/(Gap) $(798,515) $(1,108,154) $(1,534,102) $(1,919,447) $(1,933,172) $(7,293,390) Total Growth Capital remaining to raise

$(9,083,739) Grand Total remaining to raise

EXAMPLE 2: …comparing scenarios

EXAMPLE 2:

…comparing scenarios

Element

Infrastructure & No Program Growth

Only

Infrastructure + Medium Program

Growth

Infrastructure, Development Capacity & High Program

Growth

Administrative/Financial/Compensation Investments Yes Yes Yes

Development Capacity Investments Limited Limited Yes

Annual R&D Investments (Little Bets) No No $50,000

House Growth 0% 30% 55%

House Without Walls 0% 711% 1250%

Learning Retreat Growth 0% 50% 73%

Participant Growth 21% 51% 94%

Total Expenditure Growth 27% 60% 101%

Total Staff - 2016 17.5 21.5 25.25

Total Houses - 2016 46 60 71

Total House Without Walls Programs - 2016 50 405 675

Total Learning Retreats - 2016 8 12 14

Total Estimated Participants - 2016 60,458 78,420 100,891

Total Budget - 2016 $3,281,468 $4,107,968 $5,163,253

Total Additional Funding Needed (above 2012 level) $3,600,087 $5,745,977 $9,981,569

EXAMPLE 2:

…projecting expenses

FIVE YEAR FINANCIAL PROJECTIONS

PARTICIPANTS REACHED 2011 2012 2013 2014 2015 2016 2012-2016 House Programs 52,000 64,400 70,196 75,812 81,119 86,797 378,324

Non-House Programs - 500 1,500 2,250 3,375 4,219 11,844

Learning Retreats - 210 231 256 269 269 1,236

TOTAL PARTICIPANTS REACHED: 65,110 71,927 78,318 84,763 91,285 391,403

REVENUE National Foundations $1,610,525 $1,862,500 $1,470,000 $1,020,000 $1,020,000 $6,983,025

National - Individuals $53,000 $40,500 $40,500 $40,500 $40,500 $215,000

Local Foundations $796,500 $349,500 $294,500 $99,500 $99,500 $1,639,500

Local Federations $428,800 $384,300 $289,500 $277,500 $277,500 $1,657,600

Local Individuals $272,250 $207,000 $59,000 $59,000 $59,000 $656,250

TOTAL REVENUES: $3,161,075 $2,843,800 $2,153,500 $1,496,500 $1,496,500 $11,151,375

EXPENSES Ongoing Expenses

House Program $1,560,925 $1,592,144 $1,623,987 $1,656,466 $1,689,596 $1,723,388 $8,285,580

Core Operations $393,949 $401,828 $409,865 $418,062 $426,423 $434,952 $2,091,131

Total Ongoing Expenses: $1,954,875 $1,993,972 $2,033,852 $2,074,529 $2,116,019 $2,158,340 $10,376,711

Expenses for 2012-2016 Growth Plan

Expansion of House-based Programming (from 52,000 to 88,500 participants) $- $572,211 $906,904 $1,077,862 $1,241,544 $1,331,158 $5,129,680

Expansion of Non-House programming (from 0 to 6,750 participants) $- $57,882 $77,574 $128,441 $150,767 $160,018 $574,683

Expansion of Learning Retreats (from 0 to 413 participants) $- $171,862 $248,515 $290,924 $308,860 $306,402 $1,326,563

Infrastructure Growth for Program Expansion and Sustainability $- $96,559 $393,161 $554,875 $636,275 $553,593 $2,234,464

Total Growth Plan Expenses: $- $898,515 $1,626,154 $2,052,102 $2,337,447 $2,351,172 $9,265,390

TOTAL EXPENSES: $1,954,875 $2,892,487 $3,660,006 $4,126,631 $4,453,466 $4,509,511 $19,642,101 Additions to Risk/Reserve: $86,775 $111,300 $125,299 $132,854 $136,785 $593,013

TOTAL FUNDS REQUIRED: $2,979,262 $3,771,306 $4,251,930 $4,586,320 $4,646,297 $20,235,114

SURPLUS/DEFICIT: $181,813 $(927,506) $(2,098,430) $(3,089,820) $(3,149,797) $(9,083,739)

ONGOING GROWTH TOTAL

GROWTH CAPITAL REMAINING TO RAISE Total Funds to Raise 2012-

2016: $10,969,724 $9,265,390 $20,235,114

$7,293,390 Anticipated Commitments: $9,179,375 $1,972,000 $11,151,375

REMAINING TO RAISE: $1,790,349 $7,293,390 $9,083,739


INFRASTRUCTURE

Turn finance function outside in

Engage finance in analytical and strategic projects

FINANCIAL MANAGEMENT IN

MATURE ORGANIZATIONS

Presented by:

Anthony Reese

CFO/Vice-President: Financial Management Practice


Of:

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