Financial analysis and cost accounting

• Financial statements
• Putting together mission and money
• Direct and indirect costs
• Herzlinger's 4 questions:

Financial statements

These can be used for telling the financial story of an organization, but they do not tell about the quality of the work the organization is doing.  

Reading them takes time and effort because what the numbers mean is not obvious.  

Tying the ways the money is used into the actual operations of the organization is a process open to lots of interpretation.  

The things that the numbers show can also be described using many different words.

Putting together mission and money

analysis of how resources are used.

starting the conversation of why and how to best make things run.

Direct and indirect costs

figuring direct costs

allocating indirect costs to programs

Herzlinger's 4 questions:

• 1. Are the organization's goals consistent with their financial resources?
   
  • Presuppositions:
    That you have goals

    
    That you know what the goals are

    
    

    
    

    
     
  • Possibilities:
     
    • 1. Goals are too big for the resources
      refine and clarify the mission

      
      

      
       
    • 2. Resources seem large for the output
      strive for efficiency

      
      

      
       
    • Often someone is asking the question in order to cut the funding
       
  • To answer, you need:
     
    • Mission statement(s)
      Are you sticking to your mission?

      Or are you chasing the money?

      
      If the goals are broad enough, anything fits. Called "strategic drift" or "mission creep"

      What if the money runs out? What would you do?

      If the goals keep changing, funders see that  and don't like it

      
      

      
      

      
      

      
      

      
       
    • Financials
       
  • What this question is NOT: do you have enough money to do what you want to do...
     
  • Measures
    Who are you trying to serve?

    
    Cost analysis of what it takes to deliver your  service-- bring that to the meeting

    
    Net asset turnover:  Do you make good use of your resources, or  are you holding onto too much money?

    
    

    
    

    
     
• 2. Are sources and uses matched?
   
  • A costing question
    matching revenue with expense.

    matching sources and uses.

    
     
  •   Can you deploy resources to break even or generate sirpluses?
     
    • Yes
      How does it work?

      
      

      
      

      
       
    • No
      "structural deficit"

      Some projects are ALWAYS mismatched

      We know we are subsidizing this program...

      Maybe worth it to the central MISSION (Education, Homeless shelters)

      
      

      or PROBLEM

      
       
  • Benificiary and payer in nonprofit are often not the same
     
  • Will you vote for an unbalanced budget
     
    • Yes
       
      •   Concequences for ingergenerational equity?
         
    • No
       
      •   Concequences for mission?
         
  • Scope in time
     
    • Short term
       
      • If you have to...
         
      • Sometimes that's how it is
         
    • Long term
       
      • When you can for what you can
         
• 3. Is there intergenerational equity?
  Equity means "fairness"

  
  

  
  

  
   
  • If we run deficits, money has to come from somewhere
    Shows on the balance sheet, not budget

    
    

    
    

    
     
  •   Did we penalize any generation of users by what we did?
    Where's the financial cushion?

    Or is there a deficit that future users will have to deal with?

    
    

    
    

    
     
  • Longer term view
    Net assets or fund balance over time

    
    Adjust for inflation

    Does the financial strength remain?

    
    
    

    
    

    
     
• 4. Are present resources sustainable?
   
  •   If all the other questions are answered, how do we move forward?
    "what if..."

    
    ..."what would you do?"

    
    

    What sources of money are you dependent  on?

    What if something happens to those  sources?

    
    Where do you think those sources are going?

    
    

    
    

    
    

    
     
  • Sometimes the final answer is "maybe"
    Strategy: try to diversify  the revenue sources...

    
    

    
    

    
     
    • Strategy: try to diversify the revenue sources...
      But then the funders could start to cut the budget...

      
      

      
      

      
       
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