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Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
Social Enterprise Learning Toolkit (Financial Analysis Module)
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Social Enterprise Learning Toolkit (Financial Analysis Module)

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This presentation, put together by KPMG, features the Financial Analysis Module of the Social Enterprise Learning Toolkit developed by Enterprising Non-Profits. The Toolkit offers a number of …

This presentation, put together by KPMG, features the Financial Analysis Module of the Social Enterprise Learning Toolkit developed by Enterprising Non-Profits. The Toolkit offers a number of different learning modules and can be found on the enp website at www.enterprisingnonprofits.ca.

Worksheets and handouts accompanying this presentation can be found at www.enterprisingnonprofits.ca/learning-toolkits/3a-financial-analysis

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  • 1. Social Enterprise pLearning Modules:Financial Analysis
  • 2. Social Enterprise Learning ModulesSocial enterprises are businesses operated by non-profit organizations for the dual purpose of generating income through salesand achieving a social outcome. Social enterprises blend social and financial objectives.Their success requires a unique set of governance, management and operation tools, and skills and resources that utilize,adapt and integrate from both the traditional business and non-profit sectors.The Social Enterprise Learning Modules, included in this toolkit, cover the basic elements that a person or organization shouldpursue and understand if they are going to participate as a board member, manager, paid staff or volunteer at a socialenterprise.enterpriseWhile the Social Enterprise Learning Modules can stand alone, it is very important to always keep in mind the need to integratethe various components, and to realize that they are dynamic and evolving areas of learning and practice.The PowerPoint presentation covers basic p p principles and discussion p p points; p ; pursuing the recommended resources and links will gtake you much further into the depth and detail of each area: • Governance • Leadership • Business Operations • Products and Markets • Sales and Customer Relations • Financial Analysis • Risk Analysis 1 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 3. Overview of Financial Analysis ModuleIntroduction – Importance of financial analysis – Cultural integration – Identifying financial goals – Identifying financial rolesBudgeting & Monitoring – Budgeting – expenses – Budgeting – revenues – Monitoring the budgetFinancial Analysis – Income statement – Statement of Cash Flows – Balance sheet – Ratios 2 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 4. Introduction
  • 5. Importance of Financial Analysis• Provides information to form a basis for management decisions g• Overall, it will affect the following areas of the organization: – Sustainability – Efficiency – Effectiveness 4 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 6. Cultural Integration• Shift to sales and profits p• Independence from the not-for-profit organization – Formalize the relationship – Clear and separate reporting – Think like a business 5 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 7. Identification of Financial Goals• Standard business  profitability p y• Social enterprise financial goals could be: – Self-sufficiency – Profitability – Contribution 6 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 8. Identification of Financial Roles (cont’d)• Important to identify roles, responsibilities and accountabilities p y , p• Identification to be done in conjunction with allocation of tasks• Segregate the duties of preparing financial information and reviewing the financial information – For example:  A bookkeeper – preparer of financial information  An accounting manager – reviewer of financial information g g 7 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 9. Budgeting andMonitoring
  • 10. Budget and ForecastWhat it is: – An important p of the p p part planning and forecasting p g g process – A key document that translates plans into money – Estimate (informed guess) – A document that is updated and reviewed based on new information ( p (with p p proper approval from the Board of Directors)What it is NOT: – A copy of last year’s + 10% – Administrative work – Optimistic and unrealistic pictureBudget becomes more accurate through the yearsBreak the budget for coming year into a monthly budget 9 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 11. Steps to Preparing a Budget1. Align the budget with the Chart of Accounts for Revenue and Expense2. List items on which you spend money y p y3. Estimate the unit cost of the line items, then annual costs4. List likely sources of income5. Identify any drivers for variable revenues and expenses6. Prepare budget format7. Add in notes to explain items and key assumptions8.8 Obtain feedback9. Finalize the budget NOTE: If your social enterprise does not operate as a separate entity from your Not For Profit, consider setting up your social enterprise as a separate subsidiary or department for budgeting purposes 10 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 12. Determine True ExpensesExpenses:• Fixed versus Variable• Direct versus In-direct• In-Kind/Hidden Expenses – Allocation of these expenses 11 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 13. EXAMPLE – ABC Thrift Store Inc. (Fixed & Variable Expenses)Please complete “Handout #1 Worksheet – Budget for ABC Thrift Store Inc.”, using the followinginformation below. 1. ABC uses a portion of the building owned by its NPO parent to run the store, but p g y p does not pay for this space. The portion ABC rents is 10% of the total building. The rental expense for the entire building is $150,000 per year. 2. ABC incurs supplies expense (i.e., purchase of shopping bags and price tags) of $5,000 per year. y 3. ABC incurs cleaning/maintenance expense of $2,000 per year. 4. ABC sorts all donated goods as received, which costs approximately $200 per month. 5. ABC incurs utilities expense of $5,000 per year. 6. ABC incurs the following salary expenses: • One manager is in charge of operating ABC Thrift Store. The manager’s annual salary (including benefits) is $40,000. • There are two part-time sales associates. Their hours vary depending on the season; however, their hours and salary equate to one associate working working at all times when ABC is operating, paid $10/hour (including benefits). 7. ABC operates 8 hours a day and for 30 days per month. 12 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 14. Determine True Revenues and Cost of Goods SoldRevenues• Recurring versus One-time g• Other Revenues – revenues not obtained directly from operations such as rental income or the sale of an assetCost of Goods Sold (COGS)• Refers to the inventory costs of those goods that a business has sold during a particular period 13 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 15. EXAMPLE – ABC Thrift Store Inc. (Revenue & Cost of Goods Sold) Please complete “Handout #1 Worksheet – Budget for ABC Thrift Store Inc.” using the following information below. 1. ABC Thrift Store sells 3 products – T-shirts, Dresses and Jeans 2. For T-shirts: • ABC receives a donation for the t-shirts with an “in-kind value” (assumed price) of $5 each if purchased • ABC will receive1,200 t-shirts per month, and expects to sell 1,000 t-shirts per month 3. For Dresses: • ABC pays $ 0 eac for the dresses C $10 each o t e d esses • ABC will buy 700 dresses per month, and expects to sell 500 dresses per month 4. For Jeans: • ABC pays $7.50 each for the jeans • ABC will buy 400 jeans per month and expects to sell 300 jeans per month month, 5. ABC marks up its products 100% 14 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 16. Budget Exercise Review Answers on “Handout #2 Answer Key Worksheet Budget for ABC Thrift Store Inc.”Discussion points:Di i i t• What is the budget telling us?• Seasonality versus average monthly budget• Donated items: value assigned because if removed, it would be an expense to the social enterprise• Inventory: inventory remains on the balance sheet until sold at which point it is expensed 15 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 17. Budgeting Year to Year Amount Current last year Increment year budget Revenue T-shirt 120,000 10% 132,000 Dresses 120,000 9% 130,800 Jeans 54,000 -50% 27,000 Expense Cost of Sales T-shirt 60,000 5% 63,000 Dresses 60,000 9% 65,400 Jeans 27,000 -50% 13,500 Salaries 70,000 3% 72,100 Rent 15,000 3% 15,450 Utilities 5,000 2% 5,100 Maintenance , 2,000 3% 2,060 , Supplies 5,000 0% 5,000 Sorting cost 2,400 5% 2,520 16 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 18. Monitoring the budget Refer to “Handout #3 – Variance Analysis for ABC Thrift Store”, to review the information below.To monitor the budget, prepare a variance report (preferably on a monthly budgetbasis)• Report on: – Monthly income and expenses compared to monthly budget amount – Year-to-date actual comparison with year-to-date budget amounts – Compare to last year – Add percentage variances – Add explanations• Key report to be reviewed by the organization’s Board of Directors• Key Ke report to help the organization assess whether the are achie ing their goals organi ation hether they achieving 17 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 19. FinancialAnalysis
  • 20. Note to Participants The following slides on financial analysis contain financial statements that have been presented under accounting standards used by for profit businesses. This format of reporting fi i financial activity i useful f i i l i i is f l for internal management d i i making b h l i l decision ki by helping your organization gain a true picture of the sustainability of your social enterprise. If you have chosen a non-profit legal structure for your social enterprise, or your social enterprise i part of a non-profit organization, all external reporting must be accounted t i is t f fit i ti ll t l ti tb t d for under non-profit accounting standards as specified in the Canadian Institute of Chartered Accountants’ Handbook, not as presented in the following slides. This form of reporting is only to be used e ternall if your social enterprise is registered onl sed externally o r as a for profit business. 19 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 21. Income Statement Refer to “Handout #4 –ABC Thrift Store Financial Statements”, when reviewing the information below.• Statement of operations under NPO reporting p p g• This report shows the amount of revenue that was earned over a period of time and the amount of expense incurred over the same period• The difference between revenue and expenses is the net income/loss from the p p period• Income Statement divided into three sections: – Revenue:  The dollar sales amount of the product over the p p period of time – Cost of Goods Sold:  Direct costs associated with creating the goods sold – E Expenses:  Costs spent to carry out the activities of the organization 20 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 22. Statement of Cash Flows Refer to “Handout #4 –ABC Thrift Store Financial Statements”, when reviewing the information below.• The Statement of Cash Flows shows how the organization’s cash p g position changed during g g the year• As an analytical tool, the Statement of Cash Flows is useful in determining the short-term viability of a company, particularly its ability to pay bills• Varies from income in that it measures whether cash has actually been received or paid for the revenues and expenses recorded in the income statement• Statement of Cash Flows is divided into three sections: – Operating Activities  Production, sales and delivery of the product – Investing Activities  Purchase or sale of income producing assets – Financing Activities  The flow of cash between the organization, its owners and its creditors 21 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 23. Balance Sheet Refer to “Handout #4 –ABC Thrift Store Financial Statements”, when reviewing the information below.• Statement of Financial Position under NPO reporting• Balance Sheet shows total assets, liabilities and equity of an organization at a point in time• Balance sheet is divided into three sections: – Assets:  Listed in order of most current and liquid to longer term and fixed – Liabilities:  Listed in same manner as assets. Classifies as either short or long term depending on timing of payment (Less than 1 year = Short-term Liability) – Equity:  The resulting value of the company after all obligations have been paid. This is similar t th ‘N t Asset’ position of a NPO i il to the ‘Net A t’ iti f  Consists of Contributed Capital and Retained Earnings 22 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 24. Ratio Analysis Assess the ability to generate earnings Profit Sustainability Ratios as compared t it expenses d to its Assess ability to pay off short-term debts Liquidity Ratios q y obligations Analyze how well a company uses its Operational Efficiency Ratios p y assets and liabilities internally 23
  • 25. Ratio CalculationsProfit Sustainability Ratios• Sales Growth = ( (Current Year – Prior Year) / Prior Year )• Gross Profit Margin = (Revenue – COS) / Revenue• Net Profit Margin = (Revenue – (COS + Operating Expenses)) / RevenueOperational Efficiency• Operating Expense Ratio = (Expense / Revenue)• Inventory Turnover = (Average COS / Average Inventory) Where: Average Inventory = (Ending balance – Beginning) / 2• Breakeven Analysis = Total Fixed Cost / (Unit Sale Price – Unit Variable Cost) 24 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 26. Ratio Calculations (continued)Liquidity Ratios• Current Ratio = Current Assets / Current Liabilities• Quick Ratio = (Current Assets – Inventories) / Current Liabilities 25 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 27. Exercise – ABC Thrift Store Refer to “Handout #5 Ratio Analysis for ABC Thrift Store Inc.” for answers.• Please perform ratio analysis f ABC Th ift St Pl f ti l i for Thrift Store with th fi ith the financial statements h d t i l t t t handout using the ratios discussed in the previous slides• Note: We will assume that if ABC Thrift Store had been in operation for 2 years, the total sales in the previous year would be $260,000Analysis• Obtain industry ratios online to gauge if your social enterprise will be competitive• May be appropriate to set different ratios than industry average depending on your mission 26 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 28. Summary of Financial Analysis ModuleIntroduction• Importance of financial analysis p y• Cultural integration• Identifying financial goals• Identifying financial rolesBudgeting and MonitoringFinancial AnalysisKey resource: www.demonstratingvalue.org 27 © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 29. Thank youQuestions?Q ti ? © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 28

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