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The Intersection of Finance and Strategy:
Using Financial Data to Inform Strategic Decisions
By
Brent Copen
Why do so many
nonprofits endure
ongoing financial
challenges, even in
good economic
times?
Chapter 1:
An
Introduction
To The
Nonprofit
Business
Model
Components of the Business Model
Who we
are
& what
we do
How we
do it
How we
finance it
Business
Model
4
Source: The Nonpr...
The Business Model
How we
do it
How we
finance it
Who we
are & What
we do
5
Source: The Nonprofit Strategy Revolution
Wher...
A Question for the group
Are nonprofits allowed to
generate profits?
6
Surpluses Reinvested in The Business
7
 New opportunities
 Facility
 Rainy day
 Investment
A Question For The Group
Who is the nonprofit’s
“customer”?
8
Customer
fee $
Third
party
payer
funding
$$$
Service cost
$$$$
Defining Service Cost & Customer Fee
Customer
fee $$$$
Serv...
A Question for the group
Must Customer Fee +
Third Party Payer =
Service Cost for
nonprofits?
10
For Profit:
Service Cost = Customer Fee
11
Item Cost Fee
Ingredients
Coffee $0.12
Dairy $0.05
Cup + lid + sleeve $0.25
Ove...
Non Profit:
Service Cost ≠ Customer Fee
12
Item Cost Fee
Ingredients
Coffee $0.12
Dairy $0.05
Cup + lid + sleeve $0.25
Ove...
Program to Overhead Ratio
 The IRS requires charities to allocate their expenses into three
categories: Program, Manageme...
A Question for the group
Is cash always fungible
in the nonprofit sector?
14
Rules of Nonprofit Accounting
15
Unrestricted
Temporarily
Restricted
Permanently
Restricted
Three categories of contributi...
The Bottom Line for Nonprofits
16
Income Statement or Statement of Activities
Total Change in Net Assets (surplus/Deficit)...
Chapter 2:
A Look at
The
Numbers
Statement of Activities
<#>
Analyzing the Statement of Activities
 Go to the unrestricted column first
 Segregate operating revenues/expenses from n...
Budgeting
 A budget is a plan for how an organization will get and use money
over a period of time to achieve specific go...
Troubleshooting Budgets
21
 Lack of attention
 Asking for more than you need
 Rosy projections
 Accrual vs cash
 Plug...
Program Profitability
22
Program Direct Indirect
$ in Thousands School Afterschool Fitness Residential Camp
Subtotal
Progr...
From Jeanne Bell Peters and Elizabeth Schaffer, Financial Leadership for Nonprofit Executives: Guiding Your Organization t...
Dual Bottom Line – Sample Questions
 Program aligns with Theory of Change (i.e. to realize the
impact we want to have in ...
Matrix Map
<#>
School
After School
Fitness
Residential
Summer Camp
0.00
1.00
2.00
3.00
4.00
($300,000) ($200,000) ($100,00...
Budget Forecasting
26
 Major changes in funding environment will require the ability to
respond quickly
 Forecasting set...
Budget Scenario Planning
27
 Examine revenues, expense
and impact on bottom line
(ideally by program)
 Consider, from a ...
Strategic vs. Business Planning?
 Strategic planning is, at its best, the process of
considering and making strategic dec...
Business Planning: What Makes
Nonprofits Different?
 Market failure. Nonprofits must make up the market
shortfall by attr...
1-10-100 Rule
30
The Financials
 “As every seasoned investor knows, financial projections for a new
company are an act of imagination. An ...
Conclusion
32
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Berkeley Board Fellows & Social Sector Solutions Professional Development Workshop

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Berkeley Board Fellows & Social Sector Solutions Professional Development Workshop

  1. 1. The Intersection of Finance and Strategy: Using Financial Data to Inform Strategic Decisions By Brent Copen
  2. 2. Why do so many nonprofits endure ongoing financial challenges, even in good economic times?
  3. 3. Chapter 1: An Introduction To The Nonprofit Business Model
  4. 4. Components of the Business Model Who we are & what we do How we do it How we finance it Business Model 4 Source: The Nonprofit Strategy Revolution
  5. 5. The Business Model How we do it How we finance it Who we are & What we do 5 Source: The Nonprofit Strategy Revolution Where we work Our competitive advantage
  6. 6. A Question for the group Are nonprofits allowed to generate profits? 6
  7. 7. Surpluses Reinvested in The Business 7  New opportunities  Facility  Rainy day  Investment
  8. 8. A Question For The Group Who is the nonprofit’s “customer”? 8
  9. 9. Customer fee $ Third party payer funding $$$ Service cost $$$$ Defining Service Cost & Customer Fee Customer fee $$$$ Service cost $$$$ Traditional Model Nonprofit Model 9
  10. 10. A Question for the group Must Customer Fee + Third Party Payer = Service Cost for nonprofits? 10
  11. 11. For Profit: Service Cost = Customer Fee 11 Item Cost Fee Ingredients Coffee $0.12 Dairy $0.05 Cup + lid + sleeve $0.25 Overhead Labor $0.90 Rent $0.25 Marketing $0.12 G & A $0.50 Operating profit $0.30 Service cost $2.49 Customer fee $2.49
  12. 12. Non Profit: Service Cost ≠ Customer Fee 12 Item Cost Fee Ingredients Coffee $0.12 Dairy $0.05 Cup + lid + sleeve $0.25 Overhead Labor $0.90 Rent $0.25 Marketing $0.12 G & A $0.50 Operating profit $0.30 Service cost $2.49 Customer fee $2.00
  13. 13. Program to Overhead Ratio  The IRS requires charities to allocate their expenses into three categories: Program, Management/General, and Fundraising.  Ratings show givers how efficiently a charity will use your $ 13 ? 81% 19% Program Overhead
  14. 14. A Question for the group Is cash always fungible in the nonprofit sector? 14
  15. 15. Rules of Nonprofit Accounting 15 Unrestricted Temporarily Restricted Permanently Restricted Three categories of contributions and net assets
  16. 16. The Bottom Line for Nonprofits 16 Income Statement or Statement of Activities Total Change in Net Assets (surplus/Deficit): $450,000 Temporarily restricted Change $400,000 Receipts in excess of releases Unrestricted Change in Net Assets $50,000 Non-operating Revenues $100,000 e.g. campaign revenues for capital Unrestricted Operating Change in Net Assets ($50,000) Balance Sheet or Statement of Financial Position Total Net Assets (Equity): $15M Permanently Restricted $10M e.g. endowment Temporarily Restricted $4M e.g. multi-year funding Unrestricted Net Assets $1M Unrestricted Plant and Equipment Net Assets $1.5M Unrestricted Liquid Net Assets ($500k) Cash and Cash Equivalents $2M Temporarily Restricted $1.8M Prepaid for future uses Unrestricted $200k
  17. 17. Chapter 2: A Look at The Numbers
  18. 18. Statement of Activities <#>
  19. 19. Analyzing the Statement of Activities  Go to the unrestricted column first  Segregate operating revenues/expenses from non- operating  Analyze results  Look for amazement numbers 19
  20. 20. Budgeting  A budget is a plan for how an organization will get and use money over a period of time to achieve specific goals  A declaration of priorities and how limited resources are allocated  A budget, as a planning tool, is only as good as your assumptions  Be explicit about your assumptions  Monitoring the budget is critical to reaching your goals 20
  21. 21. Troubleshooting Budgets 21  Lack of attention  Asking for more than you need  Rosy projections  Accrual vs cash  Plugging with “New Grants”  Variance reports are explained as a “timing issue”.
  22. 22. Program Profitability 22 Program Direct Indirect $ in Thousands School Afterschool Fitness Residential Camp Subtotal Program General Total Budget Revenue Earned Tuition/fees 972 207 826 217 2,222 2,222 Rental income 1,145 1,145 1,145 Other 42 42 42 Revenue Contributed Individual 25 1 26 67 93 Grants 5 14 19 19 Net assets released 97 97 97 0 Total revenue 1,044 222 826 1,242 217 3,551 67 3,618 Expenses Total expenses 1,258 208 731 988 180 3,365 421 3,786 Surplus/Deficit -214 14 95 254 37 186 -354 -168 Allocation 157 26 91 124 23 Total surplus/deficit -371 -12 4 130 14
  23. 23. From Jeanne Bell Peters and Elizabeth Schaffer, Financial Leadership for Nonprofit Executives: Guiding Your Organization to Long-term Success, Fieldstone Alliance, 2002. Adapted from Boston Consulting Group’s Growth-Share Matrix. Dual-Bottom Line Matrix 23 High Mission Impact Low Sustainability High Mission Impact High Sustainability Low Mission Impact Low Sustainability Low Mission Impact High Sustainability Financial Sustainability MissionImpact
  24. 24. Dual Bottom Line – Sample Questions  Program aligns with Theory of Change (i.e. to realize the impact we want to have in our community.  Program demonstrates excellent execution (e.g. as demonstrated by excellent client feedback, measurable impact in our community, focused and enthusiastic staff, etc.)  Program fills an important gap (based on cultural competence, geographic access, and other factors, we are the best agency to offer this program.)  Program has leverage potential (e.g. as a feeder to other programs). 24
  25. 25. Matrix Map <#> School After School Fitness Residential Summer Camp 0.00 1.00 2.00 3.00 4.00 ($300,000) ($200,000) ($100,000) $0 $100,000 $200,000 $300,000 $400,000 Impact Profitability Matrix Map
  26. 26. Budget Forecasting 26  Major changes in funding environment will require the ability to respond quickly  Forecasting sets up process to revisit assumptions regularly, make changes to attain financial goal (original budget), or change the goal $ in Thousands Total Budget Comments Forecast 1 Comments Forecast 2 Revenue Earned Tuition/fees 2,222 Rental income 1,145 Other 42 Revenue Contributed Individual 93 Grants 19 Net assets released 97 0 Total revenue 3,618 Expenses Total expenses 3,786 Surplus/Deficit -168 Allocation Total surplus/deficit
  27. 27. Budget Scenario Planning 27  Examine revenues, expense and impact on bottom line (ideally by program)  Consider, from a financial perspective, how future may unfold (be honest about critical uncertainties)  Clarify challenges, engage multiple perspectives to generate new ideas and inform decisions ( determine what must be done) Tool to manage uncertainty and prepare for the future $ in Thousands Total Budget Scenario A Scenario B Revenue Earned Tuition/fees 2,222 1,485 1,485 Rental income 1,145 1,654 1,145 Other 42 23 23 Revenue Contributed Individual 93 131 131 Grants 19 292 247 Net assets released 97 127 127 0 Total revenue 3,618 3,712 3,158 Expenses Total expenses 3,786 3,683 3501 Surplus/Deficit -168 29 -343
  28. 28. Strategic vs. Business Planning?  Strategic planning is, at its best, the process of considering and making strategic decisions. - Periodic examination of organizational, programmatic and/or operational strategies  Business planning is the process of determining the parameters of an economically and operationally successful undertaking - Business planning is most powerful when the strategy calls for some major change that must be tested. - The value of the business plan is directly related to the rigor of the planning process. 28 Source: La Piana Consulting
  29. 29. Business Planning: What Makes Nonprofits Different?  Market failure. Nonprofits must make up the market shortfall by attracting other sources of revenue – including from third party payers.  Third party payers. A nonprofit organization’s “customers” are not just the individuals and groups availing themselves of a particular product or service.  Difficulty accessing growth capital. Venture capital, long a fixture of the for-profit sector, has only recently become a viable option for some nonprofits. 29 Source: La Piana Consulting
  30. 30. 1-10-100 Rule 30
  31. 31. The Financials  “As every seasoned investor knows, financial projections for a new company are an act of imagination. An entrepreneurial venture faces far too many unknowns…Don’t misunderstand me: business plans should include numbers. But those numbers should appear mainly in the form of a business model that shows the entrepreneurial team has thought through the key drivers of the venture’s success or failure.” - by William A Sahlman, How to Write a Great Business Plan 31
  32. 32. Conclusion 32

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