Diocesan Key Performance Indicators - Key Issues


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Diocesan Key Performance Indicators - Key Issues

  1. 1. A Discussion Paper Diocesan Key Performance Indicators (“What gets measured gets managed”) Prepared by the General Synod Financial Advisory Group November 2002 1. Introduction The Terms of Reference of the General Synod Financial Advisory Group (the Advisory Group) include the following: (iii) To determine and recommend what additional information should be provided by Dioceses to enable the Advisory Group to adequately fulfill its role; (iv) To develop further the agreed ‘benchmark’ for comparing accounts to provide for an element of ‘early warning’ of potential financial difficulties within Dioceses; (v) To provide assistance at the request of Dioceses to assess their existing financial reporting and recommend improvements where appropriate; (vi) To provide recommendations to Dioceses which will assist them in the management of their finances and assets, including when necessary on appropriate organisational and decision-making structures; In August 2001, the Advisory Group issued a discussion paper on Financial Reporting by Dioceses & The Application of Australian Accounting Standards. Following extensive discussion with Registrars, its key recommendations were endorsed by Bishops at their conference in Perth in March, 2002. The practical issues associated with the application of Australian Accounting Standards to Diocesan accounts, with the objective of ultimately receiving an unqualified opinion on fully compliant financial statements from their auditors, are being pursued by a Taskforce on Accounting Standards, chaired by Jim Kropp from the Advisory Group and comprising representatives of Dioceses. The Advisory Group is also continuing to review the annual accounts submitted to Diocesan Synods and, at the request of a particular Diocese, has been assisting it to restructure its financial reporting to be consistent with the recommended ‘benchmark’ and to enable it to more effectively manage its finances and resources. Page 1 of 10
  2. 2. 2. The scope of this discussion paper The purpose of this paper is to promote discussion concerning appropriate financial management of Dioceses, by focusing on key performance indicators. As foreshadowed in the August 2001 discussion paper, key performance indicators would help Dioceses to better manage their resources and particularly to respond to significant change, on the straightforward and realistic assumption that “what gets measured gets managed”. They would also provide an element of ‘early warning’ of potential financial difficulties. The main issues covered in this discussion paper are: • The ‘Balanced Scorecard; • Program costing and outcomes; and • How to assess the financial condition of a Diocese 3. The Balanced Scorecard A widely used approach in business is called the “Balanced Scorecard”. This approach was designed in the early 1990s to integrate performance measurement, and the key performance indicators that had been used by companies for many years, with a company’s strategic goals and management. It covers four key areas and groups of indicators: financial; customers; internal business processes; and what is termed ‘learning and growth’ - but has been extended by some users to include an additional perspective: the community. In order to assist understanding, a one-page summary of the concepts is attached as an appendix to this paper. Much more information is available for interested readers who should contact the Financial Advisory Group. . An advantage of the Balanced Scorecard is that it places strategy, structure and vision as the central focus of management. Some public sector and not- for-profit organizations have applied this approach because it also provides a way of communicating their strategy and priorities to various stakeholder groups, although its possible use by Dioceses needs further applied research. The Balanced Scorecard seeks to go beyond financial measures. Also, effective use of the Balanced Scorecard approach would necessarily flow from a Diocese’s long-term vision and strategy. Under this approach, financial measures would not, as a general principle, be seen in isolation from all other measures. The interconnection between the four categories of measures within the Balanced Scorecard needs to be articulated and communicated between users. Page 2 of 10
  3. 3. What would the measures be in a Diocesan Balanced Scorecard? The table below sets out a possible range of measures. Financials Growth & development − Risk-adjusted returns − Progress on key projects − Liquidity − New Diocesan ministries − Surplus real estate − In service training program − Deferred maintenance − Special purpose grants − Management Expense − Staff satisfaction/turnover Ratio (especially salaries) − Diocesan networking Parish/organisation satisfaction Process efficiency − ‘Climate’ surveys − Service standards − Market share (census) − Quality reviews − New endowments( eg to − Resource allocation Bishopric) − IT capital investments This has been developed on the basis that the “customers” of the Diocese are parishes and diocesan organisations. Obviously, application of this approach would not only involve deciding on several important conceptual and measurement issues, but also require considerable time and resources within a Diocese. It might therefore appear to be relevant only to larger and better-endowed Dioceses, although it has been successfully applied in business to smaller companies to set goals and priorities and allocate resources. The Balanced Scorecard simply provides a framework, but, to be effective, requires relevant goals and performance indicators to be identified and communicated between the key figures in management. 4.1 Program Costing At present many Dioceses present financial information on a traditional ‘line- item’ basis. That is, classifications of expenditure follow [standard] accounting practice and show categories such as: − Salaries − Electricity and water − Printing and stationery − Repairs, etc These classifications probably bear little relationship to the objectives and programs of a Diocese, and provide little assistance in understanding how effectively those objectives are achieved. An alternative is to use an “Outcomes and Outputs” framework. Associated with such a framework is a ‘program’ regime with related budgeting, costing and reporting. Page 3 of 10
  4. 4. This approach can help to answer 3 fundamental questions: (i) What does the Diocese want to achieve? [Outcomes] (ii) How does it achieve this? [Outputs] (iii) How does it know if it is succeeding? [Performance reporting] Outcomes require specifications by ‘outcome statements’, which define the impacts a Diocese expects. Such a statement would also delineate the outputs /programs that will contribute to the achievement of outcomes. In its practical application, there are 2 key aspects to ‘program’ costing: • The need to carefully identify exactly what the programs actually are and that they are expressed in a measurable way. − Intent: What will the program accomplish and what change will occur? − Target: Who or what changes as a result of the program − Geography: Where will the program take place and where will the change be observed? − Timeframe: What time frame will be necessary to produce the desired change? − Magnitude: How much change is expected? − Measure: How will one know when change has occurred? • There is usually a requirement for occasional individual and detailed time recording by all staff, including clergy. Given that the church is people-based, its introduction would need to be handled in an understanding and sympathetic manner, particularly if extended to issues of performance. There is a very substantial body of knowledge associated with Outcome based management in the public sector (the whole of the budget and performance measurement process for the Commonwealth Government of Australia is built on this model) but further work would be required to tailor this to the needs of a Diocese. Page 4 of 10
  5. 5. 4. Financial condition 4.1 Defining the financial condition of a Diocese The following discussion is drawn from a paper prepared by the Canadian Institute of Chartered Accountants in connection with the measurement of performance by Governments and can be applied to a not-for-profit entity. The financial condition of a not-for-profit entity such as a Diocese is its financial “health” as measured by sustainability, flexibility and vulnerability, looked at in the context of the overall economic and financial environment. These terms are defined as follows: • Sustainability: the degree to which a Diocese can maintain existing programs without significantly increasing its debt burden or significantly reducing the investments of the Diocese, or by making extra demands upon contributors. [These could be defined to include Parishes, in the case of central Diocesan functions, or the Diocese could be viewed more broadly to include Parishes.] • Flexibility: the degree to which a Diocese can vary the application of financial resources to respond to changing circumstances and priorities. • Vulnerability: the degree to which a Diocese is dependent on, and therefore vulnerable to, sources of funding outside its control or influence. 4.2 Challenges to reporting on financial condition First and foremost is the reality that the financial condition of a Diocese is different from the financial condition of companies. The essence of this point goes to the very heart of the difference between the not-for-profit and the private sectors. In the private sector, the principal purpose of financial activity is to increase the net worth of the enterprise. In other words, the organization's balance sheet should reflect the result or consequence of all expenditure. Dioceses are different. The benefits from their activities go, for the most part, to their own members as well as the broader community, even though any annual shortfall or surplus becomes part of the Diocese’s financial results. This means that, while congregations and other stakeholders (eg, residents of retirement villages, recipients of other support) expect the Diocese to enhance their well being (both spiritual and social), those benefits cannot be fully recorded in Diocesan financial statements. The statements largely reflect the costs of providing those benefits. This is not to suggest that Dioceses should limit their expenditure to areas that generate a direct financial return. Rather, it is to show that, unlike in business, many of the benefits that a Diocese provides will never show up on its balance sheet and, consequently, will have no directly measurable effect on its financial condition. Page 5 of 10
  6. 6. [However, there may well be circumstances in which a Diocese will want some of its “investments” to show a financial return, or at least be managed in a way that ensures that their own financial health is sound and that there is no underlying or contingent financial risk to the Diocese and its assets. The failure to maintain a ‘Diocesan’ school, retirement village or nursing facility in sound financial condition will not only have adverse implications for its ability to maintain required standards but also potentially for the Diocese itself.] A second reality is that financial condition is an assessment of just that - the condition of the finances of a Diocese, not the effectiveness of individual Diocesan spending (and revenue) decisions. Of course, outcomes are important and information that enables their assessment should also be prepared and provided, but this is separate to indicators of financial condition. A third reality is that an assessment of financial condition is essentially an exercise in accountability, which can refer to both historical and forward- looking information. It is usually emanates from historical financial reporting, with the analysis restricted to past financial decisions and trends, not proposed actions. This does not mean, however, that forward-looking financial information, including in annual budgets, is unimportant. On the contrary, it is vital for assessing whether or not the strategy a not-for-profit entity plans to follow is viable and acceptable to its members, community stakeholders and its creditors. Of course, the ability to maintain existing programs and include new initiatives in a budget is dependent on a Diocese’s financial condition. 4.3 Indicators of financial condition The most appropriate indicators of financial condition will depend on the specific circumstances of any particular not-for-profit entity. The indicators discussed below are not an absolute list; nor are they necessarily mutually exclusive. The aim should be to develop an integrated set of the most relevant financial and non-financial indicators to the current operating performance of the entity in line with its long-term goals and strategy. (i) Sustainability In assessing and improving financial condition, the first priority is sustainability: the degree to which a Diocese can maintain existing programs without significantly increasing the debt burden of the Diocese, significantly reducing its investments, or having to constantly resort to “special appeals”. If a Diocese cannot stabilize its debt burden, for example, debt-servicing charges will consume an increasing proportion of income, making it harder to sustain existing programs let alone introduce new initiatives. The inevitable long-term impact of a continually rising debt burden is the steady erosion of standards of service. In the extreme, a Diocese may need to restructure both its debt and programs in order to continue to meet cannot continue to have its debt-servicing obligations. Page 6 of 10
  7. 7. Sustainability measures can include: • Deficit/surplus as a percentage of total income • Debt as a percentage of total income. • Debt interest payments as a percentage of total income • The growth and composition of congregations If a Diocese has debt obligations with specific covenants included by the lender, they would also need to be monitored. (ii) Flexibility The second priority in assessing and improving financial condition is flexibility: the degree to which a Diocese can vary the application of financial resources to meet changing circumstances or priorities. The way a Diocese manages its finances affects its future maneuverability. This requires an assessment of commitments. For example in most, if not all Dioceses of the Australian Church, there are significant commitments to staff and heavy investments in real estate. The consequences of this for ongoing expenditures (for example, employee entitlements and maintenance) may limit the delivery of other programs in the medium term. [Moreover, there can often be other constraints that limit flexibility. The specific and historic nature of many church properties can severely inhibit their sale while at the same time making renovation to accommodate changing needs particularly costly.] Further, deferring maintenance is not an attractive option as it not only reduces the current usefulness of a property (or other capital equipment) - and may compromise important factors such as safety – but also pushes off the day that the capital will have to be restored, most likely at a higher cost. The phrase "pay me now or pay more later" clearly applies to reducing flexibility by deferring capital maintenance. Flexibility measures can include: • Changes in physical assets (Depreciation can be a measure of this but the accounting limitations of depreciation may require other approaches especially to deal with the vexed issue of ‘deferred maintenance’ - although a failure to at least recognize depreciation only magnifies this potential risk.). • Maintenance as a percentage of income. • Longer term salary commitments as a percentage of income. • Accumulated staff entitlements (eg, pensions, long service, sick and annual leave), and the extent to which they need to be and are fully funded. This is clearly an area for which non-financial indicators can also be important. For example, staff turnover and the associated time and costs Page 7 of 10
  8. 8. devoted to recruitment and training (including retraining) can have a significant impact on flexibility. (iii) Vulnerability The third priority in assessing and improving financial condition is vulnerability: the degree to which a Diocese is dependent on sources of funding outside its control or direct influence. As for companies and individuals, excessive borrowing not only reduces a Diocese’s capacity to borrow funds in the future but also to respond to adverse developments. Similarly, increasing income through demands on parishes and individual donors, or user fees, can often reduce the ability to do so in the future as the willingness of contributors becomes stretched. Regardless of the sustainability of debt or the degree of flexibility, the degree of control a Diocese has over its revenue sources can have an effect on its vulnerability Vulnerability indicators can include: • Total Debt • The percentage of debt with floating rather than fixed rates (and hence the immediate exposure to interest rate increases). • Foreign currency denominated debt (or other obligations). • Capital expenditure as a percentage of recurrent operating costs. • Special appeals (and in some circumstances even parish assessments) as a percentage of total income. • Investment income as a percentage of total income. (The Advisory Group’s preliminary review of Diocesan accounts indicates an often- large imbalance between investment income and parish assessments, which in the context of declining congregational growth, requires difficult and careful management.) The underlying financial accounts and other relevant sources will need to be restructured to provide the necessary information. Updating need not be continuous (although some can be when the accounts and other sources are appropriately organized) but ideally should be at least semi-annual, or when major decisions on new initiatives or priorities are under consideration. 5. Conclusions This discussion paper has been prepared to promote understanding of the various issues of principle, and some of the approaches that have been developed to enhance financial management via “what get measured gets managed”. Good financial management requires appropriate and consistent information. This paper therefore naturally builds on the earlier discussion paper on Page 8 of 10
  9. 9. Accounting Standards and the work of the Accounting Standards Taskforce, which was established to help extend the application of Australian Accounting Standards to Diocesan accounts. Some of the approaches discussed in this paper are obviously comprehensive. If adopted, they would require considerable internal resources and time to utilise effectively, and may not be suitable to some Dioceses. Other aspects of management reporting may also need further consideration. However, as a first step, the Advisory Group would like to facilitate the establishment of a set of Key Performance Indicators relevant to the particular circumstances of each Diocese as a way to monitor and improve their financial condition (or 'health'). This would assist a Diocese to assess the sustainability of its existing programs and its flexibility to meet new priorities. Furthermore, by also focusing on its financial vulnerability, relevant Key Performance Indicators would provide an element of 'early warning' of potential difficulties. The Advisory Group will assist individual Dioceses which may wish to explore this further. The Group will then facilitate the interchange of information about KPIs established and provide templates for calculation of the mainstream indicators adopted. The Group is also willing, as a second phase in the process, to establish a public folder where this information can reside and be accessed by all interested parties. The Advisory Group welcomes comments and/or suggestions from all Dioceses, including in written form to: The Chairman, General Synod Financial Advisory Group, PO Box Q190, QVB Post Office, Sydney, NSW 1230. Sydney, 28 November 2002 Page 9 of 10
  10. 10. Appendix What is the Balanced Scorecard? Essentially the Balanced Scorecard is a set of financial and non-financial measures relating to an organisation’s critical success factors.1It reflects the thinking of Kaplan and Norton.2 The concepts were introduced because managers have learned that yesterdays accounting results tell little about what actually can help grow and organisation---things like development of people, innovative services, advancements in research and development etc. The specific objectives of an organisation’s Balanced Scorecard are derived from the organisation’s vision and strategy. The objectives and measures view organisational performance from the following four perspectives, (in the language of the Anglican Church): Financial perspective“ To succeed financially, what kind of financial performance should we provide to our stakeholders?” Parish Internal business p p perspective p perspective “To achieve our “To satisfy our Vision and stakeholders, at vision, how should we be seen by our Strategy what processes m must we excel?” P Parishes” L Learning and Growth perspective“ To achieve our vision, how will we sustain our ability to change and improve?” The Balanced Scorecard emphasises how organisations must enhance internal capabilities and invest in people, systems and procedures necessary to improve future performance, whilst retaining the financial perspective. Innovative organisations are using the Balanced Scorecard to : 1. Clarify and translate vision and strategy 2. Communicate and link strategic objectives and measures 3. Plan, set targets and align strategic objectives 4. Enhance strategic feedback and learning. The Balanced Scorecard can become a foundation for management. 1 “Applying the Balanced Scorecard to Small Companies”---Chee w. Chow, Kamal M. Haddad and Jamie E. Williamson: Management Accounting August 1997. 2 See Robert Kaplan and David Norton, “The Balanced Scorecard---Measures That Drive Performance” Harvard Business Review , January-February ,1992 pp. 71-79. Page 10 of 10