NFP Industry Trends Kim James 1 Leadership Impact Study 3 - PDF document

2019 Not-for-Profit Symposium See whiteboards for wifi login information NFP Industry Trends Kim James 1

Leadership Impact Study 3 Fundraising & Marketing • Leveraging data • New digital tools • Peer-to-peer fundraising • Storytelling • Transparency and accountability 4 2

Up-and-Coming Tech Tools • 3D printing • Artificial Intelligence • Bots • Harnessing the power of data • Identifying tech to increase impact • Mobile-first technologies • Digitally engaging donors 5 Giving Trends and Donor Relations • Aftermath of tax reform • Donor collaboration • Individual giving • More authenticity • More focus on recurring gifts 6 3

Leadership Strategies • Adaptive change • Creating an empowering culture • Creative problem solving • More oversight in revenue and data • Strategy and people • Strong support system 7 Board Development • Authentic communication • Board engagement • Diversity and equity • Intentional relationships • Onboarding • Setting the right expectations 8 4

Resources • https://www.nonprofitpro.com 9 A Nonprofit’s Guide to Sustainability Through the Lens of a Turnaround Professional Schneider Do Schneider Downs wns No Not-f t-for-Pr Prof ofit Sym it Symposium osium August 29, 20 st 29, 2019 5

Overview Schneider eider Downs M s Meridian I dian Introduction oduction Co Common N mmon Not-for-Pr Profi ofit Mist t Mistak akes: es: Financial mistakes • • Strategic mistakes Using Using Fin Financi ncial A Anal alysi ysis to Pr Prevent an ent and Co d Combat mbat Co Common Mist mmon Mistak akes: es: • Financial metrics and ratios – calculation • Metrics and ratios – interpretation • Financial statement analysis – gaps, limitations, and time • Distressed organization- detection, warning signs, and risk Q&A Q&A 11 Schneider Downs Meridian KEY SERVICE OFFERINGS Schneider Downs Meridian was created to provide clients with award-winning consulting services in the areas of management consulting, corporate restructuring and debt financing. Additionally, our experience includes having served in the capacity of Court-appointed Receiver, Examiner and Trustee. Our clients range from closely-held businesses to large publicly- traded corporations across the country, but typically are middle- market businesses with sales between $10 million and $500 million. They encompass a wide range of industries, including not-for-profits, manufacturing, construction, distribution and IMPROVEMENT PROCESS service. Strategic Analysis The foundation of our success is a constant attention to detail, a Action Planning focused approach to solving the problems of our clients, a commitment to results, and the ability to pull from our depth of Implementation knowledge. Over the years, our professionals have gained an enviable reputation for our thoroughness, financial expertise, Monitor negotiating skills, presentation expertise, and the ability to quickly assess and address the obstacles impeding our client's Sustain and Review success. 12 6

Financial Mistakes Budgets ets are t too aggress essive b both in revenue a e and expenses es Nonprofits are typically too optimistic when budgeting for revenue and donations. At the same time, they set an expense budget to match those revenues. Confusing p using profit its fo s for p positive c cash f flow ow If an organization is break-even but has $1 million of debt payments due, its cash flow will be a loss of $1 million, despite the statement of activities showing no loss. 13 Financial Mistakes Impro Im proper debt debt structur ructure Nonprofits, out of desperation, will start using their line of credit to finance long-term assets. Similarly, nonprofits will carry too much debt, affecting their cash flow and ability to operate. Bui Building ng t too oo big big an and/o d/or raisi raising t g too oo little little Organizations raise too little money, forcing them to incur debt to complete projects. Now, in addition to the additional costs of maintaining the new asset, they also have to service the related debt. 14 7

Strategic Mistakes Focusi sing ng on on missi mission at the e at the expens nse of all of all else else Not-for-profits need to find a balance between the mission and remaining financially viable. An organization cannot serve its community or employees if it does not exist. Think about mission and value to the community over long periods of time, rather than at any particular moment. Misal Misallocati tion of of reso resources Are your assets being deployed in the most efficient manner? Is your building too big? Are your offices too expensive? Are you investing in programs with little value, both financially and in the community? 15 Strategic Mistakes Misu sunde nderstandi anding ng y your ma market Maki Making dec decisi sions base s based on on assum assumptions, s, n not fac facts Introducing a new location or program? What analyses Not-for-profits, as with any enterprise, needs to have been performed to back that strategic decision? fully understand the market they compete in and/or serve. Scenario 1 Scen 1 Scen Scenario 2 2 16 8

Using Financial Analysis to Combat Common Mistakes • Financial analysis refers to an assessment of the viability, stability and profitability of an organization  Some analyses are very common and used in daily financial conversations (e.g., EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization)  Loan documents will usually contain financial benchmarks (financial covenants – minimum net assets and fixed charge coverage ratios are examples) 17 Evaluating Financial Performance SD Meridian starts by analyzing an organization in three different • categories:  Surplus and Cash Flow  Liquidity  Debt Structure In order to compare trends across different years and/or different • organizations, financial ratios are used (e.g., FCCR – Fixed Charge Coverage Ratio) 18 9

Financial Ratios • Ratios alone are difficult to interpret • Standard Ratio Analysis  Historical performance  Peer-industry ratios  Benchmark-industry ratios 19 Type of Financial Analysis • Time-based Historical comparison over periods of time   Year-to-year, quarter-to-quarter, month-to-month, lagging 12 months and others provide visibility to unique timing issues, such as seasonality Focuses on change in relation to operational strategies  Does not account for external factors – macroeconomic and industry trends  • Cross-section Benchmarked to similar organizations (sources - D&B, Robert Morris, FTC, peers’  990 filings) Compares similar organizations, provides view to macroeconomic & industry  factors impacting all firms 20 10

Surplus and Cash Flow PROFITABILITY AND AND C CASH SH F FLOW ($000 ($000s) 2016 2016 Key Concepts of Surplus and Cash A. 1.Revenue $77,405 2.Operating Expense 65,615 Flow 3.Operating Surplus/(Loss) $11,790 4. 4.Oper erating R Rati tio (2. (2. / / 1. 1.) 84. 84.8% B. 1.Net Assets and Liabilities $62,419 • Operating Surplus 2.Change in net assets 7,036 • Cash Flow from Operations 3. 3.Return on on Net Net Asset Assets (2. (2. / / 1. 1.) 11. 11.3% • Debt Service C. 1.Change in net assets $ 7,036 2.Plus: Depreciation / Amortization 13,536 • EBITDA 3.Cash 3. sh Flow ow f from O om Operations $20,57 $20, 572 • Free Cash Flow Before Working 4.Debt Due Within One Year 4,171 5.Cash 5. sh Th Thro row-Off to to Debt bt R Rati tio (3. (3. / 4. 4.) 4.93 93 Capital • Free Cash Flow D. 1.Long-term Debt Principal Paid $ 9,038 2.Plus: Interest Expense 626 3. 3.Tota Total D Debt bt Serv Service (1. (1. + + 2. 2.) $ 9, 9,664 664 * EBITDA stands for earnings before interest, E. 1.Change in Net Assets $9,952 (income) taxes, depreciation and amortization. For a 2.Plus: Depreciation / Amortization 13,536 nonprofit, income taxes would not be relevant and 3.Plus: Interest Expense 626 4. 4.EBI EBITDA* $24, $24,11 114 would not need to be a consideration % of Revenue 31.2% F. 1.Less: Total Debt Service $9,664 2.Less: Capital Expenditures 13,250 3. 3.Free ee Cash sh F Flow ow bef before re W Worki rking Capi pital $1,200 $1, 4.Change in Working Capital 9,465 5.Free 5. ee C Cash sh Flow ow $10,66 $10, 665 21 Cash Flow Ratios • Debt Service Coverage Ratio  Ability to pay principal and interest EBITD EBITDA* Total debt ser tal debt servic ice** e** * For a nonprofit, taxes are not a factor and would not be a consideration ** Required debt payments, interest expense, and capital lease payments  Can also use cash flows in numerator  >1.25 = Sufficient cash flow  <1.15 = Cause for concern 22 11