Financial Statement Analysis Music Academy of North Carolina

Fiscal Years 2008-2011

Prepared 4.15.12 by Amelia Gallo, Priscilla James, Kim Miller and Miranda Dalton PSC 545 – Nonprofit Financial management & Budgeting

Spring 2012

Overview of MANC

• Located in the Greensboro, NC

• An organization that offers musical instruction and other services to its constituents

• Has grown to be the number one resource in North Carolina offering music education to individuals of all ages.

Overview of MANCFinancial Practices

• Bason & Company, PA in Greensboro, NC hired to audit financial statements

• Bason & Company did not prepare the financial statements. They accounting agency performed “review of financial statements

• MANC prepared their own statementsa. Statement of Financial Positionb. Statement of Activitiesc. Statement of Cash Flowsd. Schedules of Functional Expenses (Supplement)

Financial Analysis Approach• The Statement of Financial Position, Statement of Activities and the

Statement of Cash Flows for years 2008 to 2011 were examined to determine the financial health of the organization.

• An examination of the auditor’s letter and the notes section were studied to provide clearer understanding of the organization’s financial management practices.

• From the information, a series of ratios were calculated to examine the trends and patterns of the organization and to benchmark against industry standards.

• Two Hundred Fifty One for-profit musical instruction businesses were used in aggregate to benchmark the Music Academy of North Carolina.

• Recommendations were provided for future financial planning and organizational sustainability and viability.

Ratios Utilized• Common Size Ratios - (Assets, Liabilities and Net Assets)

• Liquidity Ratios - (Current Ratio)

• Total Asset Turnover

• Leverage Ratios ( Debt, Debt to Equity and Cash Flow Coverage)

• Profitability (Return on Assets and Return on Net Assets)

• Program Services

Auditor’s Opinion Letter

• The Music Academy’s two auditor’s opinion letters revealed a format consistent to the format delineated in the course readings.

• Bason & Company concluded that MANC’s financial statements between 2008-2011 presented a fair representation of the financial position of the organization.

Notes Section

• The notes section in the 2008-2011 financial statements provided further clarification about the financial position and practices of MANC.

• Some areas were ambiguous and needed further clarity in the financial practices of the organization.

• Secondly, information revealed in 2008/2009 was not revealed in the 2010/2011 notes section and vice versa.

Quick Overview of Financial Statements

• Positive fund balance or net assets

• The Statement of Cash Flows reveals that the organization did not have a significant amount of cash on hand

• Most of the organization’s assets were held in the temporarily restricted line item except in 2011.

• The next three slides provide an overview of MANC’s Common Size Ratios

2008 2009 2010 2011

15,523 7,364 11,916 4,751

Common Size Ratio Assets

2008 2009 2010 2011

Cash and Cash Equivalents .02 – 2% .01 – 1% .02 – 2% .01 – 1%

Tuition Receivables .0008 - >1% .002 - >1% .002 - >1% .004 - >1%

Miscellaneous Receivables .002 - >1% .01 – 1% .001 - >1% .001 - >1%

Prepaid Expenses .000 – 0% 0 – 0% 0 – 0% .01 – 1%

Unconditional Promises to Pay .07 – 7% .14 – 14% .15 – 15% .19 – 19%

Endowment Cash for String Competitions .19 – 19% .21 – 21% .20 – 20% .01 – 1%

Community Foundation of Greater Greensboro .64 – 64% .54 – 54% .57 – 57% .73 – 73%

Common Size Ratio Liabilities

2008 2009 2010 2011

Accrued Salaries .35 – 35% .26 – 26% .14 – 14% .02 – 2%

Unearned Revenue .13 – 13% .08 – 8% .16 – 16% .31 – 31%

Line of Credit .35 – 35% .39 – 39% .56 – 56% 0 – 0%

Capital Lease Payments .02 – 2% .16 – 16% .08 – 8% .33 – 33%

Accounts Payable .13 – 13% .09 – 9% .05 – 5% .34 – 34%

Common Size Ratios Net Assets

2008 2009 2010 2011

Unrestricted Assets .04 – 4% .004 - >1% .06 – 1& .22 – 22%

Temporarily Restricted Assets .52 – 52% .62 – 62% .52 – 52% .31 31%

Permanently Restricted Assets .44 – 44% .38 – 38% .42 – 42% .48 – 48%

Quick Overview of Financial Statements

• Between 2008-2010, MANC’s current ratio fell below the acceptable benchmark of 2.0; however, in 2011 the current ratio was 7.7. Finkler would argue that the organization did not invest their assets wisely in 2011.

• Ninety one percent of MANC’s current assets were held in the unconditional promises to pay line item.

Current Ratio2008 2009 2010 2011

Current Ratio 1.4 1.9 1.3 7.7

Quick Overview of Financial Statements

Asset Turnover2008 2009 2010 2011

Total Asset Turnover

Revenue generated per dollar

invested

1.06 1.22 1.38 1.66

• MANC’s average of 1.33 % is a little less than half of the industry benchmark, which suggests that in this area of efficiency, the MANC is operating significantly below the accepted industry standard.

•This suggests that the organization is not using their resources effectively.

Quick Overview of Financial Statements

• The definition for debt can be defined by the organization or business.

• Our analysis compared results when debt was defined as “total liabilities” and “line of credit plus capital lease payments.” The latter definition provides a clearer picture of the organization in 2010.

Total Liabilities Definition Line of Credit plus Capital Lease Payments Definition

MANC within the industry standards MANC financed over half of their operations with debt and the organization is not able to pay its creditors with its profits in 2010

Total Liabilities Definition

Leverage and Coverage Ratios2008 2009 2010 2011

Debt .07 – 7% .08 – 8% .13 – 13% .03 – 3%

Debt to Equity .07 .09 .15 .03

Line of Credit plus Capital Lease Payments Definition

Leverage and Coverage Ratios2008 2009 2010 2011

Debt .024 – 3% .046 – 5% .753 – 75% .009 – 1%

Debt to Equity .026 .050 .867 .009

Cash Flow Coverage Ratio

Coverage Ratios2008 2009 2010 2011

Cash Flow Coverage 1.15 2.23 1.21 1.24

Quick Overview of Financial Statements

MANC’s profitability is very low. It is not an organization that focuses on profits, butthe organization makes enough profit to support its mission and to meet all itsobligations.

Profitability Ratios2008 2009 2010 2011

ROA .007 -0.12 .007 .013

RONA .007 -0.13 .008 .013

Quick Overview of Financial Statements

Program Services Ratio2008 2009 2010 2011

Programs .579 – 58% .562 – 56% .494 – 49% .495 - 50%

Administrative .312 – 31% .288 – 29% .255 - 26% .288 - 29&

Fundraising .109 – 11% .150 – 15% .251 – 25% .216 – 22%

The Music Academy invests a significant proportion of its operating budget into the perpetuation of their mission through facilitated music instruction.

Recommendations• Develop a plan of action to generate more profit/cash for the organization

in an effort to have more cash on hand to ensure the sustainability of the organization during emergencies.

• Develop a plan of action allowing the amount of assets in unrestricted assets to increase permitting management more flexibility financial planning.

• As the number of assets increase, the organization should ensure that resources are being used in the most efficient manner and yielding maximum return for the organization.

• Avoid acquiring as much debt as possible to prevent the organization from being a highly leveraged organization and increasing the risk of not meeting its near term obligations.

Recommendations• Although profits are not the objective of the organization,

develop a strategic plan that will allow the organization to expand programs and services.

• The notes section should provide more clarity and give more detail to readers. This will allow readers to make connection between each fiscal year and avoid the tendency to make assumptions.

• Continue the organization’s strategy in keeping administrative and fundraising costs low without sacrificing program service and delivery.