Financial Audits, Analysis & Financial Audits, Analysis & Ratios Ratios Short Term Resource Short Term Resource Management Management

March 29, 2010

ReviewReviewWhat are the parts of a budget –

macro and micro?What order are they listed in?What is the relationship between

budgets and financial statements?

Audits & AnalysisAudits & AnalysisReadingsExamining the numbers and

related articlesAn Overview of Financial

Statement AuditingIllustrative Auditors’ Reports

Under GASFinancial Ratio AnalysisTruth or Consequences: The

Implications of Financial Decisions

Questions from Questions from ReadingsReadings

Examining the Numbers etc.

What do measurement exercises allow nonprofits to do?

What are internal auditors and what does this article say about their role?

What is the goal of comparison analysis and what are its limitations?

An Overview of Financial Statement AuditingWhy audit and what is GAAP?What (5) judgments are made by auditors?What is simple v. complex auditing?What are some common misconceptions about auditing?Three fundamental concepts

Questions from Questions from ReadingsReadings

Illustrative Auditors’ Reports Under GAS:What are the types of opinions expressed in these examples?Note disclaimers and language and how they relate to concepts that have been reviewed in class.

Financial Ratio Analysis: Define financial

analysis, and ratios.What are ratios good

for?Which are most useful

to non-profits?

Analysis and RatiosAnalysis and RatiosFinancial Analysis: selection,

evaluation and interpretation of data. Helpful in evaluating performance, risk, and organizational health.

Ratios: comparisons of financial information.

Ratios – why?Ratios – why?Relative - no across the board

standardsClassification of ratios:• coverage – ability to meet

obligations• return – net benefit : resources

expended• turnover – gross benefit: resources

expended• component – part of item : item

Liquidity RatiosLiquidity RatiosGenerally, the larger the better,

but no real good or bad.Current

current assets/current liabilitiesQuick

assets-inventory/liabilitiesNet working capital to sales

assets-liabilities/sales

Financial Leverage Financial Leverage Ratios: assess riskRatios: assess riskTotal debt to assetstotal debt/total assets

Long-term debt to assetslong-term debt/total assets

AuditsAuditsAuthority - GAAP/GAASMisconceptionsQuestions (skeptically)1.Are accounting principals in line with

GAAP? 2.Are they appropriate?3.Do financials contain adequate

information?4.Are they presented in a reasonable

manner?5.Do they reflect the financial position of

the organization?

Management AssertionsManagement AssertionsExistence/occurrenceCompletenessOwnershipValuation or measurement and

allocationStatement presentation

Audit FundamentalsAudit FundamentalsMateriality: individual judgment of

auditor as professional; based on reason

Audit Risk: based on reasonable assurance and related to amount of time and effort

Evidence: that supports financial statements; relevance and reliability

Audit Process involves seven steps

Audit Reporting Audit Reporting (Figure 2-3 in (Figure 2-3 in Overview)Overview)

Immaterial: unqualified Material: qualified – adverse or

denialFormatWhy opinion?

Short Term Resource Short Term Resource ManagementManagementReadingsA New Kind of GrantBeating The Death SpiralBuilding is Not BuyingGrant AwayMarket Magic

Questions from Questions from ReadingsReadings

Truth or Consequences: Does a diverse

revenue base improve financial health?

How many funding sources do most nonprofits have and which are the most “profitable”?

 

A New Kind of Grant:What is this article

advocating and why?What is the example

organization?

Beating the Death Spiral:How do nonprofits

usually go out of business?

What makes it difficult to forecast when nonprofits will go under?

Questions from Questions from ReadingsReadings

Building is Not Buying:What is the difference

between building and buying and which is better?

What is “burn rate” and “take off”?

What are investors looking for and why?

Grant Away:What is venture

philanthropy and why is it important?What private sector concept does this article discuss?

Why is this a good idea, or is it?

Revenue Sources by Revenue Sources by “Profitability”“Profitability”Diversity: 90% have one or two

major sourcesSources include:

private contributionsearned incomegovernment

Cash and liquidity

Funders as InvestorsFunders as InvestorsInsolvency Insolvency Start-UpsStart-UpsVenture PhilanthropyVenture Philanthropy

CLASS EXERCISE #1CLASS EXERCISE #1

Auditing and Analysis

Break into pairs and select one of the following audit scenarios. Develop questions for the audit and a list of documentation you might request.1.Public art program of a municipal parks department2.Lunchtime feeding program of a homeless shelter3.Wound care clinic for community health center

CLASS EXERCISE #2CLASS EXERCISE #2

Short Term Resource Management

Using the organization from your group project, develop two pie charts – one that shows your current revenue strategy, and one that shows an ideal revenue strategy given your potential funders.

CLASS EXERCISE CLASS EXERCISE #3#3 Budgeting Exercise – College Group

You are the President of a student group at your college/university. Build an annual budget based on the following :Revenues include the following: an annual $5,500 payoff from an endowment, membership dues of $200 per current student (154), alumni support fund contributions of $3,500, total $18,000 from the college student services division, $1,200 each donation from 15 anonymous alums for general operating, $40 each for every attendee at the annual lecture.Expenditures include the following: an annual lecture at $4,500 for speaker and $850 for refreshments and marketing (not including $600 for in-kind CEU’s), $1,200 per student for attendance at national conference (you may require students to pay part), $500 for two annual events, $1,000 for recruitment activities, $800 national dues, 10% of ED salary of $84,000, two annual stipends to student officers of $600 each, $300 for three annual celebrations/gatherings, $900 annual retreat, $4,000 supplies.