Transcript Slide 1

Sustainable Finances:
transparency, sustainability and
accountability
Helen Irvine, Christine Ryan and Mike Booth
School of Accountancy QUT
ACFID Council 2012: Sustainable Planet, Programs &
Organisations - Thursday 11 October Canberra
Introductions (1): our team
Helen Irvine
Christine Ryan
Mike Booth
[email protected]
[email protected]
[email protected]
http://staff.qut.edu.au/staff http://staff.qut.edu.au/sta http://staff.qut.edu.au/staff/
/irvinehj/
ff/ryanc/
boothms/
Members of
Not-for-profit Accounting & Accountability Research Group
Memorandum of Understanding between ACFID and QUT
(School of Accountancy and Australian Centre for Philanthropy
and Nonprofit Studies)
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Introductions (2): you
What is YOUR role in a NFP? (CFO/Treasurer;
CEO; board member; donor; regulator; community
member)
Do you read your NFP’s financial report?
Do you understand your NFP’s financial report?
Do you understand your organisation’s financial
sustainability?
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Introductions (3): sustainability
For a NFP organisation:
“sustainability primarily means being able to survive so that it
can continue to serve its constituency. At its core, nonprofit
sustainability means that the organization will be able to fulfill its
commitments to its clients, its patrons, and the community in
which it operates. These stakeholder groups depend on the
nonprofit to service a need and to deliver on the promise of its
mission. Sustainability in this context means stakeholders can
place their trust in that commitment.” (Weerawardena,
McDonald and Mort, Journal of World Business, 2009, p. 2)
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Introductions (4): financial sustainability
NFPs must achieve the financial resources they need to
continue to fulfil their mission
Not-for-profit organisations need to achieve financial
sustainability to achieve their mission … but how do
they go about this?
In an era of accountability, how do not-for-profit
organisations provide transparent demonstrations of
accountability for the use of the funds entrusted to
them?
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Presentation Roadmap
•
•
•
•
•
Financial ratios
Communicating expenditure stories
Savings and vulnerability
Financial sustainability project
Questions
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Financial ratios (1)
Have you ever consulted charity ratings tables
(GuideStar, Charity Navigator, BBB, aliveandgiving.com)
Yes/No
Would you like to see ratings tables for NFPs used in
Australia? Yes/No
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Financial ratios (2)
• NFP financial ratios: a blunt instrument?
• Calculations primarily on US data – little from
Australia
• Need to focus on overall NFP financial sustainability
• Financial ratios can aid accountability and an
assessment of sustainability
• Boards need accessible NFP financial ratios
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Financial ratios (3)
Ryan, C. and Irvine, H. (2012), “Not-For-Profit Ratios for Financial
Resilience and Internal Accountability: A Study of Australian
International Aid Organisations” (Australian Accounting Review,
Vol. 22, Issue 2, 2012)
A suite of financial ratios
EFFICIENCY
CAPACITY (LIQUIDITY)
Administration Expense Ratio
Current Ratio
Program Expense Ratio
Months of spending
Fundraising Expense Ratio
GEARING
Cost of Fundraising %
Debt to Total Assets
STABILITY
SUSTAINABILITY
Revenue Concentration
Surplus Margin
Sustainability Ratio
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Financial ratios (4)
120
Income
Group
$0-$1m
$1m-$5m
No.
orgs
100
6
80
Other income
13
Investment income
60
$5m-$10m
9
$10m-$50m
11
> $50m
Total:
5
Commercial income
Grants
Contributions
40
20
44
0
$0 - $1m
$1m-$5m
$5m-$10m
$10m-$50m
>$50m
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Financial ratios (5)
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Financial ratios (6)
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Financial ratios (7)
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Financial sustainability ratios (8)
Key Message: each organisation is UNIQUE! Boards
and managers need to understand what makes their
organisation financially sustainable
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Communicating expenditure
New website set to expose charities
stories (1)
spending upwards of 60 per cent of
donations on administration costs
What do you see as the major media focus in relation to
NFP organisations?
What is an acceptable level of expenditure on program
for your organisation?
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Communicating expenditure
stories (2)
Accountability - Transparency
1. What are the expenditure patterns of
Australian international aid and development
organisations?
2. How much information do organisations
disclose about those expenditure patterns in
annual reports and financial statements?
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Communicating expenditure
stories (3)
•
•
•
•
Program Expense Ratio
Fundraising Expense Ratio
Administration Expense Ratio
Cost of Fundraising Ratio
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Communicating expenditure
stories (4)
100%
90%
80%
70%
60%
Other
Investments
50%
Grants
40%
Fundraising
30%
20%
10%
0%
$0-250K
$250K-500K
$500K-1m
$1m-5m
$5m-10m
>$10m
Funding streams of the 97 organisations in the study
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Communicating expenditure
stories (5)
Range and diversity of expenditure patterns of the sample
Range%
Ratio
Mean Median Std Dev Low
High
Program expense
(PER)
76.6% 81.5%
17.4%
0.0% 100.0%
Fundraising expense
(FER)
6.1%
2.4%
8.0%
0.0% 36.5%
Admin expense (AER) 15.1% 10.4%
15.7%
0.0% 100.0%
Cost of fundraising
(CoF)
12.8%
5.2%
19.4%
0.0% 111.0%
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Communicating expenditure
stories (6)
Calculated expenditure ratios by annual revenue, “outliers”, and
organisations reporting zero fundraising costs
Income
group
0-250K
250K-500K
500K-1m
1m-5m
5m-10m
>10m
Total
No.
Expenditure ratio means (%)
PER
15
5
16
30
11
20
97
72.3
87.5
78.0
74.4
81.2
78.1
FER
3.5
2.7
3.0
5.2
5.5
12.6
AER
24.2
9.8
16.0
17.3
9.9
8.3
CoF
4.4
3.1
9.4
11.6
23.2
19.5
No. of entities
Outliers
1
0
1
2
1
2
7
0 fundraising
costs
9
2
3
5
0
1
20
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Communicating expenditure
100
stories
(7)
90
80
70
60
50
40
30
20
10
0
Program expenditure
Administration
expenditure
Fundraising expenditure
Annual
Report
Financial
Statements
Both
Neither
Annual
Annual
Report and Report nor
Financial Financial
Statements Statements
Cost of fundraising
Disclosures of additional information about expenditure: number of
organisations, place and topic of disclosures
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Communicating expenditure
stories (8)
45
40
35
30
25
Annual Reports
20
Financial Statements
15
10
5
0
No
disclosures
<0.5 pages
0.5-1 page
1-1.5 pages 1.5-2.0 pages >2.0 pages
Length of additional expenditure disclosures in annual (narrative)
reports and financial statements
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Communicating expenditure
stories (9)
Information and disclosures by ‘outlier’ entities
Org Income
Expenditure ratios (%)
Page
Length of
Group
PER
FER
AER
CoF
length Disclosures
of
on
($)
report expenditure
(pages)
A
0-250K
0
0
100
0
23
0
B
500K-1m
49
7.9
43.1
84.5
19
<0.5
C
1m-5m
83.9
7.6
8.5
86.6
43
<0.5
D
1m-5m
28.5
0
71.5
0
69
0
E
5m-10m
88.8
0.1
11.1
111
50
0
F
>10m
52.7
36.4
10.9
53.1
36
>2
G
>10m
49.9
35.5
14.6
44.3
45
<.0.5
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Communicating expenditure
stories (10)
Organisations reporting zero fundraising expenditure
Income Group
No of orgs % revenue from fundraising
(range)
$0-$250K
9
9.9% - 79.4%
$250K-$500K
2
43% - 99.9%
$500K-$1m
3
49.5% - 99.8%
$1m - $5m
5
0.02% - 99%
$5m - $10m
0
n/a
>$10m
1
0.8%
Total
20
0.02% - 99.9%
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Communicating expenditure
stories (11)
• Does high program expenditure and consequently low
administration expenditure indicate that longer-term
infrastructure needs are not being met?
• Do low or zero fundraising expenses indicate irregularities
in categorisations of expenditure and/or the existence of
organisation-specific fundraising dynamics?
• These irregularities within a structured data set indicate
HUGE incomparability for Australia’s broader NFP sector.
Given this, benchmarking expenditure of NFP
organisations would be pointless and unfair
Key Message: NFPs need to monitor their expenditure
AND take the initiative in communicating information
about that expenditure
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Reserves and vulnerability (1)
Thesis: ‘In the bank or on ground: An examination of
financial reserves in Overseas Aid Organisations’
Michael Stephen Booth
M. Bus, B. Econ, B. Com,
Grad. Dip. in Computing
Do you think it is right for a NFP to accumulate
reserves? Yes/no/don’t know
Is your NFP organisation financially vulnerable?
Yes/no/don’t know
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Reserves and vulnerability (2)
This study attempts to ‘shine a light’ on the paradox
inherent in considering not-for-profit savings.
•On the one hand, a public prevailing view is that
nonprofit organisations should not hoard and indeed,
should spend all of their funds on the direct
achievement of their purposes.
•Against this, is the commonsense need for a financial
buffer if only to allow for the day to day contingencies
of pay rises and cost increase
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Reserves and vulnerability (3)
Not-for-profit organisations seek to accumulate surpluses over
time as equity (Calabrese, 2009; Hansmann, 1980; Chang and
Tuckman, 1990). This behaviour is not readily explained by
‘classical economic’ models
What theories might explain this?
– Entities seek independence and reserves may be a vehicle to
achieve this (Pfeffer and Salancik 1978; James 1983; RoseAckerman 1987; Yan, Denison and Butler 2009);
– Reserves are built during periods of abundance and used during
periods of scarcity (Cyert and March 1963; Dunk and Nouri 1998;
Sigerstad, 2004);
– Hedging revenue risk may be a significant driver for
accumulation (Hansmann 1990, Tuckman and Chang 1990,
Calabrese 2009).
– Accumulation should be at least at the rate of long term inflation
(Bowman, 2011, 48)
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Reserves and vulnerability (4)
In addition to the theoretical tensions within the literature
there are also practical tensions in considering the level
of savings/net assets held:
– There is a widely held, but not rigorously developed,
view that nonprofits should hold 3 months reserves
(NORI);
– There is a question as to whether entities continue
when their ROA is consistently below the long term
rate of inflation (Bowman, 2011)?
– There may be public angst with concerns about notfor-profits hoarding (Charity Commission, 2008); and
– Where savings/equity is minimal does program
expenditure need to reduce during financial
turbulence (Keating et al, 2005)?
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Reserves and vulnerability (5)
• Each of the above statements of theory, form elements in
an overall conceptual framework on which this study is
based. Thus, in the analysis of the ACFID related entities,
we would expect to see:
– Reserves/net assets accumulated over time, in
particular during ‘good years’;
– Related to the first point, risk hedging behaviour;
– Reserves used during times of scarcity;
– Independence seeking behaviour;
– Accumulation at or greater than the long term rate of
inflation; and
– Possibly three months as a key ‘balance point’ for
reserves accumulating behaviour.
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Reserves and vulnerability (6)
RESEARCH QUESTIONS
1. What levels of reserves are held by Australian entities engaged in
overseas aid? How do they compare with levels identified in
overseas jurisdictions and/or the recommendation of regulatory
agencies or sector advisory groups?
2. In understanding the facilitators or antecedents to reserves
accumulation:
• Are reserves accrued during periods of relative resource
abundance and used during periods of scarcity?
• Do entities build reserves reflecting their reliance on a
limited number of revenue sources? That is, is there a
relationship between the level of reserves and the number of
sources of revenue available to an entity?
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Reserves and vulnerability (7)
RESEARCH QUESTIONS
3. Third in considering the accumulation of reserves as a
hedge against uncertainty:
– Did the presence of reserves serve to mitigate the impact
of financial turmoil, e.g. the effects of the GFC?
4. Finally, recognising the usefulness of financial modelling in
the US nonprofit sector
– Can US models of financial vulnerability provide guidance
to reserves policy in Australia generally and in the
overseas aid sector specifically?
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Reserves and vulnerability (8)
• The thesis considered the regulatory
requirements in US, UK and Australia.
• None set quantitative amounts (US –NORI
suggest 3 months coverage of expenditure)
• Some jurisdiction have extensive reporting
requirements
• Some (ex US) have requirements such as the
‘prudent investor’ rule
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Reserves and vulnerability (9)
USA – MIX OF
STUDIES
UK
AUSTRALIAN
OVERSEAS AID
Median level is 2.7
months
Medium and large
have an average of
almost 1 year
Average of 6.9 months
Median of 3.8 months
Between 1:6 and 1:4
have nil or negative
Small to medium
have:
-25% less than 3
months
-20% have between 3
and 6 months
-50% have more than
6 months
25% have less than 3
weeks
-38% less than 3
months
-27% have between 3
and 6 months
-34% have more than
6 months
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Reserves and vulnerability (10)
2009
Range of demographic data presented
2006-2010 panel
Little support for revenue independence, classical
slack model, little evidence of reserves supporting
relative program expenditure
BUT
Strong negative relationship between reserves
accumulation and relative program expenditure; and
Indentified saver/hedgers and spender/deliverers
‘tribes’
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Reserves and vulnerability (11)
Comparison: > 3 months and < 3 months coverage of administrative
expenses
Item
GroupAverage Comment
Fundraising 1
income/
Total
2
income
0.5597
Debt
1
0.4107
2
0.1821
1
0.1052
2
0.1654
Administrative Cost
ratio
0.6533
Not statistically significant however
under three month has a much lower
relative level of revenue from donations
and other fundraising sources.
The difference is statistically significant
this is-expected given the relationship
between liabilities and months covered
The difference is not statistically
significant but very close (0.051) with the
under three month entities having much
lower relative levels of administration
expenses
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Reserves and vulnerability (12)
Comparison: > 3 months and < 3 months coverage of administrative
expenses
Item
Group Average Comment
Margin
Program
Expenditure/
Total
Revenue
1
2
-0.0057 The difference is statistically
significant with the under three month
0.0501 entities having much lower margins
1
0.8034
2
0.7165
The difference is statistically
significant with the under three month
entities spending relatively more
revenue on program.
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Reserves and vulnerability (13)
PREDICTIVE MODELING
Z=(0.2475)+(1.108*DEBT)+(0.8402*RC) -(1.3527*MARGIN)(0.1396*SIZE)-(0.9848)
p=1/(1+e-Z) = Index of financial vulnerability
Note that the last factor in the first formulae (0.9848) is a weighting
for overseas aid
But the jury is still out!!!!!!!
Trussel 2002 (based on Tuckman and Chang)
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Reserves and vulnerability (14)
Key Message (Reserves): each organisation needs to
determine what level of reserves it needs to be
sustainable
Key Message (Vulnerability): NFP boards need to
identify and monitor signs of vulnerability
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Financial sustainability project (1)
A framework to assess, develop and communicate the
financial sustainability of Australian international aid
and development organisations
Investigators:
Professors Helen Irvine, Christine Ryan, Myles
McGregor-Lowndes
PhD Student: Mike Booth
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Financial sustainability project (2)
• Increasing accountability demands - require
greater financial skills and expertise
• Public debate on NFP financial performance
– focuses on short-term metrics and distorts
cost of programs
• ACNC’s disclosure requirements are
unknown – BUT pro-active, transparent
communication with stakeholders about
financial strategies and performance will
help!
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Financial sustainability project (3)
• Australian Research Council:
requesting $220,000 over three years
• 4 Australian NGOs (ACFID members):
contributing $1,000 p.a. over three years + inkind contributions
• ACFID: peak body partner (in-kind contributions)
• QUT: in-kind (proportional salaries of
researchers)
• Other ACFID member organisations: no
contributions required – survey participation
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Financial sustainability project (4)
1 develop a suite of financial metrics
2 Implement longitudinal financial metrics in four ACFID member
organisations
3 trial the usefulness of the analysis for boards’ internal use
4 adapt the metrics to incorporate organisational responses
5 identify opportunities for developing boards’ understanding of
financial sustainability and communication with stakeholders about
organisational finances
6 apply the suite of financial metrics to the entire population of
willing ACFID organisations
7 disseminate the findings internally to partner organisations,
externally (de-identified) to ACFID, other participating ACFID
organisations, the wider NGO community, and to the academic
community
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Financial sustainability project (5)
Benefits for ACFID partner organisations
• Financial analysis for boards
• Identification of financials to communicate with
stakeholders
• Final report
Benefits for ACFID as peak body partner organisation
De-identified data on
(1) financial metrics; and
(2) Board perceptions and strategies to distribute to
members and to inform Code of Conduct Committee
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Financial sustainability project (6)
Benefits for other participating ACFID organisations
• Access to final report including:
– comparative financial analysis
(de-identified)
– findings on board perceptions and strategies
Key Message: providing a framework for boards and
managers to understand and discuss financial
sustainability matters AND communicate them to
stakeholders
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Questions?
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