Understanding Financial Ratios, Analyzing Unrestricted Net A ssets & Setting a Proper Reserv e

1. Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Presented by: Gelman, Rosenberg & Freedman CPAs Jennifer Arminger, CPA, Partner Robert Albrecht, CPA, Partner

2. Presenters Jennifer Arminger, CPA is an Audit Partner with Gelman, Rosenberg and Freedman, CPAs and specializes in auditing and accounting services for tax-exempt organizations, both locally and nationwide. Additionally, she has extensive expertise in compliance audits in accordance with Uniform Guidance (formerly A-133), and helps manage the employee benefit plan audit practice at the firm. Robert Albrecht, CPA is an Audit Partner with Gelman, Rosenberg and Freedman CPAs, and specializes in auditing and consulting for nonprofit organizations that receive funding from agencies of the US Government. Recognized as the firm’s leader with respect to international non-governmental organizations, Mr. Albrecht has traveled to over 100 countries on behalf of the firm’s international clients. Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Gelman, Rosenberg & Freedman CPAs

3. Understanding Financial Ratios The Nonprofit • Measuring the success of a nonprofit is often based on the organization’s missions and the ability to fulfill the mission in an effective manner • Non-quantitative definition of “success” • Key ratios can help quantify • Understanding the Key Differences in Nonprofit Financial Statements: • Unrestricted, Temporarily Restricted & Permanently Restricted • FASB 116 – Contribution Revenue & Valuing Donated Services • Statement of Functional Expenses Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve

4. Understanding Financial Ratios Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Liquidity Ratios This determines a nonprofit’s ability to pay its obligations on time. It also will assess a nonprofit’s ability to continue operations within a short time frame. Current (Quick) Ratio: Current Assets (Less Inventory) Current Liabilities Net Working Capital: Current Assets (Less Inventory) – Current Liabilities Days of Cash on Hand: Cash and Cash Equivalents Monthly Expenses

5. Understanding Financial Ratios Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Measuring Financial Distress or Vulnerability These ratios can help predict a nonprofit’s long-term viability. The ratios are generally measured by positive net assets. Alternatively, leverage: Nonprofit-Specific Leverage: Indication of how much of a nonprofit’s assets are funded by other people’s money TRNA + PRNA Total Assets Revenue Concentration: Revenue source as a percentage of total revenue

6. Understanding Financial Ratios Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Measuring Financial Distress or Vulnerability Other Ratios to Measure Liquid Reserve Unrestricted Net Assets – Net Fixed Assets – Deposits Cash, Current Investments and Grants Receivable Can also be compared to Cash, Current Investments and Grants Receivable How much is available prior to setting a reserve?

7. Understanding Financial Ratios Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Program Efficiency Measures The primary efficiency measure used to assess nonprofits is the program efficiency ratio: Program Expenses Total Expenses This measure indicates what percentage of the resources consumed are used by program service. What is the best practice?

8. Understanding Financial Ratios Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Activities Efficiency Measures This measure indicates what percentage of resources are used to support general operations & fundraising of the organization. Management & General + Fundraising Total expenses Key Ratios for Watchdog Organizations such as Charity Navigator & Guidestar

9. Analyzing Unrestricted Net Assets f f 2015 2014 Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve

10. Analyzing Unrestricted Net Assets f f f f Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve

11. Analyzing Unrestricted Net Assets Quick Ratios Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Example: Quick Ratio: 1,090,000 / 95,000 = 11.47 Above 1 indicates positive results Leverage: 295,000 + 45,000 + 645,000 / 1,310,000 = .75 Below 1 indicates positive results Working Capital: 1,090,000 – (95,000 + 45,000 + 645,000) = 305,000 Positive results indicate positive working capital on hand

12. Analyzing Unrestricted Net Assets Quick Ratios = 33% = 11% What does this tell us? Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Example: Unrestricted Net Asset Ratio – Measures amount of unrestricted, spendable net assets, in relation to the nonprofit organization’s annual operating expenses Unrestricted Net Assets (325,000) Total Annual Expenses (988,000) UR Net Assets – Fixed Asset – Deposits (105,000) Total Expenses (988,000)

13. Setting a Proper Reserve Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve State of the Sector In the Annual Report produced by the Nonprofit Finance Fund based on annual survey findings, the following information was determined: 2015 Results Regarding Reserves: 23% of nonprofits had 6 months of cash reserve Majority of nonprofits had less than 3 months reserve 12% had less than 30 days reserve

14. Setting a Proper Reserve Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Specific to each organization Consider future capital investments (replacement cost for IT & other fixed assets, office space, etc.) Unexpected situations (repairs, loss of funding stream, unanticipated budget shortfalls) Who should set the reverse – Board or Management? Establish formal policy

15. Setting a Proper Reserve Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve Other Considerations for Reserve How much money to set aside at all times Defining the circumstances that will result in the reserve being used A process to determine whether or not to use the reserve The process and time frame for repayment Determine any limitations on what the reserve can be used for

16. Future Seminars

17. Gelman, Rosenberg & Freedman CPAs GRF Expertise • GRF CPAs works with 500+ nonprofit organizations locally, nationally and internationally, and travels to over 60 countries on behalf of our clients • GRF CPAs annually conducts 100+ Single Audits for nonprofits, which receive federal funding and need to comply with Uniform Guidance • Our CPAs host seminars, workshops and presentations to keep clients current with industry regulations • GRF CPAs is an industry-recognized, award-winning firm with 35 years of experience working with nonprofits • GRF CPAs is committed to technical excellence, personal attention, ongoing communication, staff continuity, community service and diversity • “Personal attention will never become obsolete” Gelman, Rosenberg & Freedman Certified Public Accountants 4550 Montgomery Avenue Suite 650 North Bethesda, MD 20814 301-951-9090 www.grfcpa.com Jennifer Arminger, CPA Audit Partner jarminger@grfcpa.com Robert Albrecht, CPA Audit Partner ralbrecht@grfcpa.com