Analytical Procedures for Nonprofit Organizations

If an organization isn’t efficient, it isn’t going to succeed. With this course, you can learn how to measure a nonprofit organization’s strength and efficiency, as well as the effectiveness of its mission accomplishment.

Objectives:

• Develop and apply unique methods of analysis for nonprofit organizations
• Understand what analytical procedures are telling you
• Learn ratio, trend and financial statements analysis techniques
• Develop an arsenal of analytical procedures that can be used either within a nonprofit organization or by external auditors

Prerequisite: Experience with nonprofit organizations

For forms of government let fools contest;
Whate'er is best administer'd is best:
For modes of faith, let graceless zealots fight;
His can't be wrong whose life is in the right:
In faith and hope the world will disagree,
But all mankind's concern is charity.

- Alexander Pope

Surprisingly little has been written in the way of practical applicability and use of analytical procedures specifically for the nonprofit organization. Attempts at applying analytical procedures designed for the for-profit business world can become frustrating to the nonprofit accountant or manager because of inappropriate nomenclature or applicability.

This course is intended, not only for accounting technicians such as auditors, consultants, and chief financial officers of nonprofit organizations, but also for those who read and want to understand financial and other information related to performance measurement. Analytical procedures are first and foremost excellent management tools.

Analytical procedures are often themselves effective communication devices, and even if not, the results of the procedures provide the manager or accountant with a powerful resource for

• Education.
– Learn how to use analytical procedures to understand the nonprofit organization's stability, liquidity, and degree of mission accomplishment.
• Explanation.
– Help others, such as prospective grantors and donors, to understand what their resource contribution can do.
• Enlightenment.
– Discover why the organization is, or is not performing as expected.

Using analytical procedures effectively involves much more than the exercise of a ritual required of external auditors. Analytical procedures are effective and efficient methods of auditing, but their use serves a much broader spectrum of interested persons and important purposes.

Terms Are Defined

Analytical procedures are defined. Types, purposes, and users are described. There are many types of and uses for analytical procedures. These should become apparent throughout this presentation. In addition to generic types and uses, many specific procedures and their applicability to nonprofit organizations will be introduced and explored.

This course is designed to provide the participant with an understanding of analytical procedures as used by managers and internal and external accountants for nonprofit organizations. Upon the completion of this course the participant should be aware that other individuals or groups besides managers and accountants often understand and use analytical procedures in the evaluation of the performance or efficiency of a nonprofit organization.

This course will offer techniques of analytical procedure application. Discussion opportunities will include

• How one goes about deciding which procedures to use.
• When one should use analytical procedures.
• The variety of purposes served by the use of analytical procedures.

Comparison to benchmarks is only one of many uses of analytical procedures. It is intended that this course afford the participant with insight into the

• Selection and application of familiar analytical procedures.
• Design and development of unique procedures for a particular type of nonprofit organization.

Performance measurement requires a type of analytical procedure application that is different from what most accountants are accustomed to working with. The process involves using quantitative methods to measure qualitative characteristics. One key objective of the presentation is to give the participant the opportunity to be creative in the design and/or selection of analytical procedures.

Nonprofit organizations are accountable to all stakeholders and that can include society as a whole. The responsibility comes with the territory. Nonprofits must provide reliable financial information and be able to communicate and explain the information in a way that is understandable to the stakeholders.

The need for accountability is stressed throughout the course. Consider the significance of the following statement by Dr. Eugene R. Tempel, Executive Director of the Indiana University Center on Philanthropy taken from an article appearing in the IDA Member News, a publication of the Indiana Donors Alliance, entitled "Let's Make Nonprofit Operations Transparent to the Public."

Donors don't give to groups they don't trust. In fact, the importance of donor trust is increasing. New donors are demanding more accountability. A recent study for Fidelity Investments Charitable Gift Fund found that almost two-thirds of the 1,000 people surveyed said they always or sometimes research a charity before making a donation. The numbers suggest the sector has its work cut out for it.

Also emphasized throughout the course is the need for responsible data and financial reporting. No analytical procedure or conclusion can be anymore reliable than the underlying data. Financial and statistical information recorded and accumulated by nonprofit organizations must be accurate and classified and summarized with consistency. That requires the use of

• A comprehensive basis of accounting consistently applied
• A reasonable system of expense allocation also consistently applied

This course includes an extensive list of specific analytical procedures including more than fifty ratios. Peer group benchmarks for the nonprofit sector are in the development stage. There are presently very few established benchmarks sufficiently stratified or customized to fit most nonprofit organizations. This course does, however, provide examples of some that do exist and offers many references to sources of analytical information for nonprofit organizations.

What's in a name? That which we call a rose
By any other name would smell as sweet.

- William Shakespeare

Upon completion of this section you should

• Know the meaning of the term analytical procedures.
• Recognize the various generic types of analytical procedures.
• Understand the meaning, for purposes of this course, of such terms as benchmarks, standards, measurement, analysis, prediction, stability, communication, explanation, quantitative and qualitative analysis.
• Know where to find analytical procedures.
• Recognize the difference between quantitative and qualitative analysis.
• Be familiar with the process of analytics development.

Analytical procedures are very useful and important tools in the area of management, finance, and accounting. But just what does the term analytical procedures mean to you? Since the author uses the term analytical procedures repeatedly in this course and since the term is included in the title of the course, a proper definition is in order. This section attempts to define analytical procedures and describe the various types of analytical procedures that would be applicable for use where nonprofit organizations are concerned.

The section is concerned also with where one looks to find analytical procedures and how one may develop such procedures where there are none to be found. In addition several other key definitions are presented in this section. Some of the terms defined may be construed to mean different things to different people, particularly since some of the words have technical meanings that are not exactly the same as everyday-use meanings.

Webster's New World College Dictionary offers the following appropriate definitions:

• Analysis – A separating or breaking up of any whole into its parts, especially with an examination of these parts to find out their nature, proportion, function, interrelationship, etc.
• Procedure – The method of proceeding in some manner, especially the sequence of steps to be followed, a particular course of action.

Analytical procedures, as used in the financial and accounting world, would appear to be well named. However, the phrase has become almost an insider term, and as such, has taken on a technical aura that might tend to cause some people to think it has a complex meaning beyond that offered by Webster. Before proceeding, it would be helpful to understand that one does not have to be an expert to understand, develop, use, or appreciate most analytical procedures.

That is not to say that there do not exist some complex analytical procedures and some complicated methodology surrounding the development and use of analytical procedures; but the basic concept is quite simple. For that matter, most analytical procedures are relatively uncomplicated and are

• Common sense ways of looking at figures, statistics, relationships, results, and performance.
• Common sense ways of looking at anything that is measurable or quantifiable in any way and, as we shall explore in a later section, common sense ways of looking at things that may not be quantifiable.
• Techniques applied in order to measure or evaluate things and communicate the results in a way that is understandable.

Applying analytical procedures in a practical way involves identifying disaggregated data by predetermined categories and comparing it to other data according to prescribed rules or methodology. To paraphrase Webster, analytical procedures are sequential steps applied to data that has been broken down in order to examine the data and find out their nature, proportion, function, interrelationship, or propriety.

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