Analytical Procedures for Nonprofit Organizations

• Chapter 0 - Overview
  • Introduction
  • Course Objectives
    • Terms Are Defined
    • Users Are Described
    • Practical Application
    • Performance Measurement
    • Emphasizing the Need for Accountability
    • Creditable Accountability
    • A Resource Document
• Chapter 1 - Analytical Procedures - What Are They?
  • Learning Objectives
  • Introduction
  • Analytical Procedures -The Concept
    • Analytical Procedures Defined
    • Not a Complicated Concept
    • Accountants Prefer Lists! Where Can I Find One?
    • Useful Definitions
  • The Process of Analytics Development
    • Planning Begins and Ends with Analytical Procedures
    • The Planning Process - A Logical Sequence
    • Suggestions for Practical Application
  • Types of Analytical Procedures
    • Trends Analysis
    • Regression Analysis
    • Ratio Analysis
    • Common Sense Relationships
  • Summary
  • Questions
• Chapter 2 - Analytical Procedures - Who Uses Them?
  • Learning Objectives
  • Introduction
  • The History of Analytical Procedures
    • The Origin
    • Evolution of the Term
  • Caveats
    • The Paralysis of Analysis
    • Handle with Care
    • Judgment Is the Key Ingredient
  • Users and Uses
    • Who Needs to Use Analytical Procedures?
    • The Executive Director's Needs
    • The CFO and Analytical Procedures
    • Uses by the Accounting Staff
    • The Director's Use of Analytical Procedures
    • The Internal and External Auditors' Role
    • Resource Providers Use of Analytical Procedures
    • The Grants or Allocation Committee
    • Other Stakeholders and Analytical Procedures
    • Correct and Reasonable May Not Be Synonymous
  • Summary
  • Questions
• Chapter 3 - Performance Measurement
  • Learning Objectives
  • Introduction
  • Defining Performance Measurement
    • Definitions
    • Synonyms
    • Other Essential Terms and Their Definitions
  • How Performance Measures Are Used
    • Who Needs Performance Measurement?
  • How Does Performance Measurement Work?
    • Have a Direction in Mind
  • Summary
  • Questions and Cases
    • Case Study 3-1
    • Case Study 3-2
• Chapter 4 - Ratio Analysis
  • Learning Objectives
  • Introduction
  • Understanding Ratio Analysis
    • What Are Ratios?
    • A Powerful Tool with Many Uses
    • Nonprofits and Ratios
  • Specific Ratios
    • Comparing the Result
    • Industry Averages
    • The Greenlee-Bukovinsky Study
    • Other Comparisons
  • The Defensive Interval Ratio (DI)
    • Too High or too Low Can Signify a Problem
  • Liquidity Ratio (LR)
    • A Conservative Approach
  • Liquid Funds Indicator (LF)
  • Net Temporarily Restricted Asset Ratio (TR)
    • May Indicate Borrowing from the Future
  • Operating Strength (OS)
  • Accounts Payable Aging Indicator (AP)
  • Savings Indicator (SI)
  • Contributions and Grants Ratio (CG)
  • Disaggregated Revenue Dependency Ratios (Derivations of CG)
  • Endowment Ratio (E)
  • Debt Ratio (D)
  • Coverage (Dc) Derivation of Debt Ratio
  • Summary
  • Questions and Cases
    • Case Study 4-1
  • Appendix -Ratios: Significance and Responses
• Chapter 5 - Efficiency and Enterprise Ratios
  • Learning Objectives
  • Introduction
  • Fund Raising Efficiency (FE)
  • Unrestricted Net Assets Ratio (UA)
  • Net Operating Ratio (OR)
  • Fundraising Expense (FX)
    • Requires Consistent Cost Allocation
  • Management Expense (MX)
  • Variations of the Management Expense Ratio
    • Variable Expense (MXv)
    • Fixed Expense (MXf)
    • Semi-Variable Expense (MXsv)
    • Cost Control Tools
    • Recordkeeping Requirements
  • Program Service Expense (PX)
  • Program to Assets (PA)
    • Apply with Care
  • Resources to Expense Ratios (RE)
    • Charity to Expense Ratio (REu)
    • Grants to Expense Ratio (REg)
    • Bequests to Expense Ratio (REb)
    • Dues and Assessments to Expense Ratio (REm)
    • Investment Income to Expense Ratio (REi)
    • Special Activities to Expense Ratio (REa)
    • Enterprise Income to Expense (REe)
    • A Different Perspective
    • Developing a Database
    • An Excellent Management Tool
    • Practical Application
  • Demand Ratios (DR)
    • Program Service Demand Ratio (DRp)
    • Support Function Demand Ratio (DRs)
    • Fundraising Demand Ratio (DRf)
    • Possible Derivations
    • Practical Uses
  • Return Ratio (RR)
    • The Robinson Study
  • Enterprise Ratios
    • Nonprofit Does Not Mean Nonbusiness
    • Nonprofit Does Not Mean Loss
    • Specific Ratios
    • Enterprise Liquidity Ratio (EL)
    • Enterprise Inventory (ELi)
    • Enterprise Receivables Ratio (ELr)
    • Enterprise Growth Ratio (EG)
    • Enterprise Safety Margin (ES)
    • Enterprise Cash/Receivable Margin (EC)
    • Enterprise Turnover Ratios (ET)
  • Cash Flow Statement Ratios
    • The New Kid on the Block
    • Five Examples
    • An Educational Tool
    • Cash Flow Margin (CFM)
    • Cash Flow Return (CFR)
    • Cash Flow Liquidity (CFL)
    • Cash Flow to Debt (CFD)
    • Cash Flow to Growth (CFG)
  • Summary
  • Questions and Cases
    • Case Study 5-1
  • Appendix -Ratios: Significance and Responses
• Chapter 6 - Trends and Other Analytical Procedures
  • Learning Objectives
  • Introduction
  • Trends Analysis - An Analytical Procedure
    • Trends Analysis Defined
    • Why Is Trends Analysis an Analytical Procedure?
    • Do Trends Occur in Nonprofit Organizations?
    • Trends Analysis Methodology
  • Trends Analysis Techniques
    • Commonly Used Techniques
  • Financial Statement Analysis
    • Scanning
    • Comparison with Prior Year
    • Common-Size Financial Statements
    • Budget Comparisons
    • Comparisons with Nonfinancial Data
  • Summary
  • Questions and Cases
    • Case Study 6-1
• Chapter 7 - The Data, the Auditor, and the Report
  • Learning Objectives
  • Introduction
  • The Data behind the Procedures
    • The Chart of Accounts
    • Functional Expenses
  • Auditing with Analytical Procedures
    • A Different Perspective
    • Different Purposes
    • Functions of the External Accountant
    • How the External Accountant Uses Analytical Procedures
  • Reporting the Results of Analytical Procedures
    • Report to Whom and Why?
    • Methods of Reporting
    • Reporting Styles
  • Summary
  • Questions
• Chapter 8 - Latest Developments
• Appendix A - Internet Resources
• Appendix B - Index to Ratios
• Appendix C - Bibliography
• Appendix D
• Appendix H of SSARS 10

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Chapter 0 - Overview

Out of the air, a voice without a fare Proved by statistics that some cause was just In tones as dry and level as the place.

                                         The Shield of Achilles
                                         W.H.Auden 1907-1973

Introduction

As we approach the subject of analytical procedures and their applicability to nonprofit organizations we can well take note of two points made by W.H.Auden. They are

• Nonprofits can prove by statistics that their cause is just, and, unfortunately,

• Statistics can be dry.

Hopefully, this course will help convince us that we can use statistics to prove that our cause is just. As far as statistics being dry, we must learn to live with that. Surprisingly, and unfortunately, 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 lack of 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, many of which involve statistics, 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.

• Enjoyment.

– The enjoyment provided by analytical procedures comes not so much from the application, but more from seeing the benefits to the nonprofit in the form of education, explanation, and enlightenment.

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.

With these things in mind, relax and enjoy a course designed to emphasize the importance of analytical procedures in the effective management, auditing, and/or measurement of mission accomplishment of the nonprofit organization.

Analytical procedures are a powerful tool when properly applied. Improper use can also be detrimental, so handle with care.

Course Objectives

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.

Users Are Described

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.

Practical Application

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

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.

Emphasizing the Need for Accountability

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.

Creditable Accountability

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

A Resource Document

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.

Chapter 1 - Analytical Procedures – What Are They?

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

                                         Romeo & Juliet – 1594
                                         William Shakespeare, 1564-1616

Learning Objectives

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 how to develop or where to find specific analytical procedures and how, when, and where to apply them.

• Recognize the difference between quantitative and qualitative analysis.

• Be familiar with the process of analytics development.

Introduction

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.

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