V. Creating Benchmarks for Funding Sources a. Percentage of overall revenue for each source b. Source percentages by program

Transcription

1 Getting Beyond Budgeting for Break-even Metropolitan Regional Arts Council- April 16, 2013 Facilitator: Rob Routhieaux, Hamline University Session Outline I. Overview of Goals and Facilitator Background II. What is "Break-even" and why it's not enough for a healthy organization a. Simple break-even - revenues equal expenses - Handouts A-B b. Break-even' calculation' - Fixed expenses / Contribution margin ratio 1. Why this calculation can be difficult for nonprofits 11. Why the concepts are important for analysis and planning lll. How to apply to each program or service you provide - Handout C IV. Why important for planning 1. Return on Investment for each program / funding method 2. Opportunity Costs - where to best spend your time v. Using high ROI programs to help fund mission critical programs with low ROI III. links between Operating Budget, Balance Sheet, and Capital Budget a. Operating Budget (Income Statement / Statement of Activities) 1. Importance of budgeting for Retained Earnings - Handout D ii. Balancing "too little" versus "too much" retained earnings iii. Accounting for Depreciation - link to Cash Flow Statement b. Balance Sheet (Statement of Financial Position) i. Accumulated Retained Earnings versus Cash ii. Asset Value - Accumulated Depreciation = True Asset Value - Handout E c. Capital Budget basics 1. Replacement of low / zero value assets (vehicles, equipment, etc) ii. Cash reserves from 'depreciation expense' for replacement iii. Retained earnings - for replacement and 'new' assets IV. Capitalization - Long term planning to avoid under-capitalization a. Keeping a reserve of cash for contingencies - 'best practices' range from 3-9 months - for most arts organizations, 3-6 months b. U sing multiple year trends and earnings for capital budgets (especially new) c. Alternative capitalization approaches 1. In-kind contributions for capital assets. 11. Bank loans lll. Other loans IV. Capital campaigns V. Creating Benchmarks for Funding Sources a. Percentage of overall revenue for each source b. Source percentages by program

2 A CD1001 Sample Organization Budget: Photography Workshops REVENUES Contributed Revenues Government Grants Foundation Grants Corporate Gifts Individual Contributions Special Events Subtotal Contributed Revenues 10, , , , , , EXPENSES Personnel Salaries & Benefits Executive Director 10% 55,000/an Education Director 75% 46,667/an 21% Accounting Services Volunteer/Mentors Photography Instructor Graphic Design Evaluation Consultant Publicist Total Personnel 5, , , , , , , , , , Earned Revenues Fees for Services Publication Sales Subtotal Earned In-Kind Revenues Volunteer/Mentors Graphic Designer Classroom Space Subtotal In-Kind Revenues TOTAL REVENUES 2, , , , , , , Other Expenses Office/Classroom Space Use Telephone and Internet Postage and Delivery Workshop Equipment Photographic Supplies Framing for Exhibits Printing for Exhibits Liability Insurance Equipment Maintenance Total Other 10, , , , , , , , , TOTAL EXPENSES BALANCE 110,

3 5 INCOME Source Amount Government Grants & Contracts 38,750 Foundations Corporations United Way or Other Federated Campaiqns Individual Contributions Fundraising Events & Products Membership Income In-Kind Support 59,100 16,650 3,000 30,000 EXPENSE Salaries & Wages (For project budgets, break down by individual position and indicate FT/PT.) Executive/artistic Director Development Associate Item Amount 39,000 15,000 54,000 Revenue Earned Income Other (Specify) Program Fees Box office 30,500 32,350 Subtotal 6,550 Insurance Benefits & Other Related Taxes 60,550 Consultant & Professional Fees 11,000 Staff Develop 3000 Equipment - Office Supplies 2,500 Printinq & Copyinq 1500 Telephone & Fax 5,700 Office Postage & Delivery 800 Rent & Utilities 3,100 In-Kind Expenses - Other (Bank fees, Board Expenses Insurance) 5,100 Production 117,100 Total Income 210,350 Total Expense 210,350 Difference (Income Expense)

4 c Break-even Formula and Examples Three steps to calculating break-even for organization and programs: 1. Contribution Margin per Unit = Unit Revenue - Unit Variable Costs 2. Contribution Margin Ratio = Contribution Margin per Unit / Unit Revenue 3. Break-even Volume = Fixed Costs / Contribution Margin Ratio Organization Fixed Costs: Executive Director Salary Staff Salaries Office Expenses Total Fixed Expenses Educational Programs: 50,000 40,000 10, ,000 Birthday Parties: Revenue per Progranl Direct Costs of Program Contribution M;rrgin - Unit Contribution M;rrgin Ratio Break-even Volume Revenue per Program Direct Costs of Program Contribution Margin - Unit Contribution Margin Ratio Break-even Volume 2,000 1,000 1, ,000 2, , ,333 For a Theater / Dance / Other Production: Fixed Costs: House 10,000 Director 3,000 Actors 7,000 Total Fixed Costs 20,000 Revenue per Ticket Direct Costs per Ticket Contribution Margin - Unit Contribution Margin Ratio Break-even Volume ,000 For 25,000 in Ticket sales = tickets (break even for production)

5 I Budget 2013 Revenues: Individual Contributions 6,846 19,188 27,083 36,820 Grant 2,500 6,000 32,250 20,000 Sponsorships 48,946 39,466 69,355 79,500 Concessions 78,451 83,902 76,105 74,000 Ticket Sales 605, , , ,760 Vendors 75,658 73,698 81,731 79,450 "Other" 8,692 10,214 12,547 14,000 Total Revenues 826, ,638 1,016, ,530 Expenses: Employees 108, , , ,000 Equipment Rental 32,564 33,923 39,698 38,800 Marketing 72,680 75,639 77,170 78,760 Performers 219, , , ,000 *Facility Rental 98, , , ,680 Staff 106, , , ,280 Stages 43,585 41,179 56,482 55,000 "Other" 24,580 26,549 28,454 26,000 Total Expenses 706, , , ,520 Cost of Goods Sold 38,390 41,620 37,847 37,000 Net Income Festivals 81,449 97, ,478 99,010 LSS Program Expenses 46, ,468 54,221 56,000 LEAF International Expenses 18,485 22,653 24,845 26,000 Total Net Income 16,444 23,154 95,412 17,010

6 This sample balance sheet is Analysis of balance sheets can based on that of an actual be aided by the use of some theater company - let's call CIDER HILL PLAYERS ratios. Within an organization them the Cider Hill Players STATEMENT OF FINANCIAL POSITION and looking year over year, (CHP). DECEMBER 31, 2009 AND 2008 ratios are meaningful. To gain perspective on the signifi- What can you see with a cance of the dollar amounts quick glance of the CHP balof the items on the balance ance sheet? Here are some.. ASSETS sheet, it is important to relate important details you can CURRENT ASSETS them to the statement of identify (FYE =fiscal year activities. end): Cash 453,728 \'- 492,511 Investments 144, ,111 Accounts receivable 9,121 2,400 Grants receivable 41,759 54,167 Prepaid expenses 1,874 8,743 Months of Cash = Cash They do not own a building Total current assets 651, ,934 Annual EKpenses 112 and the bulk of their property is equipment, sets, and costumes PROPERTY AND EQUIPMENT 2009 = 453,728 that have all but fully depreci- Equipment 33,794 38,363 1,074,344/12 ated. It is likely that CHP can use Production sets, costumes 53,000 53,000 some of their items for a few Leasehold improvements 15,082 15,082 = 5.1 Months more years; it is also likely that Less: Accumulated depreciation {95,578) {100,120) 2008 = 492,511 some replacements are in order. 862,296/12 Property and equipment (PE), net..:::,. 6,298 6,325 = 6.9 Months OTHER ASSETS Above, we see that at FYE '08, Security deposit 23,020 22,260 CHP had nearly seven months of cash, while at FYE '09, the amount dipped to about five They have a line of credit (we Total other assets 23,020 22,260 months. In general, NFF encourdon't know how much is availages organizations to aim for able - an audit note should tell TOTAL ASSETS 680, ,519 a minimum of three months of us that; but we do know the cash at all times (note that this line is at least 25,000 as that is a guideline rather than a firm was the amount outstanding at LIABILITIES AND NET ASSETS standard). FYE '09). CURRENT LIABILITIES Accounts payable 662 5,012 Unearned revenue ~ 5,222 31,600 Months of Liquid Net Assets = Line of credit, payable 25,000 20,000 Unrestricted Net Assets - (PE Net - PE Debt) They have a board-designated reserve (50,000 at FYE '08 and Total current liabilities 30,884 56,612 Annual Expenses 112 '09 - an audit note might tell us. whether there are any parameters LONG-TERM LIABILITIES = 548,667 - (6,298-0) for use of the reserve). 1,074,344 /12 Total liabilities 30,884 56,612 = 6.1 Months NET ASSETS L = 491,840 - (6,325-0) Unrestricted ~48, ,840 L 862,296/12 Unrestricted, board designated 50,000 50,000 Temporarily restricted 50, ,067 =6.8 Months Total net assets 649, ,907 CHP has little property and equipment and no facility-related debt, so the calculation is fairly TOTAL LIABILITIES 680, ,519 basic. Above we see that at FYE '08, CHP had nearly seven and NET ASSETS months of LNA, while at FYE '09,.... the amount dipped to about six months. It is safe to say, then, that CHP has strong liquidity Their 50,000 board-designated reserve provides a reasonable amount of adaptability as well. ~~ -- TOTAL EXPENSES 1,074, ,296. Grantmakers in the Arts Reader 21

7 Resources on Budgeting, Capitalization and Balance Sheets: Good presentation by Nonprofit Finance Fund on Capitalization and Budgets RebeccaPresentation.pdf Overview of Balance Sheet and Capital Assets Terminology and Analysis Concise overview of Balance Sheet and Relation to Income Statement Detailed Study on "Getting Beyond Breakeven" - with Principles, Findings and Best Practices report.pdf