The Jackson Foundation, which selects not-for-profit (NFP) entities to receive donations from the Foundation’s funds. The Board of Directors has asked you to analyze two NFPs and compare their...

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The Jackson Foundation, which selects not-for-profit (NFP) entities to receive donations from the Foundation’s funds. The Board of Directors has asked you to analyze two NFPs and compare their performance relative to each other, as well as relative to a nationwide average of NFPs of a similar size. You will prepare a professional Excel report showing the comparison and detailing your opinion as to which entity should receive the Foundation’s donation based on your analysis. Goal: The goal of this project is to improve your understanding of NFP financial reporting and analysis. Step 1: Read the article “Using Ratio Analysis to Manage Not-for-Profit Organizations” from The CPA Journal posted on Blackboard. Take note of the ratios and size groupings in Exhibit 1. Step 2: Select two NFPs with 990s available on GuideStar.org to analyze in this project. Ensure the NFPs meet the following criteria: a) 3 years of Form 990s available on GuideStar. Try to use the most recent years available, however, ensure the analysis is for the same years for each NFP (i.e., 2017-2019 for both NFPs). b) The two NFPs must be in the same size category, as measured by total assets, from Exhibit 1 in the article (i.e., both should have total assets between $100k-$500k or $500k-$1m, etc.). c) The two NFPs must be in the same industry or “cause area”. Cause areas (NTEE code) on GuideStar are labeled AZ (with accompanying numbers, but the match is required only on the letter). For example, Hofstra University’s cause area is B43, thus you would need to search for another NFP in the “B: Educational Institutions” cause area. You can search under the “Organizations” tab by “cause area”. Step 3: Conduct and prepare a financial analysis of the two NFPs relative to each other and relative to the nationwide average for peers of the same size, utilizing Exhibit 1 from the article. Calculate all ratios from Exhibit 1 over a 3-year period for each NFP. Note on Excel file: The Excel file should contain 3 tabs: (1) Cover Sheet: This tab should contain the names, mission and cause areas of each NFP. This tab will contain the written analysis summarizing the quantitative analysis in the Ratio tab. State your opinion as to which NFP should receive the Foundation’s donation. This tab should be formatted in a professional and organized manner, as if you were presenting it to a Board of Directors. (2) Ratio Analysis: This tab should contain the ratio analysis for each NFP over the 3-year period as well as comparisons to the nationwide average. Except for the averages from Exhibit 1 in the article, all other ratios must contain a formula pulling from the numbers in the supporting tab. This tab should be formatted in a professional and organized manner, as if you were presenting it to a Board of Directors. (3) Support: This tab should contain the supporting numbers used in the ratios (i.e., Cash, Depreciation Expense). Because 990s do not separate out current and noncurrent assets and liabilities, please utilize the following designations: Current Assets Part X Balance Sheet Lines 1-9; Current Liabilities Part X Balance Sheet Lines 17-19. T housands of CPAs work in the not-for-profit sector, and thousands more volunteer as members of the governing boards of not-for-profit organizations. There is little in the academic background or experience of many accountants, however, to prepare them to analyze and evaluate not-for-profits. University courses in not-for-profit accounting emphasize the recording of transactions and the preparation of financial statements, rather than the evaluation of financial and operational effectiveness. Board members without substantial accounting expertise are even less equipped to interpret not-for-profit financial reports. Because not-for-profit organizations exist for purposes other than earning a return for equity investors, measures commonly used to evaluate commercial enterprises are not well suited for evaluating them. Furthermore, although they are commonly represented as a single class of organization, great variety exists in the mission and finances of not-for-profit organizations. While many not-for-profits rely heavily on contributions, others derive most of their revenues from the sale of services or membership dues. Because of varying missions and funding sources, there are no sector-wide norms to guide managers and board members. It is often difficult for not-for-profit managers and governing boards to plan for the organization’s financial future because of a reliance on contributions and the lack of predictability of demand for their services. The future can be daunting if a not-for-profit does not have a strong grasp on its financial position. A not-for- profit can, however, help maintain its financial sustainability by following prudent financial management standards and monitoring financial ratios. Financial management standards help a not-for- profit monitor its budget, cash flow, resource utilization, and revenue sources. This article’s focus is on the use of financial ratios in trend MAY 2019 / THE CPA JOURNAL52 Using Ratio Analysis to Manage Not-for-Profit Organizations by Kaitlin Cashwell, Paul Copley and Michael Dugan DEPARTMENTS I Not-for-Profit Management 05-0119-Not for profit managt-Copley.qxp_zEssentials.temp 5/8/19 3:44 PM Page 52 53MAY 2019 / THE CPA JOURNAL analysis and benchmarking to improve the effectiveness of management and boards charged with monitoring not-for-profit orga- nizations, specifically those not-for-profits that file Form 990. Financial ratios can help determine if a not-for-profit has sufficient resources and determine if it is using those resources efficiently to support its mission. Ratios are useful because they express underlying financial relationships as a single value, allowing comparisons across time and among entities of varying size. Not-for-Profit Ratios Investors, creditors, and analysts routinely use ratios to evaluate commercial enterpris- es. Because many of these ratios focus on profitability measures, their usefulness in guiding not-for-profit managers is limited. Historically, discussion of financial ratios among not-for-profits has focused on spend- ing ratios: program, fundraising, and man- agement expenses as percentages of total expenses. Donors in particular employ these measures to evaluate the extent to which their contributions support mission-related activities. There is ongoing discussion in the not-for-profit literature suggesting that being overly focused on spending measures can have unintended consequences. Sector leaders have called for greater attention to measuring operational effectiveness; others contend that measures of financial position are necessary to assess liquidity and sus- tainability. Responding to this demand, FASB standards now require greater dis- closure related to liquidity. The authors contend that not-for-profit managers and boards should actively mea- sure and evaluate not just spending ratios, but also measures of liquidity and opera- tional effectiveness. The selection of a set of ratios to monitor is challenging because not-for-profit missions vary extensively, as do their sizes and the industries in which they operate. The most accurate statement that may be made about the choice of ratios to monitor is that no single set of ratios is suitable for all not-for-profits. The manage- ment team of each not-for-profit should consider its needs and select a set of ratios to measure that address its particular con- cerns. Regardless of the specific ratios selected, two characteristics make ratio anal- ysis more useful: n Trend analysis.Within an organization, the value of ratio analysis lies in directing management’s attention to areas of chang- ing conditions. Therefore, it is important to measure and report financial ratios across time. Once agreed upon, the selected ratios should be consistently measured and pre- sented to the governing board within each financial report so that trends can be iden- tified. The authors’ recommendation is that financial reports provided to the governing board contain five years of ratios. n Benchmarking. No generally accepted ideal or target levels exist for ratios. The desirable level for a given ratio is a matter of judgment and will vary according to the circumstances facing each organization. Ratios are generally evaluated against a benchmark rather than a theoretically opti- mal value; these benchmarks are typically calculated as an average value from a com- parison group. Therefore, in addition to agreeing upon a set of ratios to measure and monitor, each not-for-profit should also agree on a comparison group of five to ten peer organizations. Ideally, this group would consist of well-managed not-for-profits of similar size and mission. For purposes of illustration, the authors present a set of eight ratios that are likely to be useful to a variety of not-for-profit organizations. The ratios represent the three broad areas of liquidity, operations, and spending. Exhibit 1 describes the ratios, what they measure, and how they are calculated. It also computes average values for these ratios for over 200,000 not-for-profits, divided into five categories by entity size, using information available from the IRS website. Because commercial businesses are reluctant to share detailed financial infor- mation with competitors, developing suit- able benchmarks can be very challenging. In contrast, not-for-profits are aided in this process by the IRS’s requirement that tax- exempt organizations file a Form 990 and it be made publicly available. Many not- for-profits post their Form 990s to their websites or make them available through organizations such as Guidestar. In addition, the IRS website provides annual extracts of Form 990 data; users may download finan- cial information for all tax-exempt organi- zation filings in a given year. Form 990 contains much more detailed financial infor- mation than is typically available in corpo- rate financial statements and includes a wealth of nonfinancial information, includ- ing information about organizational gov- ernance and employee compensation. A list of potential ratios and the lines on the Form 990 where the information can be found appears in the article, “Why So Many Measures of Nonprofit Financial Performance? Analyzing and Improving the Use of Financial Measures in Nonprofit Research” (Christopher Prentice, Nonprofit and Voluntary Sector Quarterly, August 2016, http://bit.ly/2GlwUHX). Liquidity ratios. The “days cash on hand” ratio measures the number of days of expenses that could be paid from exist- ing cash and cash equivalents. Depreciation is removed from total expenses (denomi- nator) since it does not require a cash out- lay. Higher values indicate a stronger liquidity position. The “months of spend- ing” ratio represents a longer planning hori- zon since it assumes receivables can be collected to sustain operations. Because the ratio removes current liabilities and donor- Because many ratios focus on profitability mea- sures, their usefulness in guiding not-for-profit managers is limited. 05-0119-Not for profit managt-Copley.qxp_zEssentials.temp 5/8/19 3:45 PM Page 53 MAY 2019 / THE CPA JOURNAL54 DEPARTMENTS I Not-for-Profit Management Ratio Formula Averages by Size of Not-for-Profit Liquidity Ratios Days cash on hand: Measures the number of days of expenses that can be covered from existing cash and cash equivalents. Generally, higher values indi- cate a stronger liquidity position, although there is both a benefit and an opportunity cost to holding cash reserves. Months of spending: A less extreme measure of liquidity than days cash on hand since it assumes receivables can be collected to sustain operations. Generally, higher values indicate a stronger liquidity position. Savings indicator:Measures the net revenues that are retained by the organization
Answered 2 days AfterOct 08, 2021

Answer To: The Jackson Foundation, which selects not-for-profit (NFP) entities to receive donations from the...

Tanmoy answered on Oct 09 2021
123 Votes
Cover Sheet
        Not for Profit (NPF) Entities in United States
        Name    United Way
        Mission    United Way tries to improve the lives by mobilizing the caring power of the communities globally in order to advanced the common good.
        Cause area    United Way is deals in problem
solving, hand raising as well as game changing programs. We fight for the health, education and financial stability of every person in the community. The company creates an impact by making a positive and permanent change by going into unlikely partnerships, finding new solutions to various problems and mobilizing the best resources. United Way's activities are in the area of volunteering, public policy, donation and disaster management.
        Name    Americares Foundation Inc and Affiliates
        Mission    The ultimate mission of Americares Foundation is to save the lives of millions and improve the health of the poor or the ones affected by disaster. In order to achieve the objectives they wants to reach to their full potential
        Cause area    Americares Foundation Inc have responded to the disaster management programs during the humanitarian crisis by establishing long-term association through project recovery and bring disaster preparedness program to the vulnerable communities. Americares also created health care facilities for meeting the needs of the survivors. They have also edifice a medical team who provides assistance during cyclones, floods and hurricanes in various parts of India, US and Phillipines. They are also responsible for providing critical medical and medicine supplies to the domestic partners in the drought affected areas of Kenya and Tanzania.
                                                                    s
        Quantitative Analysis
        After observing the ratios of both the companies it can be illustrated that in terms of liquidity ratio United Ways Worldwide is far better than that of Americares Foundation Inc. United Ways monthly spending is also lesser compared to Americares Foundation Inc. Further, in terms of operating ratio, the savings indicator is better for United Ways tha Americares. In terms of Fundraising efficiency and Contribution & Grants, Americares is far better than United Ways. Thirdly, in terms of spending ratio it is Americares which expenses more than United Ways. Therefore, in a way it can be stated that since these organizations are non-profit companies and operates for the benefit of the poor and destitute people, the companies which expenses more for enhancing the livelihood of the people are more efficient. In this case it is Americares which expends more than United Ways for the betterment of the community and the poor people.
Ratio Analysis
        United Way Worldwide and Subsidiaries                        Americares Foundation Inc &...
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