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Analyzing financial statements Essay

Part I

Using Appendix B, calculate the following:

* Current ratio = 0.75(2002), 0.87 (2003), 0.90 (2004)

* Long-term solvency ratio = 3.83 (2002), 2.60 (2003), 0.94 (2004)

* Contribution ratio = 0.53 (2002), 0.51 (2003), 0.49 (2004)

* Management/expense ratio = 0.30 (2002), 0.30 (2003), 0.20 (2004)

* Revenue/expense ratio = 1.02 (2002), 1.06 (2003), 0.90 (2004)

Part II

Provide a 150- to 200-word summary of the importance of each ratio from Part I.

In order to have a good organization, it is important to look at financial ratios in order to see how to organization is doing. The current ratio for example, measures an organization’s ability to pay its short-term debts or its liquidity.. Long-term solvency ratio on the other hand, tells us the capability of the company to pay its long-term liabilities. These two ratios are important since non-payment of debt could mean that the organization is likely to close.

While current ratio and long-term solvency ratio is derived from the balance sheet, contribution ratio is obtained by looking at the income statement. Contribution ratio reveals information on how much of the organizations funds come from grants or contributions. By knowing this ratio, an organization can make plans in order to adjust their goals based on the

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amount of funding obtained. Management expense ration or MER, tells us what percentage of the money obtained is used to pay for the services of people in management.

Revenue expense ratio, also known as the efficiency ratio, is a measure of how an organization spends its money. If the ratio is greater than 1, it means the organization is spending more than what it earns.

Part III

For the program suggested in Appendix B, calculate the following:

Variable costs = $1,011,008.20 (2002), $1,142,680.77 (2003), $1,798,130.72 (2004)

Fixed costs = $174,000.00 (2002), $174,000.00 (2003), $174,000.00 (2004)

Break-even point = $1,315,886.80 (2002), $2,131,334.16 (2003), $969,891.56 (2004)

Part IV

Discuss the purpose, advantages, disadvantages, and type of feedback provided by line-item, performance, and program budgets, in a 350- to 700-word essay.

In general, a budget is defined as the amount of money assigned to a particular item. There are many types of approaching this task and three of these are called as line-item budgets, performance budgets and program budgets.

A line-item budget is the most basic and often used system. It typically covers a fiscal year and the reason it is called such is because all one needs to do is “line up” the items. A line-item budget is divided into two sections. One part is called the revenue section and it is that a company lists down its sources of money. The second is the expense section where the company lists down the things that it expects to spend on. For a human services agency, a line-item budget is also called as the operating budget.

The advantage of using this system is that it enables a human services agency to have better financial control since it is simple to see the money coming in and going out. All one has to do is easy check if the budget is balanced, that is, if the revenue is enough to cover the expected expenses. With this information, it is much easier to decide which items to spend less on. The disadvantage of using this system is that it cannot show how much service was provided and how much money was spent in providing that service. A human services agency would further encounter problems in the issue of proper resource allocation under a line-item budget system. The reason for this is that no other pertinent data is available.

In order to address this issue, a human services agency has the alternative of implementing a performance and program budget system. A program budget involves calculating the total expenses the agency will incur for a particular fiscal year and then dividing that amount by the number of goals or outcomes. Unlike the line-item budget, this system enables the agency to see if the programs it implemented are effective or not. Program budgets also enable discussions on service and efficiency concerns to be raised and thus putting the main focus on the client instead of the agency. Using this system can also help a human services agency compare how their program fares compared to other agencies. One drawback in using this system is that it is hard to set performance measures for outcome that is excellent or even good.

Aside from line-item budget and program budget, a human services agency can also use a performance budget system. Like program budgeting, performance budgeting is also done at a program level only, whereas a line-item budget can be done at both program level and agency level. If a line-item budget helps an agency have better financial control and a program budget shows if a program is effective or not, a performance budget can make us see if the program being implemented is productive or not. This is because under this system, an agency can determine the cost incurred on a particular output. The main advantage of employing this system is that it discloses the amount of service delivered and the cost per output. Much like a program budgeting system, it also opens deliberations on services and efficiency. The main problem of employing this system is that complicated cost analysis techniques are needed in order to have an accurate picture of the program implemented.

Consequently, a human services agency must employ all these three types in order to have a better perspective and see if the mission and goals set is reached.

Part V

How can knowing the cost per output and cost per outcome benefit a human services agency?

Cost analysis is very important for a human services agency since it would enable it to develop a better performance budget or program budget. However, in order to have conduct a thorough cost analysis, a human services agency must already have a program in place. The program should already have a line-item budget attached to it and has in place the necessary standards to check output and outcome performance.

One usually goes through the usual steps involved in a cost analysis but in the case of a human services agency, the final procedure involves getting the cost per output and cost per outcome of the program. By computing the value of the cost per output, a human services agency will be able to know if it is being productive or not. If a human sees that the cost per particular output is going up, then it can opt to change the program. Another measure is through computing the value of cost per outcome. This enables the agency to see if the program being implemented is efficient.

The main difference of these two values as well as their importance to a human services agency is that in knowing the cost per output of a program, the agency can look into itself and see how it is doing. In knowing the cost per outcome of a program on the other hand, the focus of the human services agency is directed at the client.

What is the primary difference between a performance budget and a program budget? Why does a human services agency need to know this information?

In order for a human services agency to make decisions regarding its programs, it is necessary that it uses a performance budget and program budget system aside from the usual line-item budget. These two budgeting systems gives a human services agency an idea of how their programs are doing. The primary difference between the two systems is that a performance budget system uses cost per output while a  program budget system uses cost per outcome. By applying a performance budget system, a human services agency is able to see if the programs it implemented are worth the money being spent. A performance budget system measures productivity and tends to focus more on the agency. A program budget system is more client-centered. Through this budgeting system, a human services agency is able to determine if the programs in place are working efficiently.

Since the two are budgeting systems, their main aim is to give feedback to the human services agency. While a line-item budget is integral to human services agency since it gives it better financial control over its money, having a performance and program budget enables the agency to make the right judgments regarding the programs they have implemented. The reason is that these two systems gives a human services agency more data thus getting a better over-all picture.

Part VI

Provide a 350- to 700-word response to the following: Identify and describe two types of traditional approaches to fund development, and two types of entrepreneurial approaches to fund development.

In order to develop a fund, there are typically two methods, the traditional and the entrepreneurial. One traditional way of developing a fund is by receiving grants through foundations. Examples of famous foundations include the Bill and Melinda Gates Foundation, Ford Foundation, and Rockefeller Foundation. Funding from foundations has been one of the main resources that human service agencies use. Under the law, a foundation has to spend around 5% of their assets through grants. There are five types of foundations. A foundation that has ties to a business is called a corporate foundation, like the Ford Foundation. Bill and Melinda Gates Foundation is obviously an example of a family foundation. The other three are general interest foundations, special interest foundations, and community foundations.

Another example of a traditional approach to developing a fund is through special events. Unlike foundations, the use of special events to obtain funding is more of a system than a group. There are many ways of getting funds through this method. One can have dinners, raffles or a marathon. In some cases, a human services agency for example, can decide to honor a particular person through a dinner and raise money by charging a fee to those who want to attend the dinner.

While it is important to note that there are many other traditional types, it is also wise to look at the other method, which is the entrepreneurial side. One example is called affinity marketing. In affinity marketing, a human services agency enters into a cooperative undertaking with businesses. These include sales promotions, credit card promotions, and charity shopping malls. In sales promotion for example, a human services agency can tie-up with Wal-Mart and have them advertise that for every $10 they spend, $1 would go to a fund that would help children at an orphanage go to school. Another example of getting funds using the entrepreneurial approach is through commercial ventures. Whereas in affinity marketing a human services agency ties-up with a business, in a commercial venture, it is the agency itself that starts the business. An agency can start a skills training program for orphans wherein they make arts and crafts. The agency can then sell those items and use the income to assist the children.

Like with the traditional approach, there are also many ways to get funding using the entrepreneurial approach aside from the two mentioned. A good human services agency must have a very definite plan in order to know which approach to take.

References

Martin, Lawrence. L. (2001). Financial Management for Human Service Administrators. Allyn and Bacon, a Pearson Education Company.

Computations:

Part I

Current ratio = Current Assets divided by Current Liabilities [Balance Sheet]

Long-term solvency ratio = Total Net Assets divided by Total Liabilities [Balance Sheet]

Contribution ratio = Grant Income divided by Total Revenue [Income Statement]

Management/expense ratio = Total Management Expenses divided by Total Revenue [Income Statement]

Revenue/expense ratio = Total Expenses divided by Total Revenue [Income Statement]

Part III

Variable costs =  Payroll and benefits, Supplies, Other, Management and Other [Income Statement]

Fixed costs = Rent and Utilities, Telephone [Income Statement]

Break-even point = (two steps) [Income Statement]

Step 1: Calculate contribution margin

            Calculate contribution margin = 1 – (Variable Costs divided by Total Revenues)

Step 2: Fixed Costs divided by Contribution margin

 

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