Financial Statement Analysis
Abstract
Sustainability is a major challenge that not-for-profit organizations have to address: managing their financial viability in negatively changing funding landscape, competing with rival nonprofits and striking collaborative partnerships, increased need to demonstrate value and accountability to their funders and supporters, as well as maximizing their contribution to the communities they serve. There has been increasing demand for safety-net and crisis support services as many people face tough economic circumstances as a result of the global financial crisis and poorly-performing American economy. There has been increased pressure on public finances which have in turn reduced federal and state funding at disposal for government public services. Government budget cuts for not-for-profit organizations have further meant that the organizations have reduced financial capacity to adequately respond to the growing demands. Typically, not-for-profit organizations operate in a commercial environment where financial viability is core for the continued survival and delivery of their mission. The greater dependence of non-profit organizations on government funding is because the funded organizations usually report their income drawn from government sources in the form of service-related fee income. The non-profit sector relies not only government direct funding, but also on committed planned giving from corporate and individuals. However, this is only possible is a favourable economic environment where significant income and/or wealth is generated and sustained. A combination of domestic and international factors in the recent times has significantly undermined the financial potential of organizations and individuals to continue their philanthropic giving. The non-profit organizations have therefore little financial reprieve from corporate or individual donors in addition to the reduced government funding.
This paper discusses the financial sustainability of Safe Horizon, accessing whether the nonprofits organization is in debt and its future financial status followed the recent and yet-to-come state and federal budget cuts. In assessing the financial status of Safe Horizon following the government budgetary cuts would be challenging. Assessing a budget shortfall is particularly challenging because of a couple of factors: (1) a budget is often not a single entity – it is made of many funds; and (2) the calculation of budget shortfall relies heavily on the choice of baseline. As such, problems increase significantly when measuring shortfalls prospectively.
Introduction
Safe Horizon, formerly known as Victim Services, is the biggest victims’ agency in the United States, with headquarters in New York. It has more than 50 branches rendering services to at least 250,000 children, adults, as well as families who are victims of crime and abuse. Safe Horizon has been providing a wide range of comprehensive support to victims of domestic violence, human trafficking, child abuse, sexual assault and rape, together with homicide families and homeless youth (Rapport, 2010). Safe Horizon is active in provision of practical services such as replacing locks, safe shelter, round-the-clock hotlines, food and other supportive services e.g. mental health counselling. Safe Horizon’s staff provides technical assistance, training and education to governmental organizations and service providers, as well global corporations and the media (Chin, 2009). Safe Horizon is able to reach a large number of people every year through integrated speaking engagements, public awareness programs, online and media outreach, distribution of public service materials on matters of violence and abuse.
In addition, Safe Horizon’s programs work in conjunction with governmental and/or community agencies in offering additional assistance such as finding resources for non-New York City residents (The New York Community Trust, 2009). Recently, the group has expanded beyond its main mission to helping out individuals and families who have been causalities of slowdown in economy, and thus currently mediates cases between creditors and consumers (Sontag-Padilla et al, 2012).
Safe Horizon employs a range of methods in raising funds for its operations, which include: direct mail appeals, print advertisements, internet, invitations to organized fund-raising events, planned giving arrangements, grant proposals, and cause-related marketing (i.e. consumer product sales, affinity credit cards, etc, that show purchases will benefit the group). The sources of funds for the organization therefore include grants income, contributions, fees income, special invents, in-kind contributions, miscellaneous income, gain on beneficial interest drawn from perpetual trust, and investment income (Chin, 2009). Safe Horizon is tax exempt in line with section 501 (c)(3) of the Internal Revenue Code. However, the group is eligible to get contributions which are deductible as charitable donations on federal income tax.
Background
In the United States, funding for community-based non-profit as well other public service organizations are designated by Schedule C. As such, funding for Safe Horizon is mandated by the New York City Council in conjunction with the Mayor’s Office of Contract Services (MOCS0S) (Human Services Council, 2010). In April 2011, the U.S. Congress endorsed a bill to cut as much as $38 billion in federal spending for non-profit organizations in an effort to close the federal deficit. The Congressional leaders along with the White House agreed to slash about $40 billion from the 2010 spending. The plan included a 0.2 percent across-the-board cut as well as cuts for community health centers, national service, family planning, legal services for the poor, domestic and international aid programs, together with a range of sectors that provide aid to not-for-profit organizations and the larger majority of people they render services to (Williams et al, 2011).
According to the Republican budget blueprint 2012, additional $6.2 trillion in cuts are proposed on the next 10 years’ budget outlined by President Obama. This net result of such drastic measure would fundamentally redefine the manner in which the United States provides aid to those in need in the country and abroad. The plan would slash spending on the national Medicaid health program besides requiring people who depend on food stamps, rental assistance among other help to get themselves jobs or job training. The new approach is thought will save the U.S. government a tune of $750 billion in Medicaid costs in the course of next 10 years.
The Problem
Safe Horizon presently faces an unfortunate financial reality in the sense that there is finance at disposal at all levels because the capacity of its funding – the Federal and state governments, as well as corporate and private individuals – to offer funding has significantly reduced. Domestically, the United States’ government budget standing is comparatively poor and constrained. This translates that the key priority of the public finance is cut costs as much as possible. Projections are to the effect that the overall income of Safe Horizon will consistently dwindle and the group is bound to face stiff competition from other not-for-profit organizations for the limited funding available.
The ensuing economic pressures that threaten the viability of a number of critical programs relating to victims of violence and abuse has made things worse for Safe House following budget cuts in the FY 2012-13 budget proposal released on January 17 the New York state. Although the budget proposal has greatly avoided the “across the board” system to cuts as has been the norm in the recent years, there are a host of real concerns especially the apparent discontinuing of funding for the State-wide non-residential domestic violence programs for the third year running (Sontag-Padilla et al, 2012). It is also feared that the budget cuts would force Safe Horizon to eliminate as many as 18 of the total beds of its successful overnight facility in addition to reducing remarkably the basic services offered at the drop-in centres such as food, laundry, showers as well as case management services.
The problem questions of this paper are therefore as follows:
• Whether in the face of the recent budget cut in non-organization, Safe Horizon would be around for many years to come?
• Is Safe Horizon in debt or is it financially stable?
Purpose of the paper
The purpose of the paper is to explore the future of Safe Horizon in light of the drastic budget cuts from its primary funder, the government. It explores the financial current financial health of the non-profit organization as well its distant future.
It is important to review the current financial standing as well the possible future outlook of Safe Horizon because of the group’s crucial role in helping victims of violence and abuse in New York and the country at large. A thorough understanding of the sustainability challenges faced by Safe Horizon and other related not-for-profits is necessary so as to maximize strategies geared to addressing financial sustainability challenges and how best to respond to them Muro & Hoene, 2009).
Literature Review
The state of New York use a two-prong test to determine the suitability of a corporation to be regarded as a non-profit organization: (1) New York not-for-profit organizations must be established only for nonpecuniary purpose, and (2) No part of the non-profit’s assets, income, of profit may inure to benefit of, or distributed to its members, board director, or officer with certain exemptions otherwise allowed. According to report by the Office of the State Comptroller (2010), non-profit organizations in the state of New York have increasingly experienced growing demand for their services in the ongoing economic crisis. The report also revealed that nonprofits have significantly experienced decreasing funding in all areas due to the current economic crisis and state budget deficits (Office of the State Comptroller, 2010). Another 2011 survey on nonprofits in New York State by the New York Council of Nonprofits showed that 66% of the respondents were forced to borrow money as a result of delayed government funding for previous couple of years. Results of a study by Fernandes (2011) found that New York nonprofits that depend on state funding for more than 50 percent of their operating budgets, were significantly receiving decreased revenue from the state government. The study further indicated that most nonprofits had already begun planning differently for the year to come as compared to their plan in the previous year as a result of financial constraints in New York State. Some nonprofits are considering merging with other nonprofits or changing their mission to survive the financial difficulties they face (Fernandes, 2011).
According to Renz et al (2010), as much as 52 percent of New York nonprofit organizations reported feeling the negative effects of cuts in government funding. A study by Basel, Williams, and Klak, (2011) found that significant number of people in New York City have reservations about their nonprofit overreliance on government funding, as a result of the the tight restrictions on how the awarded public funds can be used as well as the relatively long period of time and resources used in the effort to comply with federal and state requirements (Sontag-Padilla et al, 2012).
The overreliance of nonprofits on external funds in the current difficult times have rendered difficult for non-profit organizations in New York to generate income, sustain their financial support, and effectively meet the needs of their target populations. The nonprofits are also faced with the challenge of balancing many other community problems that exceed the mission of the organizations such as economic challenges, unique cultural contexts, and poor education (Salamon, 1999).
According to Bowman (2011), the objective of financial sustainability for not-for-profits is often to sustain or expand their services whilst developing enough resilience to frequent economic shocks in short term such as short-term discontinuation of program funding and monthly variations of donations (Hennelly, 2011). According to Besel, Williams, and Klak, (2011), New York nonprofits need to employ promising strategies so as to survive the effects of state and federal budget cuts coupled with the current recession and apparent reductions in philanthropic giving (Sontag-Padilla et al, 2012).
Budgeting
Most nonprofits need budgets in order to source for finances. Government funders and private donors will not accept a grant application without a formal prepared budget. Even if the funder is ready and willing to give funds with no prepared budgets, well- managed nonprofits will ensure that they have planned budget to ensure correct utilization of source funds (Dropkin, 2011, p.5). The key priority of any nonprofit is to stay solvent and budgeting is a key component to achieving this goal. Lastly, the thought process associated with budgeting ensures clear, accurate and objectives from the beginning to end, therefore nonprofits are able [1].to adjust plans, related activities and expenses as they deem fit.[2]. Spend funds in a cost effective manner. [3].reach the goals and objective set [4].perform audits [5]. avoid cost overruns.
Moreover, well prepared budget have other advantages to the nonprofit. [1]. Helps stakeholders understand the goals to be achieved. [2]. elaborate on work to be done and goal, [3] Allocate resources required to complete the work [5]. Helps in scheduling of activities. [6]. allocate resources to related activities and [7]. Ensures individuals accountability.
Nonprofits generally use five types of budgets. First, organization-wide operating budget such budgets capture all income and expenses to be required for the entire organization’s operation during the year (Dropkin et al, 2011). Therefore, is a projection of the expected income and expenses of the organization in the next year. Second, operating budgets for individual programs (Dropkin, 2011, p.6). This is required for each individual program in order to get support from donors and other funding sources. Third, capital budgets are budgeting done for the organization long term investments such machinery and projects. Fourth, cash flow budgets are also referred to cash flow projections. Such budgets offer the organization with projected cash inflows and outflows during a specific period of time. Such projects are important in planning activities for a nonprofit. Lastly, zero-based budgeting this is a revolution type of budgeting which reverses the working process from the traditional budgeting. Zero based budgets every budgeting item must be approved, rather than altered (Dropkin et al, 2011).
Financial Analysis
According to Williams et al (2006, p.670) “The goal of accounting information is to provide economic decision makers with useful information “Users of the financial information can therefore, determine the organizations futuristic trends and external factors that would impact it. Such statements are used differently by users depending on the goals and needs of the user. Some take a critical look at financial statement for possible investment in a company (Weygandt, 2005). However, in our case we are looking at Safe Horizon financial statement to get an understanding with the recent budget cut in non-profit organization is will Safe Horizon be around for many years to come, the nature of Safe Horizon debt and is the organization financially stable (Weygandt, 2005). Therefore, in order to answer the question posed one has to clearly examine past financial statement from 2008 to 2010.
Financial Statement
Financial statements are relevant financial information present in manner that will offer understanding to user about the state of the organization (Wang, 2005). Safe Horizon publishes annual financial statement which will be used to determine the state of the organization. Financial statements used are balance sheet that will report on Safe Horizon assets, liabilities and equity structure at a given years. Moreover, the profit loss statement will of insights into the organizational income. Lastly, the cash flow statement will offer reports on the cash flow activities within the organization and investing activities that occurred during the financial period.
Year 2008 2009 2010
Assets 38,731,264 40,295,226 39,495,056
Liabilities 22,364,781 21,925,453 20,061,768
Table.1 of Assets and Liabilities
Table.1 shows an increase in assets from 2008 to 2009 and decline 2010. On the other hand, liabilities decreased in 2008 to 2010. From the finding from the balance one is able to establish that the Safe Horizon was undergoing financial distress and is cutting back on spending. The decrease in liabilities shows cost cutting measures by the organization and sale of assets in the year 2009- 2009 through a decline in the value of assets to fund its activities.
Cash Flow
2008 2009 2010
Cash Flow Operating Activities 2,477,176 3,632,190 2,614,876
Net Cash Provided 1,581,701 2,025,179 3,492,944
Cash at the end year 949,774 3,436,124 2,254,161
Table.2 Cash Flow
Table.2 shows an increase in cash flow for operating activities from 2008 to 2009 and a decrease 2010. Moreover, the net cash provided for operating activities increased from 2008 to 2010 and cash at the end of the year increased from 2008 to 2009 and declined slightly in 2010. The decline in cash flow of operating activities in 2009 to 2010 indicates a possible cost cutting measures employed during this period by Safe Horizon or decline in the number of projects they support (Wood, 2011). In addition, an increase in net cash provided shows that the Safe Horizon is able to raise cash to fund its various activities due to the fact that it is increasing over the years. Lastly, cash at the end of the year was increasing from 2008 to 2010 showing Safe Horizon liquidity was good at the end of the year.
Profit and Loss
2008 2009 2010
Unrealized Profit -104,333 461,707 502,873
Table 3 Profit and Loss
Table 3 shows that Safe Horizon made a loss in 2008 and later increased profit in 2009 and 2010. This shows that even though Safe Horizon is a nonprofit organization it was able to make profits in 2009 and 2010 therefore, a good financial position currently.
Financial Ratio Analysis
Carrying out calculation to determine the financial ratio is important to determine the financial stability of the organization both short-term and long-term. Finance ration gives a glimpse of the dynamism that occurs in the organization which is often ignored in financial statements. According to William et al (2005, p.674) “A ratio is a simple mathematical expression of the relationship of one item to another.” Therefore, offer a means to critical determine the financial strength of an organization.
Liquidity Ratio
Liquidity Ratio is obtained from the balance sheet and is used to measure the overall liquidity of the organization during a financial period. It measures the short-term and long-terms ability to meet is financial obligations (Kieso et al, 2005). In case of Safe Horizon will try answering the following question will Safe Horizon be around for many years to come, the nature of Safe Horizon debt and is the organization financially stable.
Current Ratio is an expression between the working capital and current assets to determine the organization ability to meet its current financial obligation. This is derived through dividing the total current assets by the total liabilities
Current Ratio = Total Current Assets/ Total Current Liabilities
Liquidity Ratio
2008 2009 2010
Current Assets 38,731,264 40,295,226 39,495,056
Current Liabilities 22,364,781 21,925,453 20,061,768
Current Ratio 1.73 1.84 1.97
Safe Horizon current ratio in 2010 (1.97) is close to 2.0 which are acceptable current ratio for the organization to meet it financial obligation (Kieso et al, 2005). This shows that Safe Horizon is able to meet its financial goals. In addition, the growth in year to year in current ration indicates that the organization financial strength is improving therefore; futuristic financial indicators are good for Safe Horizon (Safe Horizon, 2009 and Safe Horizon, 2010).
Quick Ratio also referred commonly as the acid test of the liquidity of the organization. This expresses the relationship between working capital and cash, accounts receivable, prepaid and receivables for the firm to determine the organization ability to meet it current financial obligation(Safe Horizon, 2009 and Safe Horizon, 2010). The ration is derived through dividing the Total quick Assets and Total Current liabilities.
Quick Ratio = Total Quick Assets/ Total Current Liabilities
Acid Test
2008 2009 2010
Quick Assets 14585564 15508837 14545960
Current Liabilities 22,364,781 21,925,453 20,061,768
Quick Ratio 0.65 0.71 0.73
Safe Horizon quick ratio is unhealthy. In 2010, the quick ratio stood at 0. 73 which is below the acceptable industry level which is 1.0. Therefore, Safe Horizon should improve the quick ratio to above 1.0 in order to have a strong financial position.
Days of Cash in Hand Ratio helps the organization pay its bills in order to effectively run it operation. In cases where the revenue stop the organization is able to survive before it obtains additional financing(Safe Horizon, 2009 and Safe Horizon, 2010). This is determined through calculating the number of days the company can pay it expenses through the cash-on-hand-ratio. Therefore, to get a good score the organization cash-in hand-ration should be high and increasing over the years.
Days of Cash in Hand Ratio= (Cash + Marketable Security)/ Operating Cash-Bad Debt-
Depreciation)/365
2008 2009 2010
Cash + Marketable Security 12594937 12370968 13719102
(Operating Cash-Bad Debt-Depreciation)/365 51,958 48,837 48,388
Days of Cash in Hand 242.40 253.31 283.52
In the cash in hand ratio is high and increasing for Safe Horizon. This gives the organization a good score in terms of it days-of cash-in-hand-ratio. Therefore, Safe Horizon is financial stable to meet its daily operation needs.
Conclusion
Following a thorough analysis of Safe Horizon Financial Statement through 2008 to 2010 the organization is in good financial position to meet its goals both short-term and long-term. Safe Horizon in the nonprofit industry and heavy relies in funding from donors to fund its activities. The financial statements indicate an increasing funding year-on-year which is a strong indicator that Safe Horizon will continue to meet it financial and activities obligation in future. In addition, Safe Horizon scored highly in other indicators such as days-of –cash in hand ratio and the current ratio which showed that Safe Horizon financial was strong and increasing. However, Safe Horizon had a poor quick ratio which was below 1.0 which should be improved by increasing it quick assets. Consequently, I believe that Safe Horizon be around for many years to come, meet its debt obligations and is financially sound
Recommendation
Looking at the financial analysis done on Safe Horizon a number of recommendations can be made for the organization. Firstly, Safe Horizon should focus on just measures to reduce expenses and increase cash available for activities. Moreover, Safe Horizon should also focus on activities that increasing funding and strength it financial strength. Such activities will improve the net income, lower liquidity and ensure that activities are funded effective.
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