Retooling Your Financial Reserves

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<ul><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 1/50</p><p>2012 CliftonLarsonAllen LLP1</p><p>11</p><p>2012CliftonLarsonAllenLLP</p><p>Retooling Your Financ ial Reserves</p><p>Catholic Cha rities USA Annua l Gathering</p><p>Oc tober 1, 2012</p><p>Ben Aa se and Bruc e Braunewell</p><p>CliftonLarsonAllen LLP</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 2/50</p><p>2012 CliftonLarsonAllen LLP2</p><p>Learning Objec tives</p><p>At the end of this session, you will be able to:</p><p> Speak with confidence about the importance of financial reserves</p><p>to the long-term viability of your organization.</p><p> Prepare, communicate, and update a data-driven reserves policythat will build confidence with your organizations key</p><p>stakeholders.</p><p> Understand how this policy integrates with your financial</p><p>planning and reporting processes.</p><p> Create an interactive process to develop and adjust reserve</p><p>targets that will engage your staff and board.</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 3/50</p><p>2012 CliftonLarsonAllen LLP3</p><p>Why Nonprofits Need Reserves</p><p> To bridge cash flow needs</p><p> To maintain financial solvency</p><p> To weather economic cycles</p><p> To fund expected opportunities</p><p> To fund unexpected opportunities</p><p>To protect yourselves against unpredictable political behavior</p><p> To purchase and maintain productive assets</p><p> To drive capacity for new debt to fund major capital needs</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 4/50</p><p>2012 CliftonLarsonAllen LLP4</p><p>Who Cares About Our Reserves?</p><p>Organizational leaders</p><p>Board members</p><p>Creditors</p><p>Regulators</p><p>Rating agencies</p><p>Contributors</p><p>Service recipients</p><p>A lot more people than youd</p><p>think when you dont have them</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 5/50</p><p>2012 CliftonLarsonAllen LLP5</p><p>What Were Seeing and Hearing</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 6/50</p><p>2012 CliftonLarsonAllen LLP6</p><p>Context</p><p>Reserves (by themselves) Capital</p><p>Reserves are (just) one important</p><p>part of an organizations overall</p><p>capital structure.</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 7/50</p><p>2012 CliftonLarsonAllen LLP7</p><p>Capita lization: One Definition</p><p>The accumulation and application of resourcesoperating andworking capital, operating reserve, risk capital, endowment and</p><p>building reserveto support achievement of an organizations</p><p>mission over time.</p><p>Excerp ted from http :// ww w.kresge .org/ co ntent/ files/We bina r%20PPT%201-25-11.pptx</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 8/50</p><p>2012 CliftonLarsonAllen LLP8</p><p>Understanding Risks of Undercapitalization</p><p>Excerp ted from http :// ww w.kresge .org/ co ntent/ files/We bina r%20PPT%201-25-11.pptx</p><p>The theory being that without adequate capitalization or theappropriate capital mix your mission is at risk.</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 9/50</p><p>2012 CliftonLarsonAllen LLP9</p><p>July 2009 Urban Institute Study</p><p>AGE DOESNT MATTER</p><p>Sixty-five percent of young organizationsdefined as no more</p><p>than five years oldhad operating reserves that would cover</p><p>less than three months of operating expenses, and nearly one-</p><p>third of these young organizations have no operating reserves.</p><p>Older organizations tend to be somewhat stronger, but even</p><p>among those that are more than 30 years old, nearly 50 percent</p><p>had low operating reserves.</p><p>SIZE DOESNT MATTER</p><p>More than half of</p><p>organizations in every range of</p><p>expenses reported operating</p><p>reserves of less than three</p><p>months.</p><p>REVENUE BASE MAY MATTER</p><p>Two categories had significantly more</p><p>organizations with less than the suggested</p><p>minimum reservesthose with revenue</p><p>primarily from government grants orprogram services.</p><p>MISSION DOESNT MATTER</p><p>More than half of all organizations across</p><p>all missions, except for environment and</p><p>animals, had operating reserves of less</p><p>than three months.</p><p>HOW DID THESE ORGANIZATIONS FARE THE LAST RECESSION?</p><p>Those that filed an IRS Form 990 in 2000 but did not file in 2006 because of organizational closure or</p><p>contraction reported reserves ONE-THIRD THE LEVEL of those organizations that survived.</p><p>Available a t http :// ww ded pd f/411913_dc _nonprofit_reserves.pdf</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 10/50</p><p>2012 CliftonLarsonAllen LLP10</p><p>Nonprofit Operating Reserves Initia tive</p><p>Ad hoc group of nonprofit</p><p>finance professionals.</p><p>Center on Nonprofits and Philanthropy</p><p>at the Urban Institute serves as secretariat.</p><p>Objectives:</p><p> Define an Operating Reserve Ratio</p><p> Use the ratio to focus attention on</p><p>the importance of nonprofit financialstability</p><p>Available at http:// ww w.ncc iki/imag es/3/ 3c/O peratingReservesWhitePaper2009.pdf</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 11/50</p><p>2012 CliftonLarsonAllen LLP11</p><p>Nonprofit Operating Reserves Initia tive</p><p>White paper recommendations:</p><p> Set a minimum operating reserves ratio.</p><p> Tailor your policy to your organizations needs and funding structures.</p><p> Recommendation = no less than three monthsof operating expenses. Define how the operating reserves will be invested as part of your</p><p>organizations overall investment policy.</p><p> Decide how often to measure and report.</p><p> Discuss how your operating reserves will be replenished if you need todip into your reserves or they fall below the minimum threshold.</p><p>Available at http:// ww w.ncc iki/imag es/3/ 3c/O peratingReservesWhitePaper2009.pdf</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 12/50</p><p>2012 CliftonLarsonAllen LLP12</p><p>Why You Need Them Today More Than Ever</p><p>In conclusion, both intuition AND evidence suggest that</p><p>Many nonprofit organizations have inadequate reserves and have</p><p>suffered over the past several years because of it</p><p>and while many organizations are understandably focused on a</p><p>relatively short time horizon</p><p>there is an emerging interest in addressing the question of financial</p><p>reserves more prudently</p><p>to help you emerge from this current economic crisis wellpositioned to withstand the next challenge that arises.</p><p>Adapted from Maintaining Nonprofit Operating Reserves, The Nonprofit Operating Reserves Initiative Working Group, December 2008</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 13/50</p><p>2012 CliftonLarsonAllen LLP13</p><p>Common Questions</p><p> How can we build some?</p><p> How do we defend them?</p><p> How much is enough? Too much?</p><p> How do I build a culture that values them?</p><p> What sources can fund reserves?</p><p> What should our policy include?</p><p> How can I respond to clawbacks?</p><p>HOW ARE RESERVES</p><p>IMPACTING YOU?</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 14/50</p><p>2012 CliftonLarsonAllen LLP14</p><p>CASE STUDY:</p><p>NATIONAL COUNCIL ONFINANCIAL RESERVES</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 15/50</p><p>2012 CliftonLarsonAllen LLP15</p><p>NCFRs Reserves</p><p>Does this trend look</p><p>familiar?</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 16/50</p><p>2012 CliftonLarsonAllen LLP16</p><p>Old Target</p><p>November 2003: NCFR Board of Directors approved recommendation</p><p>from NCFR Finance Committee</p><p>Resolved that the following motion shall be approved:</p><p>To establish a reserve goal of at least 50% of</p><p>operating expenses and that NCFR work to</p><p>achieve this goal within 10 years.</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 17/50</p><p>2012 CliftonLarsonAllen LLP17</p><p>Why 50%?</p><p>Because it felt good.</p><p>Responsible.</p><p>And its what their peer</p><p>organizations were doing.</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 18/50</p><p>2012 CliftonLarsonAllen LLP18</p><p>Ask Yourself</p><p>Q: Best practice or popular practice?</p><p>A: Popular practice</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 19/50</p><p>2012 CliftonLarsonAllen LLP19</p><p>The Danger of Conventiona l Wisdom</p><p>Benchmarking may provide a good starting point</p><p>but beware of conventional wisdom.</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 20/50</p><p>2012 CliftonLarsonAllen LLP20</p><p>SO WHAT IS ONE TO DO?</p><p>A h / 2 Ph / S</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 21/50</p><p>2012 CliftonLarsonAllen LLP21</p><p>1 Approach / 2 Phases / 6 Steps</p><p>Review of Current</p><p>Policy and Practice</p><p>Data Co llec tion</p><p>(via Survey )</p><p>Quantitative</p><p>Modeling</p><p>Draft Policy</p><p>Rec omm endations</p><p>Finance Comm ittee</p><p>and Board Approval</p><p>Facilitated</p><p>Stakeholder Sessions</p><p>Phase 1: Identify risks to m ajorprog rams / business lines</p><p>Phase 2: Quantify identified risksand build appropriate polic y</p><p>IterativeFeedback Loop</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 22/50</p><p>2012 CliftonLarsonAllen LLP22</p><p>STEP 1: REVIEW OF CURRENT</p><p>POLICY AND PRACTICE</p><p>R i f C t P li d P ti</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 23/50</p><p>2012 CliftonLarsonAllen LLP23</p><p>Review of Current Polic y and Prac tice</p><p> Current reserve policy and historical context</p><p> Business and financial reporting structure</p><p> Historical reserve targets vs. actual performance and use</p><p> Program summaries</p><p> Related risk (e.g. SWOT) or strategic planning documents for each</p><p>program, operating unit, or entity-wide</p><p> External environmental scan</p><p> Investment allocation risk analytics</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 24/50</p><p>2012 CliftonLarsonAllen LLP24</p><p>STEP 2: DATA COLLECTION</p><p>Data Collec tion (via Survey)</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 25/50</p><p>2012 CliftonLarsonAllen LLP25</p><p>Data Collec tion (via Survey)</p><p> Suggest surveying internal departmental directors</p><p> Direct service delivery at the departmental or site level</p><p> Business and finance</p><p> Information technology</p><p>Physical plant</p><p> Questions revolved around</p><p> Identifying specific business risks</p><p>The likelihood and timing of their occurrence</p><p> Their anticipated financial impact</p><p> Their categorical nature</p><p>Alternative mitigation strategies</p><p>Sample Survey Questions</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 26/50</p><p>2012 CliftonLarsonAllen LLP26</p><p>Sample Survey Questions</p><p> True or False: NCFRs current reserves policy works well.</p><p> What are the most critical cost drivers in your department?</p><p> Keeping both your cost drivers and income sources in mind, whatpotential high impact risks could result in your departments needto access NCFR reserve dollars?</p><p>Sample Survey Questions (c ontd)</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 27/50</p><p>2012 CliftonLarsonAllen LLP27</p><p>Sample Survey Questions (c ont d)</p><p>For each of these identified risks</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 28/50</p><p>2012 CliftonLarsonAllen LLP28</p><p>TIME OUT FOR A SURVEY</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 29/50</p><p>2012 CliftonLarsonAllen LLP29</p><p>STEP 3: FACILITATED</p><p>STAKEHOLDER SESSIONS</p><p>Fac ilitated Stakeholder Sessions</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 30/50</p><p>2012 CliftonLarsonAllen LLP30</p><p>Fac ilitated Stakeholder Sessions</p><p>Goals:</p><p> Test departments response to seeing the survey data in aggregate</p><p> Fill any data gaps or clarify items that required interpretation</p><p> Move to consensus, most likely scenario for each identified risk</p><p> Test the materiality of smaller risks identified</p><p> Explore rationale in assigning likelihood, timing, and financial impact</p><p> Test risks identified by other respondents to ensure they are:</p><p> Appropriately excluded</p><p> Void of any overlaps and disputes</p><p>Sample Session Agenda</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 31/50</p><p>2012 CliftonLarsonAllen LLP31</p><p>p g</p><p> Introduction and Perspectives of Participants</p><p> Review Committee Charge</p><p> Ground Rules</p><p> Risks vs. Opportunities</p><p> Insurable vs. Uninsurable Risks</p><p>Budgeted New Initiatives vs. Reserve Contingencies</p><p> Review of Survey</p><p> Agree on nature, likelihood, impact timing, and dollar exposure</p><p> Review proposed financial model conventions</p><p>Consider overlap with other operating units or departments</p><p> Identify additional reserve requirements</p><p> Agree on adjustments to survey results</p><p> Open Discussion and Wrap-Up</p><p>On to Phase 2</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 32/50</p><p>2012 CliftonLarsonAllen LLP32</p><p>Review of Current</p><p>Policy and Practice</p><p>Data Co llec tion</p><p>(via Survey )</p><p>Quantitative</p><p>Modeling</p><p>Draft PolicyRec omm endations</p><p>Finance Comm ittee</p><p>and Board Approval</p><p>Facilitated</p><p>Stakeholder Sessions</p><p>Phase 1: Identify risks to m ajorprog rams / business lines</p><p>Phase 2: Quantify identified risksand build appropriate polic y</p><p>IterativeFeedback Loop</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 33/50</p><p>2012 CliftonLarsonAllen LLP33</p><p>STEP 4: QUANTITATIVE MODELING</p><p>Quantitative Modeling</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 34/50</p><p>2012 CliftonLarsonAllen LLP34</p><p>Objective: To develop a data-driven financial reserve model that</p><p>quantifies the risks identified in surveys and stakeholder sessionsagainst NCFRs current reserve levels, and that provides NCFR with a</p><p>reasonably comprehensive yet practical tool to carry forward.</p><p>Result: A compilation of total financial risk that can be analyzed by</p><p>various characteristics reserve type, time horizon, likelihood, etc.</p><p>Reserve Model Schematic</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 35/50</p><p>2012 CliftonLarsonAllen LLP35</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 36/50</p><p>2012 CliftonLarsonAllen LLP36</p><p>STEP 5: DRAFT POLICY</p><p>RECOMMENDATIONS</p><p>Rec ommended Reserve Categories</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 37/50</p><p>2012 CliftonLarsonAllen LLP37</p><p>A reduction in members, membership dues, and/or assessment allocations due to</p><p>economic downturn.</p><p>Membership/ Assessment</p><p>Poor performance on conference and meeting activities from economic downturn,open access, political disruption, or disruptive technology.</p><p>Conference a nd Meeting Ac tivities</p><p>Poor performance on publishing activities due to a host of environmental,</p><p>competitive, and functional factors.</p><p>Publishing Ac tivities</p><p>Decreased investment returns caused by market volatility.</p><p>Market Volatility</p><p>Rec ommended Reserve Categories (contd)</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 38/50</p><p>2012 CliftonLarsonAllen LLP38</p><p>Repair, replacement, or expansion of major physical and technological infrastructure.</p><p>Cap ital Investment</p><p>Uninsurable litigation risks.</p><p>Employment Funds</p><p>Entity-wide strategic undertakings not yet executed.</p><p>Major Initiatives</p><p>Unclassified ongoing business risks.</p><p>Other Baseline Reserve Needs</p><p>Data Summary</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 39/50</p><p>2012 CliftonLarsonAllen LLP39</p><p>Projected requirement of $10 million at full risk valuation.</p><p>Recommended reserve categories are as follows.</p><p>Capital Investment $ 2,300,000 23%</p><p>Publishing Activities 2,300,000 23%</p><p>Market Volatility 1,700,000 17%</p><p>Employment Funds 1,000,000 10%</p><p>Major Initiatives 400,000 4%</p><p>Conference and Meeting Activities 400,000 4%</p><p>Membership/Assessment 400,000 4%</p><p>Other Baseline Reserve Needs 1,500,000 15%</p><p>Tota l $ 10,000,000 100%</p><p>Not All Risks Will Oc cur Simultaneously</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 40/50</p><p>2012 CliftonLarsonAllen LLP40</p><p>A reserve level of approximately $7.1M would capture all risks assigned</p><p>either a medium or high likelihood and a time horizon of 5 years or less.</p><p>accounts for 71% of all identified risks at full their valuation.</p><p>represents 52% of forecasted fiscal year 2012 operating expenses.</p><p>offers a subjectively reasonable bottom range.</p><p>LIKELIHOOD TIMEHORIZON</p><p>Rec ommenda tion</p></li><li><p>7/29/2019 Retooling Your Financial Reserves</p><p> 41/50</p><p>2012 CliftonLarsonAllen LLP41</p><p>Based on current risks and forecasted fiscal year 2012 operating</p><p>expenses of $13.7 million, NCFR should maintain reserve levelsbetween $7.1 million and $10 million.</p><p>Reserve Leve l% of</p><p>ForecastedFY12 Expenses</p><p>% of CurrentRisks at Full</p><p>Value</p><p>Amount Over /(Under) CurrentReserve Leve l</p><p>Ceiling $10 Million 73% 100%$1 Million</p><p>Over</p><p>Current $9...</p></li></ul>