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Adele Johns Executive Officer Community Compass Inc Research student International Graduate School of Business University South Australia Director Adssi Home Living Australia Better Boards Conference 2013 ID: 244137

board financial current income financial board income current ratio research boards governance analysis profit members australian data management organisation

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Slide1

Presenter: Adele Johns Executive Officer: Community Compass Inc.Research student: International Graduate School of Business, University South AustraliaDirector: Adssi Home Living Australia

Better Boards Conference 2013

Board Complexities and the (

dis

)Engagement of Financial DataSlide2

AcknowledgementAcknowledgement to countryIntroductions background, purpose, outcomesSlide3

Non profit sector in Australia is worth at least $70 billionIt is Australia’s principal employer with more than 600,000 employeesIt is reported that charities employ about 7% of the workforce and account for 5% of gross domestic product – making the sector equivalent in size to

agriculture

Not for Profit Productivity Commission Report 2010 – Peter Fitzgerald.

Setting the sceneSlide4

Of the 59,000 non profits that are employers the CEO/Manager position works under the governance structure of a board.Requires Executive positions to be held by the board, the financial executive position known as the Treasurer

.

All board members have a legal fiduciary responsibility

Governance structureSlide5

Australian Charities & Nonprofit Commission:“Governance is the process, activities and relationships that make sure your organisation is effectively and properly run.”Governance for Good: The ACNC’s Guide for charity board members. www.acnc.gov.au/ACNC/manage/tools/ACNC/edu/tools Governance Good Governance Guide - ACNCSlide6

Strategic planning – big picture thinkingSetting the Vision

Setting the objectives to meet the key purpose of the organisations existence

Ensuring sustainability and viability – ability to meet all pecuniary liabilities

Certify compliance and accountability matters of the organisation are adhered to

Role of GovernanceSlide7

Maintain effective record keeping and monitoring of organisational objectives Audit requirements dependent on level of income received.Australian Taxation obligations – Goods and Services tax, Withholding taxes Fringe benefits tax

Funders requirements – philanthropic or Government funds, State and Federal

Statutory ComplianceSlide8

The purpose of this research is to highlight the complexities of board dynamics and engagement of financial management providing an insight as to ‘how’ boards are currently engaging in financial management practices and alternate models.  To identify if Boards of non profit organisations are insufficiently engaged with sound financial management practices.  To observe Board members

(lack)

confidence in asking appropriate questions regarding financial

matters.

Determine the level of understanding of financial reports.

Research purposeSlide9

My observation is, the member of the board responsible for financial matters, usually called the Treasurer, presents a report which is only given moments of ‘air-time’, before the agenda is quickly whisked along to matters of general business. The treasurers report and financial statements are either inappropriately set out, condensing financial data to meaningless reports/spreadsheets, rather than formal financial statements. This could be the result of lack of interpretation and understanding of accounting standards and formats but there are a range of other issues including the capability of the board to deal with financial issues.

Research purposeSlide10

This research provides the opportunity to delve deeper into the complex nature of board, unveiling boardroom capacity in financial management mattersObservation of member participation in their engagement with financial data, report layouts and time allocated for exploring the financial performance and position

Recognise the human dynamics at play with the theoretical perspective of Ralph Stacey

.-

Stacey

, R. and Griffin, D., (2005). “Complexity and the Experience of Managing in Public Sector Organisations”. London,

Routledge

.

MethodSlide11

How could non profit boards improve engagement in financial management?Subsidiary questions… What issues/complexities arise due to the relationship(s) between the CEO and the board? The power of influence – Ralph Stacey – Complexity Theory.The research questions posed… Slide12

Zahara and Pearce (1989) have stated, “There are countless lists of what boards should do. Yet evidence of ‘what boards actually do’ is not well documented… there is a pressing need to document what boards actually do: (pp325 – 326). Zahara, S.S & Pearce, J.A., (1989) “Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15,291-334.Slide13

Board members often lack skills in understanding financial management reportsMeaningless reports are being

presented

Large asset purchase decisions being made by members with little understanding of the financial position or future forecast

Cash flow forecasts either being

non-existent

or provided with limited

information and understanding

Current observationsSlide14

Movement away from ‘Community’ based committees/ boards being replaced with ‘Skills’ based board membershipAgenda set and led by internal staffLongevity of membership linked to ‘power’ by either board or staff depending on term.

Current observationsSlide15

Strategic planning led by staff, with limited input by BoardDominance of position linked to longevityNew members have silenced voices

Selection of board members led by CEO/internal staff

Current observationsSlide16

Shielding - Lightbody M (2000) – agenda set by internal staff creating opportunity to shield information due to differentiating between operational and governance activity of the board.

Dominance and power observed through robust conversations, (or lack thereof), linked to longevity of membership and skill

Renz,D

(2001

),

DiscussionSlide17

Ralph Stacey lens – the interplay of human dynamics and relating that are apparent around the board room tableTo Stacey an organisation is not a system, but a set of inter-connections.

Complex nature of humans, a set of interactions and relations

DiscussionSlide18

Two organisation observed – both Company Ltd by Guarantee reporting compliance to Australian Securities Investment Commission (ASIC)

Further research to broaden the scope of services observed, diversifying entity type and governance models

Limitations of current research:Slide19

Investigate board member selection practicesLittle research has been conducted into the composition of not for profit boards in Australia.Limitations

Slide20

Organisation 1 ( Org 1)Organisation 2 (Org 2)

Entity Type:

Company Limited by Guarantee

Company Limited by Guarantee

Reporting to:

Australian Securities Investment Commission (ASIC

)

Australian Securities Investment Commission (ASIC

)

Financial Reporting compliance:

Corporations Act 2001.

Australian Accounting Standards

Board

(AASB)

Australian Taxation Office (ATO)

Corporations Act 2001.

Australian Accounting Standards

Board(AASB

)

Australian Taxation Office (ATO)

Current Board Membership

7

7

Membership mix

Staff representatives, Project Volunteers and Community members

Directorship volunteer capacity – no remuneration

Note CEO holds position of Company Secretary

Community or Skills based board

Mixed

Transitioning from Community representatives to Skills based board

Funding source

70% Government grants

77% Government grants

Total revenue

$1,021,000

$8,254,000

Interest Income

$14, 648 – 1.4% of total revenue

$131,563 – 1.6% of total revenueSlide21

What is the future sustainability of the non profit sector when research identifies such gaps. With accountability mechanisms and compliance increasing, coupled with a shrinking pool of funds/resources/volunteers – how will the development of government intervention – ACNC impact the sectors sustainabilityHow can boards strengthen their skills and understanding of financial management without loosing the value of community based membership?Further research questions…Slide22

Bridging the gap..Presentation of financial dataSources of incomeRisk – dependenciesOutgoingsCritical cost areasMonitoring and tracking trendsSlide23

Data Analysis for effective decision makingWhat is the ‘back-story’ the financial reports reveal about your serviceHow do we portray this story to other members

Strengthening/empowering the board with informative data to aid in effective decision makingSlide24

Where we are at….. The accounting conceptsBalance sheet itemsUnderstanding the financial position of the organisationUnderstanding the performanceInflow and outflows of funds… vulnerabilities/reliance's/ diversifying income..

Moderating expenditure.. Maximising efficienciesSlide25

Where do we want to be.. Linking strategy to financial reporting…How do we know what we want to measure… Ratio analysis – snap shot of data, showing big picture outcomes.. D

ashboard

of key performance indicators

Slide26

Presentation of financial dataPie chartsTrendsRatio analysisKey critical cost areas – what are we trying to measure / monitor ?Are reports aligned with strategyKey critical sources of income How do we manage these ?Slide27

Project analysisSlide28

Pie Chart/ Sources of IncomeSlide29

Tracking TrendsSlide30

Ratio AnalysisGross Profit Margin Gross Profit Income- % of each income dollar is gross profit- determines the adequacy of direct income/selling priceSlide31

Ratio AnalysisOperating Expense RatioTotal Operating Expense IncomeIndicates the % of each income dollar absorbed by operating costsHelps control operating expenses(Lower the better )Slide32

Ratio AnalysisWage cost ratioWages x 100 IncomeLower the better, indicates the level of wages to incomeSlide33

Ratio AnalysisCurrent RatioCurrent AssetsCurrent LiabilitiesMeasures cash positionAssets available for every dollar of current liability(Higher the better)Slide34

Ratio AnalysisLiquidity or Quick RatioCurrent Assets less stockCurrent Liabilities less overdraftBetter measurement of cash measures liquid (cashable) current assets(Higher the better)Slide35

Ratio AnalysisCash reserves in weeksCash – Grants in AdvanceTotal Expenditure / 52 (weeks)Indicates how many weeks an organisation could continue to operate if all income was ceased immediatelySlide36

Thinking differently about the presentation of financial dataMonitoring and review of critical income and cost areaImportance of governance and effective reporting to enhance/support effective decision making aligned with strategyImportance of a robust induction process for new board membersUnderstanding the complex nature of board dynamics.Take homes…Slide37

Tips and Tools available for downloadwww.betterboards.netwww.communitycompass.org.auAdele JohnsCommunity Compass Incadele@communitycompass.org.auTo wrap…