Chapter 12
Financial Analysis:
Improving Your
Decision Making
Benchmarking
• Provides comparisons with the best
practices of other organizations
• Firms do not have to be in the same
industry; however traditionally
comparisons based within specific
industries
Common Size Balance Sheets
• One number is selected and then divided into all
other numbers in the statement
• Total assets are used as baseline figure
• Gross revenue or net revenue is used as basis
for income statement
• Presents trends over time
• Factors that may influence calculation
– Amortization
– Forward purchase contract
– Put option
Common Size Income
Statements
• Calculated in the same matter as common
size balance sheets
• Converts information into common basis to
detect trends in operations
Financial Ratio Analysis
• Liquidity ratios
– Current ratio
– Quick or acid-test ratio
• Activity ratios
– Accounts receivable collection period
Accounts receivable ÷ Average daily revenue
– Inventory turnover
Cost of goods sold ÷ Inventory OR Revenue from
inventory
Financial Ratio Analysis—cont’d
• Leverage ratios
– Debt ratio
– Long-term debt to total capitalization
– Debt to equity
• Profitability ratios
– Operating profit margin
• Net trade cycle
Not-for-Profit Comparisons
• Profitability ratios may not be calculated in
the same manner
• Balance sheets have unrestricted and
temporarily restricted fund balances
– Unrestricted fund balances are provided to
others to support the mission
– Temporarily restricted fund balances are used
for projects having a specific purpose
Not-for-Profit Comparisons—
cont’d
• Lack of standardization in terminology and
formats make comparison difficult
• Information is not as readily available
• Consolidated balance sheet and statement
of activity
– Current Ratios
– Activity Ratios
– Leverage Ratios
– Profitability Ratios
Cash on Hand
The amount of cash necessary to meet actual daily
cash operating expenses
Days of cash on hand =
__________Cash + Marketable securities__________
(Operating expenses – Bad debts – Depreciation)/365
Cash Flow Coverage
Measures how well able to cover required
payments
Cash from operations + Interest + Rent
Interest + Rent + Debt payments
Program Service Ratio
• Designed to determine what proportion of
a firm’s expenditures goes directly into its
program services
• Unique to not-for-profit organizations
Program service ratio=
Program services expenses
Total expenses
Additional Financial Ratios
• Ratios computed for either for-profit or notfor-profit entities
– Revenue per Employee: Net Revenue ÷
Number of Employees
– Net income per Employee: Net Income ÷
Number of Employees
– Price earnings ratio: Market price of stock ÷
Earning per common share
– Growth Rate of Revenue: Percentage Change
in Revenue from Previous Time Period
Additional Financial Ratios—
cont’d
• Ratios more applicable for not-for-profit
entities
– Percentage of deductibles: Deductibles ÷
Gross patient service revenue
– Reported income index: Net income ÷
Changes in fund balance
– Long-term debt to fund balance: Long-term
debt ÷ Fund balance