Drug and Alcohol Office
WANADA FORUM
2 May 2012
Sustainable Pricing
Tonia Swetman and Jon Petelczyc
Presentation Aims
To provide an awareness of organisational sustainability and
pricing to:
 Develop your organisation’s capacity to determine a
sustainable price for a community service.
 Assist you to prepare an offer as part of a request for
tender process.
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Objectives
At the conclusion of the session, you should be able to:
 Understand the concept of organisational sustainability
and factors that impact organisational sustainability.
 Apply financial governance principles to your own
organisation and identify broad areas for improvement.
 Identify the key steps in responding to a tender with
regard to sustainable pricing.
 Consider alternative frameworks for developing a pricing
model for variable outputs.
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Objectives
At the conclusion of the session, you should be able to:
 Appreciate the importance of tracking and monitoring
service delivery and costs to ensure sustainability.
 Appreciate the value in conducting internal and external
audits.
 List major threats to organisational sustainability.
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What is Sustainability?
Sustainability is the ability to continue a defined behaviour indefinitely.
Wikipedia
Where a system is capable of being maintained at a steady level
without exhausting natural resources or causing severe ecological
damage to sustainable development.
Collins English Dictionary – Complete and Unabridged© HarperCollins Publishers
1991, 1994, 1998, 2000, 2003
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Sustainability
Sustainability is the attribute of a system that has the internal
capacity to:
 achieve the sustainability of its internal workings;
 catalyse the achievement of the sustainability of its external
environment; and / or
 adapt and survive no matter how unsustainable the external
environment might be (ie. it can always 'ride the waves' down
as well as up).
This is an attribute that can only be aspired to by 'living' systems species, ecosystems and societies.
Philip Sutton, Green Innovations Inc
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Sustainability
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Organisational Sustainability
 A sustainable state is one in which utility (for consumption) is nondeclining through time.
 A sustainable state is one in which resources are managed so as to
maintain production opportunities for the future.
 A sustainable state is one in which the (natural) capital stock is nondeclining through time.
 A sustainable state is one in which resources are managed so as to
maintain a sustainable yield of resource services.
 A sustainable state is one which satisfies minimum conditions of
(eco) system stability and resilience through time.
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Factors that impact on Organisational
Sustainability
Economic or financial sustainability, while critical, is only one
aspect of an organisation's overall sustainability.
Organisations must also build a broad range of organisational,
technical, and human capacities.
Many factors influence the sustainability of an organisation
including the operating environment, such as:
 national and local politics and policy,
 the activities of other organisations,
 the availability of skilled personnel, and so on.
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Factors that impact on Organisational
Sustainability
Corporate Governance
Authority, accountability,
stewardship, leadership,
direction and control
Characterised by ongoing
monitoring and evaluation
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Corporate Governance
Effective corporate governance helps an organisation to
achieve its objectives and desired outcomes and fulfil its
obligations through sound:

strategic and business planning;

risk management;

financial management and reporting;

human resource planning and control; and

compliance and accountability systems.
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Corporate Governance
Conceptual representation of the four categories of good governance features.
Corporate Governance Handbook for Company Directors and Committee Members 2nd Edition, June 2010 The Department of
Families, Housing, Community Services and Indigenous Affairs, Australian Government.
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Corporate Governance Principles
ASX Guidelines
 Recognise clear roles and responsibilities;
 Structure the Board to add value;
 Ethical and responsible decision making;
 Integrity in financial reporting;
 Timely and balanced disclosure;
 Respect the rights of members;
 Recognise and manage risk; and
 Renumerate fairly and responsibly.
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Budget Cycle
Control
• Take corrective
action
Monitoring
• Compare budget to
actual revenue,
expenditure
• Investigate
variance
Planning
• Develop goals,
objectives
Development
• Estimate cost of
attaining each goal
• Project revenues
Implementation
• Record budget in
accounting system
General Ledger
P L A N N I N G P H A S E
C O N T R O L P H A S E
Financial Monitoring and Management
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The Challenge for a Not-for Profit
Balancing the pursuit of community service objectives (the mission)
with business objectives.
A not-for-profit service provider organisation needs to achieve
commercial outcomes as well as vocational, advocacy and other
support outcomes for its clients / members.
These dual roles can, however, create conflict when it comes to
decision making.
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The Financial Imperative
A strong financial capacity provides the means to achieve a not-forprofit’s mission.
 The focus on vocational, advocacy and other support outcomes
can sometimes be at the expense of business objectives of an
organisation.
 In turn, pursuit of community service outcomes can then
threaten the financial viability and sustainability of the
organisation if the dual objectives are not properly balanced.
 Effective corporate governance can assist in achieving this
balance.
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Consider
What elements would you consider when
determining a sustainable price?
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Sustainable Pricing
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Definition of a Sustainable Price
A sustainable price for a community service includes all real and
anticipated costs incurred from:
 delivering;
 administrating;
 monitoring; and
 evaluating the service
at a pre-determined quality, for a specified time period plus a
component for profit and contingencies, less any programme
subsidies or grants to be received.
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Definition of a Sustainable Price
A sustainable price also considers organisational strategic
initiatives, current and planned, where relevant costs are allocated
across relevant programmes.
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Cost Analysis – Why?
To:
 Identify and prioritise cost saving initiatives.
 Fundraise from donors to cover the true costs of delivering a
programme.
 Price the community service at a level that covers the true costs
of providing the service.
 Report the true costs of a programme.
 Make adjustments to programme delivery, if necessary.
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Costing Considerations
Before the costing exercise:
 Determine objective in costing (outcome / output).
 Define the service.
 Identify the processes associated with the service delivery.
 Determine the time period.
 Consider ALL cost components (inputs) in the accounting
system.
 Understand the difference between cash and accrual
accounting.
 Consider costs not identified in an accounting system.
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Categories of Costs
 Direct
 Indirect (or overhead costs)
 Capital related costs
 Depreciation
 Taxation
 Opportunity Cost
 Services and resources received free of charge
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Cost Drivers:
Allocating Indirect Costs
 The building blocks for unit costs.
 A cost driver has an effect on costs.
 For example, in service provision, the number of hours for
providing care is a cost driver for labour.
You will need to determine your indirect costs allocation method,
based on the cost driver.
You must apply your model:

Accurately

Consistently
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Calculating Costs
Total Cost
Direct + Indirect + Other Costs + Other Factors = Total Cost
Unit cost
Total Cost divided by number of units
Capturing Costs
 Historical Data
 Research
 Assumptions (based on trends and other factors)
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Top-Down and Bottom-up
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Pricing Schedules
EXAMPLE 1 : LUMP SUM
SERVICE
DESCRIPTION
UNIT (e.g.
hourly, daily,
weekly)
ESTIMATED
USAGE
PRICE/RATE
(Inc GST)
Total Cost
(Inc GST)
(insert rows as
necessary)
TOTAL
(Lump Sum)
EXAMPLE 2 : SCHEDULE OF RATES
SERVICE DESCRIPTION
UNIT (e.g. hourly,
daily, weekly)
PRICE/RATE
(Inc GST)
(insert rows as necessary)
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Completing the Tender Document
• Define the community service delivery programme
to be costed
Step 1
Step 2
• Determine community service delivery scope
• Consider the Request for Tender / Expression of
Interest (Ask the nine questions)
• Consider and determine pricing options
Step 3
Step 4
• Identify / collect data for the relevant time period
and modify source and format of data, where
necessary
• Allocate direct costs by community service
programme
• Identify cost drivers
Step 5
• Allocate indirect cost
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Completing the Tender Document
Step 6
• Allocate 'other costs' (capital related, opportunity cost,
depreciation, amortisation, taxation, outcomes
measurement)
• Check data - accuracy and logical soundness
Step 7
Step 8
Step 9
• Assess results by conducting a bottom-up costing
exercise and consider implications for the organisation
• Consider market conditions and organisation objectives
• Finalise Pricing
• Demonstrate value for money (include services and
resources provided free of charge)
• Consider the tender evaluation process to ensure you
have allocated appropriate detail / emphasis relevant to
Step 10 the weightings.
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Costing Model Example
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Financial Reporting and Recording
 Recording Costs
 Tracking Costs
 Monitoring Price Sustainability
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Financial Information Tasks and Objectives
‘Accounting’
Collection
 Collection (in money terms) of information relating to transactions
that have resulted from operations.
Recording and Classifying
 Recording and classifying data into a permanent and logical form.
This is usually referred to as “Bookkeeping”.
Summarising
 Summarising data to produce statements and reports that will be
useful to the various users of accounting information - both external
and internal.
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Financial Monitoring and Management
Interpreting and Communicating
 Interpreting and communicating the performance of the business to
the management and its owner.
Forecasting and Planning
 Forecasting and planning for future operation of the business by
providing management with evaluations of the viability of proposed
operations.
 The key forecasting and planning tool is the budget.
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Accounting System Components
 People
 Procedures and instructions
 Data
 Software
 Information Technology infrastructure
 Internal controls and security
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Financial Monitoring and Management
Accounting
Financial
Accounting
Management
Accounting
External Users
Set Report
Internal Users
Custom reports
Government
Agencies
Customers
Donors /
Investors
Directors and
CEO
Line Managers
Employees
Other
Stakeholders
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What is an audit?
External Audit: For External Stakeholders
The purpose of an external audit is to form an independent view
on whether the information presented in a financial report, taken
as a whole, reflects the financial position and performance of the
organisation at a given date, for example:
 Are details of what is owned and what the organisation owes
properly recorded in the balance sheet?
 Are profits or losses properly assessed?
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What is an audit?
Internal Audit: For Internal Stakeholders
Internal auditing is an independent and objective assurance and
consulting activity designed to add value and improve an
organisation's operations.
It helps an organisation accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance
processes.
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Types of External Audit Opinions
√
Unqualified
x
Qualified
Adverse
Disclaimer
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Financial Sustainability Threats
 Unrealistic service targets – trying to deliver more than is
sustainable (quality and output)
 Under pricing
 Over pricing
 Inadequate / poor financial recording and reporting
 Inadequate / poor management and monitoring
 Failure to have regular independent audits
 External factors (competition, demand, reputation, etc)
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Costing and Pricing
Questions?
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