Responding to a Request for Services – Financial Considerations

1. Responding to a Request for Services – Financial Considerations • Jeff Simper This presentation represents the opinion of the author. The contents are for general information only and are not intended as professional advice. The author expressly disclaims all liability for any loss or damage arising from reliance upon any information in this presentation

2. Agenda • Understanding Financial Statements • Budgeting and Forecasting • Preparing Your Tender Proposal • Some examples

3. Understanding Financial Statements Income and Expenditure Statement Statement of Cash Flows Balance Sheet

4. Balance Sheet A snapshot of the financial position of an organisation at a moment in time. • Assets Items of value owned by the organisation • Liabilities Amounts owed to external stakeholders • Equity The accumulated funds from the operations of the organisation

5. Income and Expenditure Statement A summary of an organisation’s income and expenses over a specific period of time. • Income • Expenses • Gross Profit • Net Profit • Segment Reporting

6. Statement of Cash Flows A summary of money coming into and going out of an organisation over a specific period of time. • Operating Activities • Investing Activities • Financing Activities

7. Financial Ratio Analysis Financial Ratio Analysis will help to monitor the financial health of your organisation • Liquidity ratios • Solvency ratios • Profitability benchmarks • Operational benchmarks • Management Ratios • Balance Sheet Ratios

8. Financial Record Keeping • Chart of Accounts • Processing of Transactions • Management Reporting • Segment reporting • Allocating overheads

9. Budgeting and Forecasting Budgeting and forecasting represent the future financial plan for your organisation. They should be • Prepared against strategic goals • Aligned to financial reporting systems • Regularly compared against actual results • Be a trigger to makes changes if results indicate budgets will not be met • Provide direction for preparing your tenders

10. Income and expenditure Budget Budgets may be prepared using the following methods Incremental Analysis • Previous years activities are used as the basis for preparation Zero Based Budget • Where all the financials are prepared without consideration of past activities Combination of both • Always a need for balance of effort and benefit

11. 10 Steps to preparing your budget • Review the Strategic Plan and note the expected Outcomes and Service Model for the year • Separate the activities into existing and new • Document all the assumptions that have been made to develop the budget • Review long term trends in your financial results • Review the previous years income and expenditure statements

12. 10 Steps to preparing your budget Cont. • Separate income and expenses by activity or program • Determine the basis and allocate overheads to programs • Combine all income and expenditure into one statement and review the overall result • Consider amendments to pricing, expenses or your service model • Present to your board or management committee for approval

13. Budgeting for Wages. Understanding Salary on Costs - Leave Provisions • Annual leave • Annual leave loading (if applicable) • Long service leave • Sick leave • Public holidays • Parental leave • Compassionate, family, study and other leave entitlements

14. Budgeting for wages Cont. Other Salary costs • Workers compensation • Superannuation • On-Call allowance • Travel allowance • Recruitment costs • Shift penalty (Including additional annual leave) • Need to replace staff while on leave • Payment on termination

15. Understanding Overheads It is important to understand • The impact of growth or decline of organisational activities on total overheads expenses • The impact of growth or decline of organisational activities on the allocation of overhead expenses. • Drivers for overhead allocation

16. Cash Flow Forecasting A cash flow forecast will predict an organisations capacity to maintain adequate cash to support its operations. A cash flow differs from an income and expenditure forecast in that it takes into account : • The timing and revenue payments and receipts • The impact of non cash transactions • The impact of capital transactions

17. 6 Steps to preparing your cash flow projections. • Document your assumptions • Forecast the timing of all income receipts • Forecast the timing of all expenses payments • Adjust for non cash transactions (e.g. depreciation) • Forecast the timing of all capital transactions • Prepare cash flow forecast by analysing budget and forecasts above

18. Why you need to budget for a surplus “Sustainable service delivery refers to the ability of an organisation to continue to provide services over a long term period “ And “Depends on the ability of that organisation to secure funds to meet the full cost of service delivery, attract and retain human capital and manage operational risk” Delivering Community Services in Partnership Policy

19. Why you need to budget for a surplus Cont. Building in a margin for sustainability • Margin for Risk • Margin for Innovation • Margin for Capital Investment • Replacement value of existing assets • Purchase of new assets

20. Preparing your tender to deliver services Context of Outcome Based Accountability Activities Outcomes Value Proposition Costs Price

21. Preparing Your Tender Cont. • Measuring and understanding existing costs • Understanding “Unit Costs” • Providing for future costs • Valuing of notional costs • Impact on pricing of services

22. Preparing Your Tender Cont. Understanding your existing costs • Salary and Wages • Understanding Overhead Allocations • Reliable Records

23. Preparing Your Tender Cont. Issues to Consider in Developing Unit Prices • Preparation time • Travel time • Contract administration • Factoring in cancellations • Other direct costs per unit • Share of overheads per unit

24. Preparing Your Tender Cont. Providing for Costs that may be Incurred in the Future • Severance and redundancy obligations • Potential additional accommodation costs • Repairs and maintenance • Additional costs when terminating a lease • Run-off insurance implications • Marketing and reputation issues when closing a service • Cost of Measuring and reporting Outcomes

25. Preparing Your Tender Cont. Placing a value on in-kind or notional costs • Value of volunteers • Free or concessional rent • Concessions provided for services delivered • Finance cost of funds invested in the business

26. Pricing Your Services. Strategic and Organisational considerations • Support for other organisational services • Establishing a new service • Market demand for services • Experience and reputation • Quality of service

27. Pricing your Services Cont. Cost issues in determining your price • Recovery of current costs • Consider existing infrastructure, unused capacity and overheads allocations • Consider the value of notional costs • Consider future cost contingencies • Cash flow considerations

28. Pricing Your Services Cont. Building in a margin for sustainability • Margin for Risk • Margin for Innovation • Margin for Capital Investment

29. Responding to an open price tender. Open Price Tender. • Understand Actual Costs • Full costs of Salaries • Understand Overhead Allocation • Understand your in-kind value items • Understand future cost obligations • Determine your Price • Calculate your costs • Adjust for in-kind support • Adjust for future cost obligations • Adjust for margin • Adjust for Strategic/Organisational Issues

30. Responding to a fixed price contract. • Change the quantity of activities– managing volumes • Adapting the service model – activities • Adapting the services model – quality • Adjusting the margin – per your pricing policy • Implement supplementary fees if feasible • Develop alternative sources of income • Understand the consequences of decisions

31. Presenting your value proposition. • Recognise that funding agencies have budget limitations, service expectations and accountabilities • Demonstrate the value of your proposal • Demonstrate the effectiveness of your activities in delivering outcomes • Need to ensure your long term organisational viability

32. Consider some examples . The Kingston Family and Neighbourhood Centre receive annual funding of $50,000 from the Department for Communities to provide the Tim Tam Community and Neighbourhood House Development Service (‘purchased service’). The purchased service model involves a mix of programs and activities which are provided by the organisation (ie: the organisation is wholly responsible for all aspects of service delivery) and other providers (whereby the organisation provides the premises only). The organisation charges fees for external providers to use the premises. The price is determined according to whether the provider is government, for profit, not for profit or a community group. The organisation is located in a middle-class area. On occasions, it may charge participants a small fee to cover costs but it does not exclude people who are unable to pay this fee. The organisation is located in premises that are owned by the department however under the Deed of Licence, it is responsible for certain items of maintenance. The purchased service is delivered by a family support worker, however the Centre Coordinator also provides supervision and support to this worker, and an administration officer also assists.

33. Consider some examples . • How do you cost a specific workshop or program (eg six week parenting program) – that is (a) provided with funding from the purchased service or (b) facilitated by an external provider where there is no cost to the organisation • What if the service was based on a coordination model whereby it did not provide actual services, but coordinated activities only • What if the service were staffed by a single coordinator alone who is responsible for both management and administration of the purchased service

34. Consider some examples . • What if the service was provided by an organisation that had several funding streams and this funding was a contribution toward an overall service delivery model. • What if the service included an outreach component (ie provision of services outside the centre premises) • What if the service was located in a regional or remote area • What if the organisation provided the purchased service from different venues in the same area or different towns

35. Tax Concessions– Available to NFPs • Organisation Status • Check on abr.busines.gov.au • Income Tax • Fringe Benefit Tax • GST Concessions • Gift Deductions • State Tax Concessions • Preparing for the ACNC