Financial analysis

1

• Financial analysis
• of social enterprises
• (NPO CO-OP)

2
Session Outline

• Why adjust the financial statements?
• The parameters of the social economy.
• Review of the main financial statements.
• What are these adjustments and how are they
  different from conventional financial statements?
• How are these adjustments made?
• Determining the capacity to meet financial
  commitments.

3
The financial statements do not value

• Any information on the enterprises social
  performance partial illustration of performance
• Difficulty presenting the non-monetary dimension,
  such as the fair value of the balance sheet
  assets, involvement of volunteers, donations of
  fixed assets

• Difficulty presenting the revenue coming from
  Government contracts in the results
• Difficulty standardizing the representation of
  the investments of the specialty funds
• No balance sheet item allowing representation of
  quasi-equity investments

4

• A picture that doesnt show the special features
  of a social enterprise

5
Why adjust the financial statements?

• Improve the chances of success for social
  enterprises
• Increase access to financing
• Evaluate the real capacity to meet financial
  commitments

6

• Financial statements based on an approach that is
• CONVENTIONAL instead of SOCIAL

7
Brief review

• Importance of financial statements
• Very revealing image of the enterprises
  financial position
• Allows the enterprise to establish short-term and
  long-term plans and control current operations
• Used for several external purposes lenders,
  government agencies for funding, employee
  representatives for union negotiations

8
Brief review

• Income statement summary between 2 periods /
  efficiency of operational management
• Balance sheet reflection of the financial
  position at a specific date
• Statement of net assets (NPO) Statement of
  reserve (CO-OP) measures the increase or
  decrease of assets or the reserve
• 4. Cash flows inflows and outflows of funds from
  operating, investing and financing activities

9

• Adjustment of the Income Statement

10
Social enterprises NPO CO-OP

• Revenues come from
• Sale of goods or services
• Revenue from government contributions
  contribution NPO
• grant or contribution CO-OP
• 3. Fundraising activities and other revenue

11
Adjustment of the income statement

• Why?
• To determine
• the recurring nature of the revenues
• the increase of the revenues (or not)

11
12
According to the social economy approach

• Recurring revenue
• Related to the organizations fundamental mission
• Delivery of goods or services at the market cost
• Recurring nature

13
Revenue reclassification

• Recurring revenue sale of goods or provision of
  services, government revenue related to the
  mission
• Non-recurring revenue grants from external
  contributions
• Other revenue not obtained directly from
  operations

14

• Reclassification of revenue
• Impact on self-financing ratios
• and on appraisal of
• operating surpluses (deficits)

15

• Before adjustment
• the non-recurring or final surplus (deficit)
  includes non-recurring revenue and expenditure
  items,
• on which the analysis of future results cannot
  be based

16

• After adjustment
• Income statement actual current operating
  revenues and expenditures
• Assess the medium and long-term economic
  viability as the basis for the financing decision

17

• Balance sheet adjustment

18
Balance sheet adjustment

• Why?
• Determine the enterprises real debt and equity
  structure
• (or net worth)
• How is the enterprise financed in the long term?

19
According to the Canadian Institute of
Chartered Accountants

• Long-term debt
• secured bank loan
• or specialty fund loans
• deferred contributions (NPO) or
• deferred grants / contributions (Co-op)
• deferred grants for
• acquisition of fixed assets
• Shares (Co-op)

• Equity (the enterprises net worth)
• Net assets (NPO)
• Net equity (CO-OP)

20
Reclassification of long-term liabilities

• Deferred contributions or grants
• ?
• are not repayable debts

• Certain types of loans
• long-term debt

21
Reclassification of long-term liabilities

• Deferred contributions or grants
• equity

• Certain types of loans
• patient capital
• (or quasi-equity)

22
Debt structure on the balance sheet

• Patient capital or
• Quasi-equity
• 2 conditions
• Generally with no security on the financed assets
• Principal repayment is often flexible

• Only the long-term portion of the long-term debt
  can be reclassified as quasi-equity
• Current liabilities will never be reclassified

23

• Except thataccording to Co-op Act
• According to section 149 of the Canada
  Co-operatives Act not required to redeem the
  shares if this jeopardizes its financial health
• The Co-op and its members flexibility regarding
  redemption by the issuer which allows the shares
  to be considered equity

24
Fair value of the assets

• In short
• Account for more flexible repayment commitments
• Identify the margin of safety and forbearance
  constituted in the liabilities
• Impact on the financial stability ratios

25

• The ratios

26

• The ratios
• about fifteen financial ratios for financial
  analysis
• 3 categories of ratios
• Liquidity indicators
• Financial stability indicators
• Management indicators

27
Analysis of resultsPercentage ratio - Co-op

28

• Meeting its financial commitments

29

• THE question asked by every lender
• What are the generated funds?

30
The capacity to meet its financial commitments

• Principal repayment of the current and future
  debt
• Replacement of current assets
• Purchase of new fixed assets
• Redemption of membership and preferred shares
  (Co-op)
• Working capital necessary for development

31
Financial resources

• Internal or external
• Funds generated from operations
• Grants for acquisition of fixed assets
• New term borrowing
• New capitalization loans
• Issue of membership and preferred shares (Co-op)

32
Appropriate financing

• Matching Scenario
• High-Risk Scenario
• Risky Long-Term Scenario

33
Equity financing

• Permanent capital
• Equity of a Co-op or net assets of an NPO
• Obtained from members, philanthropic investors,
  donors
• The more equity an enterprise has, the more
  leverage it obtains

34
Patient capital (quasi-equity) financing

• Patient capital
• Comes from investment funds for capitalization or
  development purposes
• Little availability outside Quebec

35
External financing

• Long-term / short-term borrowing
• Sectoral
• Technical support

36

• The key
• maintaining the balance
• between debt and internal financing

37

• Thank you!