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About A-Score
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While other financial
models have been introduced by Moody's and Standard & Poor's,
The Bonadio Group is the only group focused on providing a
financial scoring model specifically designed for non-profit
organizations. But why, you might ask, would we only focus on
non-profits? "For almost 30 years, I have heard and read reports
regarding the frustration of non-profit board members and
management's inability to comprehend the significance and
importance of non-profit financial ratios and operating
indicators. This frustration is most often expressed in the
aftermath of a non-profit's financial failure or bankruptcy,"
says Gerald Archibald, partner at The Bonadio Group. |
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One of the most
frequently asked questions in any business financial crisis is "Why
didn't we know this was going to happen?" or some
variation dealing with oversights of the past. The answers are
not readily available from financial statement audits or
internal operations reports. So what can an organization do to
provide this information on a timely basis to prevent a
financial crisis? |
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There are several
financial modeling and analysis solutions available, including
the well-known "Z-Score", but only A-Score can provide a
complete and detailed financial analysis for non-profit
organizations. Gerald Archibald and his class of articulate and
expert CPA's have developed a financial analysis model
specifically designed for non-profits called A-Score. "We have
tested the methodology on our existing client base to ensure the
broad applicability of the model", said Gerald Archibald. |
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So what is A-Score
and how does it work? |
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The A-Score employs
12 readily available financial ratios to develop a "grade" or
"score" as a predictor of financial stability for a non-profit
organization. Each ratio is assigned a weight in the calculation
which produces a score based on the familiar 100-point scale.
This tool achieves its best results when applied on an annual
calculation basis. |
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More important than
the absolute score developed for your organization is the
development of the score over a five-year trend analysis.
Improvement or deterioration in these ratios over a multiyear
period can be helpful to both agency management and the board in
establishing strategic goals and targets for the organization. |
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The A-Score model
uses a statistical, multi-tiered weighting methodology for each
ratio used and impacts the overall score based on three factors: |
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The
relative importance of the ratio to the overall score - high,
medium or low |
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The
desirable target level for each ratio; and |
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The
deviation of the actual ratio from the desirable target. |
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The 12 ratios used in
developing the A-Score and their respective importance are: |
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Days of cash on
hand representing the number of days that operating expenses
of the organization could be covered with existing cash
reserves. This ratio is of high value in the A-Score and
carries a desirable target of greater than 30 days. |
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Days outstanding
in accounts receivable represents the number of days'
revenue for the organization that is ties up in the process
of being paid. This ratio is of high value with a desirable
target of less than 55 days. The target in this case may
vary depending upon the payer sources for your agency and
their typical payment terms. |
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Current ratio is
a measure of liquidity and represents the relationship
between assets that are expected to be converted into cash
in the next 12 months (numerator) compared to liabilities
that need to be paid in that time frame (denominator). This
ratio is of high value with a target level of greater than
one-to-one. |
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Debt service
ratio is commonly referred to as "banker's cash flow." This
ratio calculates the ability of the entity to generate
sufficient cash flow to pay principal and interest on its
debt obligations. The desirable target is greater than 1.20
and has a high value in the A-Score calculation. |
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Ratios of net
surplus to total revenue is the last of the five high-value
ratios. The ability to generate surplus in the non-profit
sector is the lifeblood of financial stability. The federal
government is the only business enterprise that has
demonstrated the ability to survive decades of continuous
deficits. However, the government also has the advantage of
being able to print money. The desirable target for the
ratio is between 1 percent and 3 percent of surplus for
every dollar of revenue. Every industry has its own targets
for surplus in relation to revenue as well as components of
the non-profit industry (e.g., education vs. health care). |
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In addition to the five high-value ratios, there are five
ratios that given medium weight and two that are given a
lower weight in the A-Score. They are: |
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Days outstanding
in accounts payable |
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Total liabilities
as a percentage of net assets |
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Line-of-credit
balance as a percentage of total current assets |
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Percentage of
total revenue received from the largest single payer source |
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Revenue as a
percentage of total assets |
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Administrative
expenses as a percentage of total expenses |
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Fund-raising
revenue as a percentage of total revenue. |
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The first step in
assessing your organizations financial stability is asking how
many of these 12 ratios you currently monitor and report to your
board. If the answer is "none" or " a few," please consider
adding that information to your monthly management reports. The
second step would be to address changes necessary to improve the
organization's financial position. For assistance establishing
these ratios or how to use them please consider our A-Score
service program. |
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To try A-Score for
free check out our
Free
A-Score
Assessment Tool,
or purchase one of our specialized service packages. |
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About Us |
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Bonadio & Co., LLP
was founded in 1978 in Rochester, NY on the premise that
companies need expert financial services and advice in a
personalized manner at a reasonable cost. We've upheld
our dedication to providing such services, and have
grown into one of the largest Rochester-based accounting
firms with 150 employees and an impressive client base. |
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As a provider
of personalized consulting, auditing, and tax services,
Bonadio & Co., LLP is the "hidden asset" behind many
successful organizations. We are committed to forging a
strong, working partnership with each of our clients and
to helping them achieve their business objectives. Our
continual investment of time and resources in
professional continuing education, state-of-the-art
computer technology and extensive business relationships
is indicative of our commitment to excellence. |
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The Bonadio
Group, LLP (internationally known as Moore Stephens
Bonadio) is a member firm of Moore Stephens
International Limited. Moore Stephens is regarded as one
of the world's top twenty accounting and consulting
networks with more than 380 member firms and
correspondent offices in 80 countries |
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