This column will continue my attempt to convince tax-exempt organizations that traditional monthly financial statements, without dashboard analysis, are a failure in terms of management and board communication, transparency, and accountability. My prior columns (one of which ran in the 11/12/18 issue of CNYBJ, titled: “Using financial ratios to detect problems in nonprofits”) were devoted to the extraordinary benefits that can be derived from the development and effective use of dashboards. I believe that developing or enhancing dashboard reporting for your organization should focus on the following eight quadrants:
1) Balance sheet financial ratios
2) Operating ratios and performance indicators
3) Salary and fringe benefit ratios and metrics
4) Billing, program revenue, and units of service
5) Human resources — recruitment, retention, turnover, and vacancies
6) Regulatory and corporate compliance reporting
7) Cash flow and capital purchases
8) Projected actual to budget variances and action steps required
The recent columns focused on balance sheet financial ratios and operating ratios and performance indicators. This column will address the following:
• Salary and fringe-benefit ratios and metrics
• Billing, program revenue, and units of service
•H uman resources — recruitment, retention, turnover, and vacancies
Salary and fringe-benefit ratios and metrics
The third of our eight dashboard quadrants may be the most important of all, since 65 percent to 75 percent of expenditures for most tax-exempt organizations fall into the salary and benefit categories.
The dashboard information selected for each quadrant must be tailored to your organization. The suggestions made in this column are not intended to be all-inclusive. In fact, it would be surprising to me if your organization’s management and board would not ask for additional data elements as well as eliminate one or more of my suggestions.
In the area of salary and fringe-benefit ratios and metrics, I believe the following dashboard data points are appropriate. Each of the following can be compared to your annual budget expectation.
a) Number of full-time equivalent (FTE) employees. If appropriate, you can provide both full-time and part-time employee statistics.
b) Total payroll incurred / accrued during the month. This information may be more useful if presented by program service area / department as well as administrative functions.
c) Total fringe benefits, which would include health insurance, workers’ compensation, and employer retirement cost.
d) Overtime hours paid and total dollars expended.
e) From the information provided above, the dashboard quadrant can include the following valuable information:
i. Fringe-benefit costs as a percentage of salaries.
ii. Health-insurance costs per FTE.
iii. Retirement costs per FTE.
iv. Workers’-compensation costs per FTE.
f) Employee-incentive costs can be presented if your organization has a monthly, quarterly, or annual policy of lump sum payment distributions to reward desirable performance and/or achievement of performance goals.
g) Finally, subject to your editorial modifications, the total amount of vacation and holiday hours together with total expense for paid time off provides far more valuable information than your traditional monthly financial statements.
Billing, program revenue, and units of service
The fourth quadrant is also important, since we all have heard the comment that “cash is king.” Prompt billing and monitoring of service volumes and your receivable collection practices are what convert receivables into vital cash flow. This quadrant will most likely require the most significant editing to develop the most important information relevant to your program-services revenue, as follows.
a) ˇotal revenue recorded by program for the period in comparison to budget.
b) Total accounts receivable outstanding at month-end.
c) Aging percentages of outstanding accounts receivable by time duration from billing date (e.g., 30, 60, 90, over 120, etc.).
d) If your organization has any amount of backlog in processing claims for all services rendered during the period, this quadrant should include the total dollar value of services provided but not billed.
e) Total amount of cash deposits received and processed during the period. This amount, when compared to total revenue above, will indicate whether total receivables are increasing or decreasing.
f) While not directly related to the focus of this quadrant, it is important to report the total amount of check disbursements, which will indicate, when compared to deposits, whether a cash basis surplus or deficit was generated for the period.
g) Service volumes and units of service by program component in comparison to budget represent the most important statistic to monitor during the year. Accordingly, current month and year-to-date statistics should be presented.
h) If your organization provides health care, human services, and/or social supports, this quadrant should include information regarding service-provider productivity in comparison to target expectations.
The preparation and processing of check disbursements without mailing is referred to as “held checks.” This procedure represents an internal control weakness and should be avoided. However, if a held check procedure is used by your organization, the total amount should be reported in this quadrant.
Human resources — Recruitment, retention, turnover, and vacancies
In my more than 40-year career serving and advising tax-exempt organizations, I must now disclose my most significant frustration with traditional internal or audited financial statements. That is, no one can determine the total cost of employee turnover from traditional financial statement reporting. There is no “cost of turnover department,” and as a result, one of the most significant costs to any tax-exempt organization is recorded in five or more distinct cost accounting classifications. Rarely, if ever, are these costs summarized for management and board awareness.
The following quadrant recommendations, if adopted, will eliminate my most significant career frustration. The first step in accumulating the cost of turnover is to identify the costs incurred related to a single employee being hired as well as employees who are voluntary or involuntary terminations.
Based on calculations and estimates that we have made for our clients, the cost of a single employee turnover in most tax-exempt organizations ranges between $3,000 and $10,000. That is why, with turnover frequently exceeding 10 percent, the information in this quadrant can produce extraordinary value for your organization in terms of actionable procedural improvements. In order to properly assess the cost of turnover, an organization must determine and report the following information in this quadrant:
a) Employee FTE turnover during the reporting period.
b) Number of new FTE hires added.
c) Current number of vacant positions by program.
d) Total number of actual FTEs vs. budgeted FTEs, including a calculated vacancy percentage.
e) Overtime costs incurred during the reporting period due to vacancies.
f) ˇraining and orientation costs for each new hire.
g) Dollar impact of mandated minimum- wage increases. This can include incremental salary costs resulting from “salary compression” for longer-term employees.
Management is in the best position to identify and determine the estimated cost of employee turnover. You will note that I have not referenced the human resources department in any of the above quadrant recommendations. Obviously, the HR department is responsible for more than just recruitment and retention. The most productive approach in estimating the approximate costs of human resources devoted to addressing turnover is to obtain the opinion of your HR director.
Finally, please be aware that all information provided in any dashboard quadrant can be compared to either or both a targeted benchmark or the organization’s budget expectation.
Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at the Bonadio Group. Contact him via email at email@example.com