Analysis of RIBA Using Financial Ratios - Case Study Example

ANALYSIS OF RIBA USING FINANCIAL RATIOS Letter of Transmittal Dear, This report on the subject representing an ‘Analysis of RIBA using financial ratios’ explores the varied aspects of the use of financial statements to understand the performance of a charity. It uncovered that through the use of selected financial metrics represented by current ratio, asset turnover ratio, viability ratio, and fundraising efficiency an understanding of the performance of a charity could be examined. Each of these metrics delved into different aspects of RIBA’s performance that revealed the charity has taken steps to enhance its position by reducing its reliance on donations by using a self-funding measure. This is a key aspect of charitable operations where they are exposed to fierce competition for donations that also have economic and other external variables that can negatively impact their charitable activities. The key findings of this report are: RIBA has implemented alternative revenue generation steps since 2014 that increasingly rely on membership subscriptions, income from investments, the sale, and acquisition of revenue generation projects as well as other measures to reduce its reliance on donations. The company is increasing its use of digital platforms as a means to reduce internal operating administrative costs and as a means to offer enhanced services. The use of the aforementioned metrics that delved into current ratio, asset turnover ratio, viability ratio, and fundraising efficiency all revealed that the charity has and is making significant progress in terms of the improvement of ratios and metrics that indicate a healthier operating performance basis. I would like to indicate my thanks for the opportunity to research the strategic, performance and ratio aspects used in this report to examine the operations of RIBA as these areas provided the basis to evaluate the company’s progress. Regards. Abstract The motivation for this study represented delving into the operations of RIBA that looked at its recent business performance using financials from the years 2014, 2015 and 2016 as a basis to examine its performance using ratios and metrics. The charity was also examined from the standpoint of its strategic decisions and business performance during these years. It was found that RIBA crafted programmes and strategies to increase its self-sufficiency represented by a reduction of internal administrative expenses, offering increased services through the use of digital platforms and more self-generating revenues. It is the increased emphasis on internal self-revenue generation that was found to be the most significant aspect. This is because external donations represent competing with a large number of other charitable organisations that are all vying for a limited pool of funds. This means that with increased emphasis on global humanitarian, environmental and other issues, these types of areas could very well garner increased donations that might erode some of RIBA’s important donor contributions. Through internal revenue generation represented by member subscriptions, the purchase, and sale of investment properties, and other areas, RIBA has increased its generation of funds to underpin its charitable operations. This is a critical aspect as it h\as helped and will continue to aid the charity in establishing an ongoing sustainable operation in the future. Table of Contents Introduction 5 Financial Examination 5 Performance and Strategic Decision Areas 5 Ratios 7 Conclusion 10 References 11 Table Table 1 - RIBA Performance Summary 6 Introduction In terms of charitable organisations, the analysis of these types of financials differ considerably from a for-profit operation as the donations and revenues generated are primarily distributed for varied activities undertaken (Zietlow, Hankin & Seidner, 2011). The exception is the hedge that charitable organisations maintain against the unforeseen revenues to be raised in ensuing years (Zietlow et al, 2011). These represent unknown aspects that are subject to a possible change in a dramatic fashion as future donations can undergo changing donor and fundraising revenues, impacts of an uncertain economic climate, as well as changing individual and or corporate profits (Ryan & Irvine, 2012). Financial Examination In terms of the financial statements issued by charitable organisations, they differ considerably from for-profit companies (Brigham & Houston, 2012). A for-profit organisation’s financial statements are comprised of a balance sheet, profit/loss statement, statement of cash flows and a statement of owners equity (Brigham & Houston, 2012). A nonprofit financial statement is comprised of a statement of financial position, statement of activities, statement of cash flows and a change in net assets (Brigham & Ehrhardt, 2013). In terms of a simplified explanation, a for-profit organisation is reviewed based on in changes in revenue, net profit, operating costs and the value of the organisation from one year to the next (Brigham & Ehrhardt, 2013). In the instance of a nonprofit, its activities are based on the number of donations and revenue generating activities it has conducted (List, 2011). Performance and Strategic Decision Areas This report looked at the financial health of RIBA Architecture that is a global body comprised of a professional membership that seeks to drive excellence in architecture (RIBA Architecture, 2017). The purpose of RIBA is to serve its members as well as society in the delivery of better buildings that increase the use of environmentally sustainable practices (RIBA Architecture, 2017). The performance report for RIBA is multi-faceted. As such, the following table reveals the more significant highlights as a basis for understanding what it has and is achieving: Table 1 - RIBA Performance Summary (RIBA, 2016, pp/ 7-12) *This area represents a key change in internal fundraising and donations where RIBA is increasing its internal processes to derive increased revenues from internal generation of income to lessen the reliance on donations. The last area under the above table represents a highly important strategic and financing decision that is commented on in terms of ratios in the next segment. RIBA has increased and its improved use of digital platforms (RIBA, 2016). The charity now offers more services at a reduced administrative cost to thus increase its allocation of resource for other areas (RIBA, 2016). Ratios In terms of this segment, the following financial ratios have been utilised: A. Current Ratio This is a measurement of the ability of an organisation to pay short-term liabilities (Gibson, 2011). Higgins (2012) suggests that a charity should seek to maintain a current ratio above 1.0 as this figure indicates stability. Figures below this threshold indicate that a charity might have difficulties in terms of asset vulnerability. As shown by the following, since 2015, RIBA’s ratio for this area has fallen slightly below this figure (1.0). Despite this, the organisation has increased its self-generating revenues from sources such as stocks and works in progress, along with subscription income from members, income from clients, along with leadership and knowledge services as contained in the financial report for 2014 (RIBA, 2014, p. 62). In terms of 2015 (RIBA, 2015, p. 60) and 2016 (RIBA, 2016, p. 62). RIBA has expanded revenue generation to include dividends, interest, and rents from investments, proceeds from the sale of fixed assets, purchase if fixed assets, acquisition of Heritage Assets, proceeds from the sale of investments, and the purchase of investments. As a result, despite the current ratio declining b\elow the indicated 1.0 threshold, this does not indicate a financial concern for RIBA. 1. 2014 RIBA current ratio is calculated as Current Assets / Current Liabilities = Current Ratio (RIBA, 2014, p/ 71) 985,000 ÷ 984,000 = 1.00101626016 2. 2015 RIBA current ratio is calculated as Current Assets / Current Liabilities = Current Ratio (RIBA, 2015, p. 60) 17,151,000 ÷ 19,392,000 = 0.884436881188 3. 2016 RIBA current ratio is calculated as Current Assets / Current Liabilities = Current Ratio (RIBA, 2016. p. 52) 13,443,000 ÷ 18,599,000 = 0.722780794666 B. Asset turnover ratio This ratio is a measurement of the revenue generated from assets (Gibson, 2011). It reveals the efficiency of a charity in the spending of funds (Delen, Kuzev & Uyar, 2013). This ratio generally shows how responsible the organisation has been (Delen, Kuzev & Uyar, 2013). In this instance, lower scores (under 1.0) indicate efficiency in terms of the use of assets (Delen, Kuzev & Uyar, 2013). 1. 2014 RIBA asset turnover ratio is calculated as Donations / total assets = Asset Turnover ratio (RIBA, 2014, pp. 62, 71). 532,000 ÷ 985,000 = 0.540101522843 2. 2015 RIBA asset turnover ratio is calculated as Donations / total assets = Asset Turnover ratio (RIBA, 2015, pp.60, 69) 274,000 ÷ 1,082,000 = 0.253234750462 3. 2016 RIBA asset turnover ratio is calculated as Donations / total assets = Asset Turnover ratio (RIBA, 2016, pp. 52-53) 209,000 ÷ 13,344,000 = 0.015662470024 C. Viability ratio This ratio represents the measurement of the viability of a charity where a higher figure indicates its ability to cover the long-term debt, raise additional funds, and increase revenue activities (Pantelias & Zhang, 2010). 1. 2014 RIBA viability ratio is calculated as Net assets/long-term debt = Viability (RIBA, 2014, pp. 64, 71) 985,000 ÷ 5,282,000 = 0.186482393033 2. 2015 RIBA viability ratio is calculated as Net assets/long-term debt = Viability (RIBA, 2015, p. 74). 1,082,000 ÷ 4,488,000 = 0.241087344029 3. 2016 RIBA viability ratio is calculated as Net assets/long-term debt = Viability (RIBA, 2016, p. 53). 13,343,000 ÷ 523,0000 = 2.55124282983 The increase in this ratio represents the internal revenue generation programmes RIBA has put into effect to lessen reliance on donations. D. Fundraising Efficiency This is one of the more important metrics as it provides the ratio required to raise charitable contributions (Waters, 2011). It is a key performance indicator that provides an indication of the efficiency of a charity in raising funds (Waters, 2011). Figures under 1.0 represent a good ratio (Epstein & McFarlan, 2011). 1. 2014 RIBA fundraising efficiency is calculated as Fundraising Expenses ÷ Total Contributions = fundraising efficiency (RIBA, 2014, p. 62) 15,353,000 ÷ 35,896,000 = 0.427707822599 2. 2015 RIBA fundraising efficiency is calculated as Fundraising Expenses ÷ Total Contributions = fundraising efficiency (RIBA, 2015, pp. 72-73) 12,355,000 ÷ 1,386,0000 = 0.891414141414 3. 2016 RIBA fundraising efficiency is calculated as Fundraising Expenses ÷ Total Contributions = fundraising efficiency (RIBA, 2016, p. 52) 22,231,000 ÷ 28,858,000 = 0.770358306189 Conclusion The preceding review of RIBA regarding its recent business performance, strategic decisions and financing decisions have uncovered a well run and organised charity that has arranged its operations to move toward increased self-sufficiency in terms of its fundraising activities. As a charity, fundraising represents the means for a charity to continue its operations where business performance, strategic decisions and financing decisions are an important aspect that were uncovered in this review. The most noteworthy aspect is that RIBA has increased its internal revenue generating activities to lessen its dependence on donations. This is a highly important aspect as it means that the impact of economic downturns, increased competition for charitable funds and other aspects will have less of an impact on its activities and ability to underwrite its mission and objectives in the future. The exploration of four key metrics (current ratio, asset turnover ratio, viability ratio, and fundraising efficiency) permitted looking at the charity from important aspects that brought forth its foresight, planning and performance. References Brigham, E. & Ehrhardt, M. (2013) Financial Management: Theory & practice. Toronto: Cengage Learning. Brigham, E. & Houston, J. (2012) Fundamentals of financial management. London: Cengage Learning. Delen, D., Kuzev, C. & Uyar, A. (2013) Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications. 40, 3973-3975. Epstein, M. & McFarlan, F. (2011) Measuring the efficiency and effectiveness of a nonprofit's performance. Strategic Finance. October. 27. Gibson, C. (2011) Financial reporting and analysis. New York: South-Western Cengage Learning. Higgins, R. (2012) Analysis for financial management. New York: McGraw Hill Irwin. List, J. (2011) The market for charitable giving. Journal of Economic Perspectives. 25. 163-165. Pantelias, A. & Zhang, Z. (2010) Methodological framework for the evaluation of the financial viability of public-private partnerships: Investment risk approach. Journal of Infrastructure Systems. 16, 241-250. RIBA (2014) Trustees’ Report and Financial Statements. London: Royal Institute of British Architects. RIBA (2015) Trustees’ Report and Financial Statements. London: Royal Institute of British Architects. RIBA (2016) Advancing Architecture Performance Report. London: Royal Institute of British Architects. 7-12. RIBA (2016) Annual Report and Financial Statements. London: Royal Institute of British Architects. RIBA Architecture (2017) Strategy and Purpose. Retrieved from https://www.architecture.com/about/strategy-and-purpose Ryan, C. & Irvine, H. (2012) Not‐For‐Profit Ratios for Financial Resilience and Internal Accountability: A Study of Australian International Aid Organisations. Australian Accounting Review. 22, 181-182. Waters, R. (2011) Increasing fundraising efficiency through evaluation: Applying communication theory to the nonprofit organization—donor relationship. Nonprofit and Voluntary Sector Quarterly. March. 23-27. Zietlow, J., Hankin, J. & Seidner, A. (2011) Financial management for nonprofit organizations: Policies and practices. New York: John H. Wiley & Sons. Read More