But it’s important to remember that “nonprofits don’t pay tax, so there is no tax effect (benefit) related to the debt component of the capital structure,” he said.Īs to the cost of equity, his organization refers to “fund capital,” which is capital from retained earnings, contributions, and/or grants. One way to consider the cost of debt is to look at similar nonprofits that have outstanding debt and use their debt cost, according to the CFO of one nonprofit. The key to calculating WACC for a nonprofit is figuring out what to use to mimic the cost of debt and equity. But the organization faced a common hurdle for nonprofit institutions: It didn’t have debt and it didn’t have equity. Second, as part of a new fundraising effort, the organization began to receive more multiyear grants that required the finance team to discount the cash flow to net present value and incorporate a WACC component.“It’s customary to lay WACC on top of that.” “We look at ROI, capital models and NPV,” she said. “We have a sophisticated business model that requires high-level analytics,” Hodo-Iddris said. First, the nearly half-a-billion dollar organization was reaching a certain level of maturity where it needed a robust measure to help make investment and capital expenditure decisions. That was the conundrum faced by Brenda Hodo-Iddris, director of corporate finance and business strategy for nonprofit education organization Step Up for Students, when she set out on a quest to up FP&A’s game on how to help her organization make smarter decisions on investing its funds.Īccording to Hodo-Iddris, a couple of drivers prompted Step Up for Students to start looking at how to calculate WACC: It’s a lot less so for nonprofits they frequently don’t have debt and never have equity. That’s relatively straightforward for publicly traded companies. WACC calculations are based on the cost of debt and equity. Small fluctuations in cost of capital can create huge swings in discounted cash flow figures strongly affecting strategic decisions about future capital investments and acquisitions. Traditional capital project appraisal techniques are based on discounted cash flow (DCF) analysis, where weighted average cost of capital (WACC) is a key factor. FP&A professionals’ involvement in capital budgeting and planning is critical and, if performed effectively, helps to narrow the gap between strategic planning and execution. In both types of organizations, it’s become a more visible and important component of the strategic planning process. The role of financial planning and analysis (FP&A) in for- and not-for-profit organizations is increasingly similar: It needs to help management make smart decisions about how to make investments and cut costs.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |