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UN Financial Performance Analysis Walden Conservatory of Music Case Study

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UN Financial Performance Analysis Walden Conservatory of Music Case Study
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UN Financial Performance Analysis Walden Conservatory of Music Case Study
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UN Financial Performance Analysis Walden Conservatory of Music Case Study
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UN Financial Performance Analysis Walden Conservatory of Music Case Study
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Walden Conservatory of Music: A Case of Nonprofit Financial Analysis and Strategic Planning INTRODUCTION Walden Conservatory of Music was founded in the late 1800s in the City of Walden, the largest city and the main cultural and economic center in a north-central state in the United States. It is the largest nonprofit community music school in this state and provides quality music programs for all ages and levels. The conservatory’s mission is to provide the finest musical education and performance opportunities to all individuals who desire a means of cultural enrichment and self-fulfillment. The conservatory is located on the main street in the center of the city, the Walden Square. Within the same block on the different sides of the main street, the conservatory owns two century-old crimson-colored brick mansions, i.e. Pike Hall and Walden Hall, where it holds private music lessons, master classes, and practices for ensembles. Within the Walden Hall building, Walden Hall is the main music hall where most of the concerts have been held. Walden Conservatory of Music has made great efforts in preserving the historical architecture of the two buildings and in updating building features to support its regular operations, which leads to about $100,000 of annual maintenance costs. Right across Walden Conservatory of Music, there is a beautiful tall cathedral church building, full of artistic heritage and architectures. Next to the church, the city offices reside in Walden City Hall, a large gray concrete building. Walden Museum of Fine Arts and a state university are two blocks away from the conservatory. Along the two sides of the main street in between big buildings, small business stores like CVS, Starbucks, 7-11, and restaurants such as Panera Bread, Burger King, Subway, and a local pizza shop, etc. are sharing the space, one next to each other. 1 The conservatory features three main music programs: Private Lessons, Concerts, and Camps. The conservatory has approximately 100 faculty to teach classical, jazz, rock, folk, blues, and vocal arts, etc. private lessons. The lessons are offered in three different lengths: 30, 45, and 60 minutes long, depending on students’ age and level. The costs of these private lessons range from $45, $60, $90 per lesson by length respectively, in addition to the charges for music materials. The prices for private lessons are competitive on the market. Students need to go through an interview and a screening process in order to sign-up for private lessons, which helps the music program directors to decide the right levels of lessons to place students. Once the directors assign students to the appropriate levels of lessons and corresponding teachers, the students and parents will register for their lessons for a fixed schedule during each term (fall, spring, or summer). Typically, each term has about 14 to 15 weeks of lessons. The Concerts Program hosts musical concerts throughout the year. The concerts are open to the public, and tickets are sold both online and in the ticket office at the entrance of the Walden Hall. The conservatory is the home to several audition-based ensembles like Walden Youth Orchestra (WYO), Walden Youth Chorale (WYC), and Walden Jazz Group (WJG). Most concerts are performed by the faculty and students of the ensembles, and those who take lessons from the conservatory. The ticket prices range from $10 to $60 according to seat locations. The majority of the audience in these concerts are grandparents, parents, relatives, and friends of the students who are performing at the event. In the basement of the Walden Hall, there is a large ball room, where most after-concert receptions are held. Parents often volunteer to bring bakeries as desserts for receptions and group gatherings. Occasionally, orchestras and bands from outside the area (other cities, states, and countries) may also come to play in the Walden Hall. Typically, 2 the tickets for these concerts are $40 to $75 depending on the seating, slightly higher than those of the concerts performed by students and faculty. The Camps Program mainly focuses on providing school-age students with music-related activities during school breaks. For winter and spring breaks, the conservatory offers week-long camps, where students have music lessons, local field trips (e.g. visiting Museum of Fine Arts), and social activities. During the summer, besides regular week-long camps held at the conservatory, students can also sign up for Music Abroad Camps, where groups of students will travel to foreign cities like Vienna, London, Berlin, etc. to perform at local churches or small music halls and enjoy some sight-seeing activities during the trip. The conservatory typically charges about $350 weekly for full-day camps and $200 weekly for half-day camps, plus additional field trip costs. Besides the above three music programs, the conservatory also has a fundraising program which aims at promoting the conservatory and raising funds to support program-related activities. The conservatory hosts fundraising events like Play at Your Conservatory Gala and holiday fundraising concerts either in the Walden Hall or in the mall which is about a couple of miles away. The conservatory also solicits monetary donations as well as donations of instruments and other musical supplies through Friends of Walden Support program. People including alumni who give different levels of donations annually can enjoy free or discounted admissions to concerts and other popular local events. Periodically, the conservatory also calls for financial support from the community through Walden Radio Station (WRS), a local radio station. During the past year, the conservatory launched a new campaign program with intensive marketing efforts, including hiring an IT consulting firm to redesign its website, running advertisements on TV and radio, and hosting numerous fundraising events, etc. The campaign 3 aims to raise funds for its financial requirements for the next five years and calls for donations to make a difference in the life of a conservatory student today and support future performing artists and educators of the country. CASE DESCRIPTION Mary Smith, the CEO of the Walden Conservatory of Music, retired two year ago after having served this role for twenty years. The conservatory had gone through variable leadership with a couple of interim CEOs until earlier this year when Justin Lappin, a veteran CEO from an independent music school in a neighbor city, took the CEO role of the conservatory. As an effort for improvement, Justin initiated the new campaign discussed earlier last year and hopes to recover about $20,000 of campaign-related costs in a year or so. In addition, he hired a consulting group from Illuminations Inc. (a strategic advising firm) to review current operations and seek more appropriate business strategies. You are a senior business student who is hired by the CEO office as an intern to work with the consultants from Illuminations. Your tasks involve analyzing the financial performance of the conservatory and working with the consultants to provide strategic recommendations for the leaders of the conservatory. It is an exciting opportunity for you because you can directly apply what you have learned in your business classes to the consulting project. You are eager to impress the staff in the CEO office and the consultants with high-quality work, hoping to either get a return offer from the conservatory or a new offer from the consulting firm next year. In preparing to analyze the financial condition of the Walden Conservatory of Music, you recall from your course work four areas to consider for financial review: Liquidity, Solvency, Profitability, and Efficiency. It is essential that nonprofits maintain an adequate level of 4 liquidity to meet current obligations. Financial accounting standards require nonprofits to disclose both quantitative as well as qualitative information about the availability of financial resources to meet cash needs that come due within one year of the balance sheet date. In addition to maintaining an adequate level of liquidity in the short-term, nonprofits must be sure they can cover their total obligations of the long-term. Solvency ratios measure an organization’s ability to operate over the long-term. Too much leverage can make a nonprofit organization vulnerable to future financial distributions. Profitability ratios indicate the extent to which the nonprofit is earning a surplus or deficit. Nonprofits earning consistent deficits run the risk of becoming fiscally distressed. Conversely, nonprofits that earn large surpluses run the risk of stakeholder backlash and public ire that they are hoarding resources and not investing enough in their mission. Finally, nonprofit organizations aim to be efficient with the resources entrusted to them. Efficiency ratios measure what proportion of total expenses are spent on programs compared to administrative and fundraising activities respectively. While charity evaluators, such as the Better Business Bureau Wise Giving Alliance, expect charities to spend at least a minimum threshold amount on program services, nonprofits not investing enough in their administrative capacity may fall victim to what has been commonly referred to as the “starvation cycle” where underinvestment in a nonprofit’s capacity ultimately leads to diminished outcomes.1 REQUIREMENTS You and the consultants are given the Statement of Financial Position and Statement of Activities based on Form 990s (the IRS tax form for tax-exempt organizations) of the 1 For a more expansive discussion of the starvation cycle see Lecy and Searing (2015). 5 conservatory from 2006 to 2018 for your analyses (see Tables 1 and 2 in the Appendix). There are two parts of requirements: (1) First, you will conduct a preliminary financial analysis of the conservatory. Upon finishing your analyses, you will need to write a business report detailing the financial condition of the conservatory and submit it to the consulting group as well as the CEO office; and (2) Second, utilizing your analysis results from Part 1 as a base, you will work with the consultants to identify appropriate business strategies for the conservatory to ensure the sustainability of the organization. Toward the end of the project, you and the consultants, as a group, are expected to write a business memo to Justin and the Board of Directors of the conservatory with strategic recommendations including supporting evidence. Part 1. Utilize Table 1 and Table 2 to answer the Part 1 questions. 1. Illuminations consultants have prepared a list of financial ratios (numbers) for your analyses. For each of the ratios (numbers), first identify which of the following category each ratio (number) falls under: A) Liquidity, B) Solvency, C) Profitability, or D) Efficiency. Then use the formula given below and calculate these ratios from 2006 to 2018 in Microsoft Excel. Make sure to use the cell referencing feature in Excel. Administration Expense Ratio =Administration Expenses/Total Expenses Number indicates the percentage of total expenses that cover administrative expenses. Current Ratio =(Cash+Marketable Securities+Receivables+Inventory)/(Accounts Payables+Grants Payables+Deferred Revenues) Number indicates whether the organization has sufficient current assets to meet its short-term obligations. Debt to Asset Ratio =Total Liabilities/Total Assets Number indicates the extent to which the organization's assets are financed with debt 6 Debt to Net Asset Ratio =Total Liabilities/Total Unrestricted Net Assets Total debt in relation to unrestricted net assets. Number indicates percentage of unrestricted net assets that are being financed with debt. Defensive Interval =(Cash+Marketable Securities+Receivables)/((Expenses-Depreciation)/12) Number indicates the number of months the organization could operate using cash, marketable securities, and receivables on hand at year end. Liquid Funds Amount =Unrestricted Net Assets-Net Fixed Asset+Long-Term Debt Amount of unrestricted liquidity remaining after fixed assets and related debt are removed. Liquid Funds Indicator =[(Total Net Assets-Permanently Restricted Net Assets-Fixed Assets)*12]/Total Expenses Number of months that an organization can operate based on net assets (reserves) that do not include fixed assets or endowments. Program Service Ratio =Program Service Expenses/Total Expenses Number indicates the percentage of total expenses that go directly into program services. Quick Ratio =(Cash+Marketable Securities+Receivables)/(Accounts Payables+Grants Payables+Deferred Revenues) Number indicates whether the organization has sufficient liquid current assets to meet its short-term obligations. It is a more stringent measure than current ratio. Return on Investment =Investment Income/Average Investments Number indicates the gain or loss generated on an investment relative to the amount of money invested. Savings Indicator =(Revenues-Expenses)/Revenues Number is the income (loss) as a percentage of total revenue. Positive number indicates income and negative number indicates loss. Times Interest Earned Ratio =(Increases or Decreases in Net Assets + Interest Expenses)/Interest Expenses 7 Number indicates whether the organization has sufficient increases in net assets to pay the current year's interest expenses. 2. Explain the financial position and performance of the conservatory using the ratios that you have calculated in Part 1.1. 3. A graph is worth thousands of words. Use graphs to show the trends of financial performance of the conservatory. Do you derive the same conclusions as those from Part 1.2.? 4. Table 3 details ratios for peer art organizations. How does the Walden Conservatory of Music compare with its peers? 5. Find a comparable conservatory in your home town or city as a benchmark. Compare the financial performance of the two organizations and provide suggestions (based on the comparison) for the Walden Conservatory of Music, both from a financial and operational prospective. Part II As a part of their strategic review, Illuminations Inc. conducted an in-depth review of Walden’s three programs as well as the development efforts. Their review utilized a mapping tool that considered both the mission impact of each program as well as their financial performance. The mapping tool is derived from the book, The Sustainability Mindset by Steven Zimmerman and Jeanne Bell. The tool first measures the financial performance of each program as well as the development area. The financial performance was based on the latest twelve months of data. 8 The tool then compares the financial performance of each program or area with its relative mission impact. Mission impact is based on a survey of key stakeholders including large donors, board members, program staff, and executive officers. Each stakeholder was asked to respond to a mission impact survey as follows: “On a scale of 1 to 4 with 4 being the highest, please rate each program below on the following criteria. As you complete the survey, remember that there is no "right" answer in the survey and take into account all the information you have from your experience with the organization.” The four criteria are: 1) Contribution to Intended Impact: Relative to other programs, how well does this program contribute to what the overall organization aims to accomplish? 2) Excellence in Execution: Is this program something that the organization delivers in an exceptional manner? 3) Significant Unmet Need: Is there significant competition or are there similar offerings of this program? Is there an adequate supply of services to meet the demand for them in our community? 4) Scale: How many people are touched or influenced by this program? Based on the responses from the survey and the financial review, the overall summary was as follows: Criterion 1 Program Contribution to Intended Impact Criterion 2 Excellence in Execution Criterion 3 Significant Unmet Need Criterion 4 Scale Lessons 3.90 3.80 2.50 3.60 Camps 3.40 3.20 3.50 3.00 Concerts 3.30 2.90 2.50 3.00 Development 1.80 2.00 1.50 2.00 Note the Mission Impact Score represents the average score across the four criterions. Mission Impact Score 3.450 3.275 2.925 1.825 9 Walden Conservatory of Music Programs Profitability Mission Impact Expenses Lessons $ 74,054 3.450 $1,516,290.00 Camps $ (60,938) 3.275 $244,156.00 Concerts $ (147,285) 2.925 $171,664.00 Development $ (76,486) 1.825 $482,562.00 Total $(210,655) $(2,414,672) Note the Expenses column includes an allocation of all administrative expenses to the four program areas. The profitability of each program area represents the difference between the last twelve months revenues and expenses associated with each program area. Total expenses are given to provide a measure of the relative size of each program area. Twenty-percent of the total expenses represent fixed costs (ex: occupancy costs) that would exist even if one of the program areas was eliminated. Appendix A includes a mapping of this data. Note the map includes a bubble for each program area. The size of the bubble indicates the relative size of the program area based on total expenses. The x-axis represents the profitability of the program area while the y-axis represents the relative mission impact of the program area. As noted in the The Sustainability Mindset, programs in the upper right quadrant are in the star quadrant. Organizations should consider investing and growing these programs. The bottom right quadrant is referred to as the money tree quadrant. Organizations should consider whether these programs can be watered and harvested to increase impact. Programs in the upper left-hand quadrant are in the heart quadrant. Organizations will typically want to keep these programs but must consider ways to contain costs. Finally, the bottom left quadrant is referred to 10 as the stop sign quadrant. Organizations must consider whether these programs should be closed or transferred to another organization. Before speaking with the consultants, the CEO would like to get your insights into the analysis. Based on your review of the profitability and mission impact of the individual program areas, what initial recommendations do you have for the CEO to ensure Walden Conservatory of Music is on a sustainable path for the future? References: Lecy, J. D., & Searing, E. A. (2015). Anatomy of the nonprofit starvation cycle: An analysis of falling overhead ratios in the nonprofit sector. Nonprofit and Voluntary Sector Quarterly, 44(3), 539-563. Zimmerman, S., & Bell, J. (2014). The sustainability mindset: Using the matrix map to make strategic decisions. John Wiley & Sons. 11 Walden Conservatory of Music Matrix Map 4.500 3.500 Concerts Lessons Camps Profitability 2.500 $(200,000) $(150,000) $(100,000) $(50,000) $- $50,000 $100,000 $150,000 Development 1.500 Liquid Unrestricted Net Assets: ______________ 0.500 Impact Net Surplus: ($210,655) 12 Table 1 Statement of Financial Position Data for Walden Conservatory of Music, Inc. (Based on Form 990s) Assets Current Assets Cash & Equivalent (Investible Assets) Accounts Receivable Pledges & Grants Receivable Inventories for Sale or Use Noncurrent Assets Investment / Securities Fixed Assets (LBE Depreciation) Other Total Assets Liabilities Current Liabilities Accounts Payable Deferred Revenue Long Term Liabilities Loans and Notes Total Liabilities Net Assets With Donor Restrictions - Temporary in Nature With Donor Restrictions - Permanent in Nature Without Donor Restrictions Total Net Assets Total Liabilities and Net Assets 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $1,852,392 $37,447 $1,296,880 $21,921 $1,166,252 $20,114 $739,518 $7,353 ...
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Final Answer

Attached.

Running head: FINANCIAL PERFORMANCE ANALYSIS

FINANCIAL PERFORMANCE ANALYSIS
Name:
Course:
Instructor:
Date:

1

FINANCIAL PERFORMANCE ANALYSIS

2

Walden Conservatory of Music
Question #1
Liquidity

Solvency



Current Ratio



Debt to Asset



Liquid Funds Amount



Debt to Net Asset



Liquid Funds Indicator



Times Interest Earned ratio



Quick Ratio



Defensive Interval

Profitability

Efficiency



Return on Investment (ROI)



Administration Expense ratio



Savings Indicator



Program Service ratio

Ratio analysis is presented in the excel worksheet attached herein.
Question #2 Financial Performance of Walden Conservatory
In terms of liquidity position, Walden Conservatory has been in a suitable liquid place
since 2016. However, it has reduced gradually, as evidenced by a decrease in current ratio, quick
ratio, liquid funds amount, and liquid funds indicator. The current ratio and quick ratio can be
used to measure the firm’s short term liquidity position over a given period. A firm with a
current ratio of above 1.0 is in a sound liquidity position. Walden’s current ratio has been
reducing over the 12 years of the analysis. The positive thing, however, is that the company is in
a suitable liquid position since the current ratio has been over 1. Also, the quick ratio is above
1.00, denoting that the firm has enough quick assets in the form of cash and cash equivalents to
pay for its current liabilities. In terms of the defensive interval, liquid funds amount, and liquid
funds indicator, it has been reducing over the specified period implying that the company’s
liquid position is diminishing, and measures need to be implemented to redefine its liquidity.

FINANCIAL PERFORMANCE ANALYSIS

3

The company’s solvency is excellent. From the year 2006 to the year 2018, Walden
Conservatory had more assets than its liabilities. Therefore, the company has been performing
well in terms of the ability to pay off its long term debts. The company’s debt asset ratio and debt
to net assets ratio have been less than one but reducing over the period meaning that more of the
business is being financed by debt, and it may have trouble paying back its loans in the future.
On the other hand, Time Interest Earned ratio has been unstable between the years. The ratio was
always zero for the first few years before it started rising again. According to Chen (2019), a
higher interest coverage ratio represents the company’s ease of paying the interest expense,
whereas a lower ratio implies the company’s difficulty in paying the interest expense.
Walden Conservatory’s profitability has been unstable between 2006 and 2018. Return
on investment from 2006 declined until 2012, where it has been rising. A positive and rising ROI
means ...

JesseCraig (17924)
Carnegie Mellon University

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