Financial Analysis of Non-Profit Media Companies

A while ago I published an article about the use of financial modeling (Value Driver Analysis: The CFO's roadmap to transformation) to delve into the performance of a commercial entity. I was having a few discussions regarding non-profits so I thought I would share with you an end to end analysis of a non-profit: how do you pick metrics to analyze the health of such an entity when the key definitions for revenue and margin have a completely different meaning?

In this article I will take a segment from the media vertical: public broadcast. We will look at the segment and dive into a Power-of-one analysis using metrics that are specific to non-profits. All the data presented here was collected from the form 990 that these entities file with the IRS - so it is all based on public information.

Contents:

1. Introduction to Public Broadcast
2. The Unique Financial Structure of Non-Profit Media Companies
3. Financial Analysis and Measuring Health & Success of Non-Profit Media Companies
4. Financial Scenario Modeling
5. Power-of-1 Analysis

1. Introduction to Public Broadcast

Public broadcasting media companies play a crucial role in informing, educating, and entertaining the public while often operating under a non-profit model. Unlike commercial media organizations, which rely heavily on advertising revenue, public broadcasters such as NPR, PBS, and their affiliate stations primarily depend on charitable donations, public funding, and other non-commercial sources of income. This unique financial structure presents both challenges and opportunities for financial management and analysis.

By understanding the nuances of financial management in this sector, stakeholders can better support the sustainability and growth of these vital institutions.

The sources of revenue include:

1. Government Funding: Public broadcasters often receive a portion of their funding from federal, state, or local government agencies. In the United States, for example, the Corporation for Public Broadcasting (CPB) provides federal funding to public radio and television stations, including NPR and PBS. This funding is intended to support the public service mission of these organizations.
2. Charitable Donations: Individual contributions and philanthropic grants are significant sources of revenue for public broadcasters. These donations come from listeners, viewers, and charitable foundations that support the organization's mission. Fundraising campaigns, such as pledge drives and membership programs, are common methods used to solicit individual donations.
3. Corporate Sponsorship: While public broadcasters do not air traditional commercial advertisements, they do receive corporate sponsorships. These sponsorships are acknowledgments of financial support from businesses and are typically accompanied by brief on-air messages that mention the sponsor.
4. Grants and Endowments: Public broadcasters may receive grants from various sources, including government agencies, private foundations, and educational institutions. Endowments, which are funds that are invested to generate ongoing income, can also provide a stable source of funding.
5. Earned Revenue: Some public broadcasters generate income through the sale of merchandise, licensing of content, and other commercial activities. However, these revenue streams are usually secondary to the primary sources of funding.
6. Special Events and Other Sources: Fundraising events, such as galas and auctions, can also contribute to the revenue of public broadcasters. Additionally, some organizations may receive income from rental properties or other investments.

It's important to note that the mix of funding sources can vary significantly between different public broadcasting organizations, depending on their size, location, and programming focus. This diversity in funding sources is crucial for the financial stability and independence of public broadcasters, allowing them to fulfill their mission of serving the public interest.

The following chart introduces the leading non-profit media groups in the US:

In this chart I included the public funding $ value listed in the form 990. This ranges from 0.3 (KCET) to 21.5 (for TPT). By the way, if you are not familiar with these entities here is a brief overview:

1. WTTW (Chicago, Illinois): A major public media organization offering diverse programming, including news, arts, and educational content, serving the Chicago metropolitan area. Financials on ProPublica
2. WHYY (Philadelphia, Pennsylvania): A leading public media provider in the Philadelphia region, offering news, information, and cultural content across multiple platforms. Financials on ProPublica
3. KCET (Los Angeles, California): An independent public television station in Southern California, providing a wide range of programming, including news, arts, and cultural content. Registered as Public Media Group of Southern California. Financials on ProPublica
4. TPT (Twin Cities PBS, Minnesota): A prominent public television and media organization serving the Twin Cities and greater Minnesota, offering educational, cultural, and public affairs programming. Known as Twin Cities Public TV. Financials on ProPublica
5. KQED (San Francisco, California): One of the largest public broadcasting stations in the U.S., providing a broad array of television and radio programs, as well as educational and community services in the San Francisco Bay Area. Financials on ProPublica
6. WETA (Washington, D.C.): A major producer and distributor of public television and radio content, including news, public affairs, and cultural programming, serving the Washington, D.C. metropolitan area. Known as "Greater Washington Educational Telecommunications Association Inc". Financials on ProPublica
7. WNET (New York, New York): A leading public media provider in the New York City area, offering a wide range of educational, cultural, and news programming across television and digital platforms. Includes WMBQ, WLIW, WNET and WLIW-FM. Financials on ProPublica
8. WGBH (Boston, Massachusetts): A major public media organization known for producing and distributing national content, including educational and cultural programming, serving the Boston area and beyond. Known as WGBH Educational Foundation. Financials on ProPublica

2. The Unique Financial Structure of Non-Profit Media Companies

Non-profit media companies, such as public broadcasting organizations, operate under a financial structure that is distinct from their commercial counterparts. This structure is characterized by a reliance on a mix of funding sources, each with its own set of implications for financial management and sustainability.

Revenue Sources

As I mentioned above, the primary sources of revenue for non-profit media companies include government funding, charitable donations, corporate sponsorships, grants, endowments, earned revenue, and special events. The proportion of revenue from each source can vary widely among organizations, influenced by factors such as their mission, audience, and geographic location.

Operating Margins Derived from Fundraising

A significant aspect of the financial structure of non-profit media companies is the reliance on fundraising activities to maintain and enhance operating margins. Unlike commercial media companies, which rely on advertising revenue to generate profit, non-profit media organizations must engage in continuous fundraising efforts to support their operations and fulfill their public service mission. This includes conducting pledge drives, securing grants, and cultivating relationships with donors and sponsors. One of the metrics we will explore is the efficiency of fundraising (the cost vs. the funds raised)

Organizational Structures

Public broadcasting media companies can have diverse organizational structures, including fully funded entities, affiliate station groups, and independent stations. Fully funded entities receive a substantial portion of their funding directly from government sources or parent organizations. Affiliate station groups are networks of stations that share content and resources, with each station raising its own funds. Independent stations operate autonomously, relying on local fundraising efforts and community support.

Governance and Oversight

The governance structure of non-profit media companies typically includes a board of directors or trustees responsible for overseeing the organization's operations and ensuring its adherence to its mission and financial goals. The board plays a crucial role in setting strategic direction, approving budgets, and ensuring compliance with legal and ethical standards. Trustees are often drawn from the community the organization serves and may include representatives from business, academia, and other sectors. Their involvement ensures that the organization remains accountable to its stakeholders and operates transparently and effectively.

Financial Management Challenges

The unique financial structure of non-profit media companies presents several challenges, including:

• "Revenue" Volatility: Dependence on donations and grants can lead to fluctuations in revenue, making financial planning and stability more challenging.
• Fundraising Costs: Engaging in fundraising activities incurs costs, which can impact the organization's net revenue and operating margins.
• Regulatory Compliance: Non-profit status requires adherence to specific regulations, including limitations on commercial activities and political advocacy.

Opportunities for Financial Sustainability

Despite these challenges, the financial structure of non-profit media companies also offers opportunities for sustainability and growth:

• Diversified Funding Sources: A mix of funding sources can provide financial stability and reduce dependence on any single revenue stream. For example, monetizing library assets, consumer based streaming revenue (DTC) and other commercial arrangements and partnerships for content distribution and ancillary revenues.
• Community Engagement: Strong relationships with the audience and community can lead to loyal support and recurring donations.
• Mission-Driven Focus: A clear and compelling mission can attract funding from individuals and organizations aligned with the company's goals.

3. Financial Analysis and Measuring Health & Success of Non-Profit Media Companies

Financial analysis for non-profit media companies involves assessing their financial health and sustainability, with a focus on metrics that reflect their unique funding structure and mission-driven objectives. The following metrics are crucial for evaluating the success of these organizations:

3.1 Return on Investments (ROI)

• Formula: Investment Income / Average Investments
• Purpose: Measures the efficiency of investments made by the organization.

3.2 Gross Margin

• Formula: (Sales of Merchandise - Cost of Goods Sold) / Sales of Merchandise
• Purpose: Assesses the profitability of merchandise sales, which can be a significant revenue source for some non-profit media companies.

3.3 Margin on Rental Activities

• Formula: (Rental Revenue - Rental Expenses) / Rental Revenue
• Purpose: Evaluates the profitability of rental activities, which can include studio space or equipment rentals.

3.4 Current Ratio

• Formula: Current Assets / Current Liabilities
• Purpose: Indicates the organization's ability to meet its short-term obligations.

3.5 Net Working Capital

• Formula: Current Assets - Current Liabilities
• Purpose: Measures the liquidity and operational efficiency of the organization.

3.6 Days Cash On Hand

• Formula: Cash and Cash Equivalents / Monthly Expenses
• Purpose: Measures how many months a nonprofit can continue to pay bills if it stops receiving revenues. 3-6 months of cash on hand is desirable.

3.7 Accounts Payable to Monthly Expenses Ratio

• Formula: Accounts Payable / Monthly Expenses
• Purpose: Evaluates the organization's management of payables in relation to its operating expenses.

3.8 Leverage

• Formula: Total Liabilities / Total Assets
• Purpose: Indicates the level of debt relative to assets, assessing financial risk.

3.9 Profit Margin

• Formula: (Total Revenues - Total Expenses) / Total Revenues
• Purpose: Measures the organization's overall financial efficiency and sustainability.

3.10 Revenue Concentration Index

• Formula: Sum of squares of each revenue source divided by total revenues.
• Purpose: Assesses the diversification of revenue sources, indicating financial risk associated with dependence on specific funding streams.

3.11 Administrative Cost Ratio

• Formula: Administrative Expenses / Total Expenses
• Purpose: Evaluates the efficiency of administrative spending in relation to total expenses.

3.12 Equity Balances

• Formula: Total Equity / Total Revenues
• Purpose: Assesses the organization's financial stability and capacity for growth.

3.13 Size (Natural Log of Total Assets)

• Formula: Natural log of total assets.
• Purpose: Provides a scale measure for comparing organizations of different sizes.

3.14 Fundraising Efficiency

• Formula: Fundraising Expenses / (Contributions + Special Event Revenue)
• Purpose: Measures the effectiveness of fundraising efforts in generating contributions and event revenue.

3.15 Months of Expense Owed

• Formula: Accounts Payable / Monthly Expenses
• Purpose: Indicates how many months of expenses are still owed to creditors

Key Metrics example

WNET and WGBH. This analysis is up to FY 2022 (ending in Jun 2022) since 2023 data is not yet filed with IRS and comparing consolidated reports would make it difficult to match numbers.

The fundraising efficiency ratio measures the efficiency of an organization’s fundraising activities. Simply put, it measures how much it costs to generate one dollar of charitable contributions. WNET’s fundraising efforts show significant efficiency in its fundraising (kudo's to Neal Shapiro 's team for doing such a great job!)

The fixed asset turnover ratio reveals how efficient a company is at generating sales from its existing fixed assets. The fixed asset turnover ratio is calculated by dividing funding by the average balance in fixed assets. A higher ratio implies that management is using its fixed assets more effectively.

WNET’s ratio is 4-5x higher than WGBH, suggesting management is highly effective using its fixed assets.

Accounts Payable divided by Monthly Expenses: this measure indicates how many months of expenses are still owed to creditors.

WNET is more current on expenses owed, likely with a short DPO. This may be an opportunity to increase cashflow and will be explored further.

A concern for many nonprofits is their ability to pay their obligations on time (liquidity). Today, in for-profit companies, liquidity is assessed by looking at free cash flows. This is often measured by: Cash from Operating Activities + Cash from (Nondiscretionary) Investments.

Since the Form 990 does not require a cash flow statement, it often not possible to compute free cash flows. Instead, analysts compute more traditional liquidity measures as days cash on hand, revenue concentration index and fundraising efficiency ratio.

In the case of both WGBH and WNET, Improving cashflow and diversifying funding sources would give both organizations better liquidity.

4. Financial Scenario Modeling

Next I will take your through a financial walkthrough, in this case we are diving into the metrics for WNET:

Let's look at the benchmarking analysis for key metrics. You can substitute any of the above metrics with your own, but first I need to explain how I set up this model:

At the bottom-left of the table are nine financial KPIs (metrics). The DSO metric is not applicable to WNET because they don't really have significant invoiceable revenue, as is clear from the metric.

As you look at the rows, you will notice my algorithm highlights the "best of"-year for that metric. So 2018 was the best of 6 years for SG&A (55.1% of funding) and EBITDA as % of funding was highest in 2021 (48%).

Special note on "EBITDA": To approximate the EBITDA equivalent for a nonprofit from its Form 990, you would typically adjust the "Change in Net Assets" to exclude interest, depreciation, and amortization expenses. However, Form 990 does not directly align with the corporate income statement structure, so you need to piece together relevant information.

Ok. Now we know which year the company had the best performance, for each of the six chosen KPIs. This is summarized in the middle of the table:

Next we add external benchmarks: I like to pick a few competitors (peers), but for sake of simplicity I only analyzed WGBH and for industry benchmark I used metrics from the media & entertainment segment - which includes commercial entities. This gives us a nice stretch goal to compare ourselves to.

Now we have two sets to compare with: internal benchmark (our own company in the best year of its performance, for each metric) and industry/external benchmark.

My model analyzes the performance for 2022 (the year we are focusing our analysis on) with the internal benchmark and the external benchmark, and then calculates an "attainment" score:

As you look above - you can see that the first benchmark (SG&A as a % of funding), which was the lowest in 2018, while this year it was 60.4%. The range for this metric was 55.1% - 74.7% so a spread of 19.5%. We calculate the distance on that spread for 2022 vs. the best year of performance (2018):

Let's call this metric SR (SG&A as a % of Revenue):

( 74.7% [max SR] - 60.4% [2022 SR] ) / 19.5% [spread of SR in 2018-2022]

That gives us a 73.3% attainment - as you can see from the first row in figure 4.4. This scoring allows us to compare disparate metrics and figure out which 2022 KPI performs closest to its benchmark - and to build a leaderboard of KPIs.

We do the same for all the other metrics, both against the internal and the external benchmark, and calculate a ranking. The results are summarized in the two tables at the top:

Let's pause for a moment. What do these results tell us?

Our revenue growth in 2022 was 10.8%, which is the highest it has been in six years. However based on the external benchmark, we are only at 70% attainment compared to 15.3% revenue growth for the industry.

Similarly - our SG&A as a % of revenue was the lowest in 2018 (when it was 55.1%) while it was 60.4% in 2022. Our performance in this metric didn't even make the top fix metrics for the second table (external benchmark attainment)

My analysis compares between the internal and external benchmarks and decides which is a bigger goal to go after, and this will be used in the next analysis.

What can we do with this data?

5. Power of one analysis

I believe this is the most powerful insight you can generate based on your financial metrics. What we do next, is take a benchmark target and ask ourselves: if we could attain that benchmark, what impact would this have on our cash flow?

• In the cast of WNET's form 990 - their net PP&E is reported as $20.8M.
• Dividing the 2022 revenue into netPP&E yields a net fixed asset turnover of: 7.3
• The benchmark fixed asset turnover is: 8.1
• The difference between 2022 performance and the benchmark of 8.1 is 10%, which represents ~$2M reduction in fixed assets
• Assuming a depreciation rate of 15% (calculated from the financials), those $2M in fixed assets would depreciate at $0.3M.

So: if we could meet the benchmark 8.1 asset turnover, the impact would be an increase of $2.3M ($2M + $0.3M)

We repeat this exercise for each of the financial metrics and get a list of measures impacting cash flow. This allows us to prioritize initiatives to improve financial health or to develop technologies for backend or front end (e.g. where would our funding be better spent: building a modern content distribution and fulfillment or focusing on vendor invoicing analysis and vendor performance?

I won't expose the entire analysis for WNET here - but ask you to stop and reflect on the above and let me know what your think? I am particularly interested to hear from non-profit CFOs and am glad to share more about this model and approach to financial health audits.