Since the 1970s, the American Chemical Society has used various financial guidelines to assess the society’s overall financial health and vitality. Analysis of financial information, including performance against several guidelines, is an integral part of the planning process. While no single guideline can indicate an organization’s financial health, a dashboard of carefully selected and monitored guidelines, set for an organization’s strategic goals and operations, can provide valuable information to the organization’s members, governance, management, and staff. Society leadership uses the financial guidelines to assess the current financial health of ACS and to provide an indication of ability to execute the society’s strategic and operational plans.
The society’s current financial guidelines have evolved over time and are revisited regularly, typically every four to five years at ACS financial planning conferences. The most recent conference was held in November 2017 with attendees from the ACS Board of Directors, the Committee on Budget and Finance, ACS management, and invited guests with relevant expertise. The participants reviewed and validated the five ACS financial guidelines and targets used to monitor liquidity, solvency, free cash flow, reserve adequacy, and sustainability. This validation was based on benchmarking data drawn from other large, complex tax-exempt organizations, as well as measures frequently used by credit rating agencies (Standard & Poor’s, Moody’s, Fitch Ratings) to evaluate the financial condition of large nonprofits.
The society’s current financial guidelines are as follows:
Current ratio. The current ratio is the most commonly used measure of financial viability and illustrates an organization’s ability to have sufficient current, or liquid, short-term assets—in the form of cash or near-cash assets that can be converted into cash quickly without loss of value—to pay its short-term liabilities. At the conference, the board reaffirmed the current financial guideline for liquidity (the current ratio) for short-term assets to be 65% of short-term liabilities, based on the historical flow of funds for ACS. This 65% is also referred to as .65x.
Debt ratio. The debt ratio measures an organization’s solvency, or its ability to meet long-term obligations. It is calculated as a ratio of total debt to unrestricted net assets. As it is used by ACS, this calculation also provides an easy method for calculating the society’s maximum borrowing capacity. At the conference, the board reaffirmed the debt ratio guideline at a target of a maximum of 50%. The society does not currently have any long-term debt.
Free cash flow. Free cash flow is a common measure of internally generated cash, defined as cash from operations less fixed-asset purchases. The society’s guideline uses a three-year rolling average of free cash flow, with a target of breaking even over the period, meaning average free cash flow for any three-year period must be positive. At the conference, the board reaffirmed the free cash flow guideline.
Fund balance ratio. This ratio provides a rough test of the society’s margin of safety, or reserve adequacy, by comparing the current year’s fund balance with next year’s operating expenses. This ratio is intended to ensure that the society has sufficient reserves to survive an uninsured, catastrophic event or to fund a major capital investment or a strategic acquisition. The fund balance ratio reflects the percentage of next year’s operating expenses that could be paid for in full from the reserves. At the conference, the board reaffirmed the fund balance ratio guideline at a minimum of 50% of the next year’s projected operating expenses.
Financial sustainability ratio. This sustainability ratio helps ACS meet the fund balance ratio target by moderating the net from operations, which dampens the reserves’ volatility, and providing a level of spending discipline. At the conference, the board confirmed the purpose of this ratio and instituted a target performance range of 4 to 8%, with the specific return on revenue target in a given year to be established by the board, on recommendation from the Committee on Budget and Finance, during the proposed budget cycle.
Management reports on the projected or actual performance against the board-approved financial guidelines at each Committee on Budget and Finance meeting. Current financial projections for 2018 indicate the society will likely meet or exceed all five of its financial guidelines.
I hope this brief history of the society’s financial guidelines gives ACS members insight into the scrutiny and fiscal discipline undertaken by ACS leadership. If you want to know more about the financial guidelines or other society financial information, additional information is available on www.acs.org (click About ACS, then Our Organization, then Financial, then Financial FAQs). If you have any questions or comments, please do not hesitate to contact me at firstname.lastname@example.org.
Views expressed are those of the author and not necessarily those of C&EN or ACS..