As highlighted in last week’s post, Magnifying Financial Insights: DuPont Analysis for Associations, DuPont analysis provides a proven framework for financial evaluations and is highly adaptable for associations. In this post, we delve into one practical application of DuPont analysis: benchmarking.
The data presented here is drawn from publicly available IRS Form 990 filings; however, specific association names have been withheld to protect their privacy.
The CFO of a prominent Virginia professional association was confronted with a straightforward yet profound question: "Why?"
The association had achieved a record year, with membership and conference registrations totaling an impressive $9.5 million—exceeding budget expectations. Yet, despite this success, the association operated at break-even, with no surplus to reinvest in its mission or build reserves for future stability. This financial inflexibility signaled an urgent need for a strategic shift.
The initial “Why?” soon expanded into deeper questions: “Where?” and “How?” Where could costs be trimmed without sacrificing value? How could revenue streams be diversified to secure the association’s long-term financial health? Answering these questions required a deeper dive into the organization’s financial performance and a commitment to transformative action.
To assess whether other state societies in the same profession faced similar challenges, the CFO turned to IRS Form 990 filings and applied DuPont analysis. These filings provided the necessary data, including total revenue, expenses, changes in net assets, and figures from the Statement of Financial Position, such as total assets, liabilities, and net assets. By benchmarking Virginia’s financial performance against its peers, the CFO sought to uncover shortcomings and identify improvement opportunities.
Below is the raw data (in millions):
| Association | Total Revenues | Total Expenses | Net Surplus | Total Assets | Total Liabilities | Net Assets |
|---|---|---|---|---|---|---|
| Georgia | 8.5 | 8.3 | 0.2 | 18.3 | 3.3 | 15.0 |
| Michigan | 8.8 | 7.4 | 1.4 | 22.1 | 3.8 | 18.3 |
| New York | 9.3 | 8.3 | 1.0 | 27.5 | 6.1 | 21.4 |
| Ohio | 8.8 | 8.1 | 0.7 | 15.4 | 5.9 | 9.5 |
| Virginia | 9.5 | 9.5 | 0.0 | 25.4 | 5.9 | 19.5 |
Despite leading in revenue, Virginia is operating at break-even with no surplus. This indicates a critical issue requiring further analysis to uncover root causes and opportunities for improvement.
Return on Net Assets (RONA)—the nonprofit equivalent of Return on Equity (ROE) for for-profits—offers a high-level measure of financial performance:
RONA = Change in Net Assets / Net Assets
Here is how the five associations compare:
| Association | Change in Net Assets | Net Assets | RONA |
|---|---|---|---|
| Georgia | 0.2 | 15.0 | 1.3 |
| Michigan | 1.4 | 18.3 | 7.7 |
| New York | 1.0 | 21.4 | 4.7 |
| Ohio | 0.7 | 9.5 | 7.4 |
| Virginia | 0.0 | 19.5 | 0.0 |
Virginia’s 0.0% RONA is a red flag compared to peers, where healthy levels range from 4% to 8%. To achieve even a modest 4% RONA, Virginia would need a surplus of approximately $780,000 (4% of $19.5 million in net assets).
While RONA provides an overall snapshot of financial performance, it does not show why the performance is lacking or where to focus improvement efforts. This is where DuPont analysis becomes invaluable.
DuPont analysis breaks RONA into its three core components: profitability, efficiency, and leverage. By dissecting financial performance into these elements, CFOs can pinpoint specific areas requiring attention and prioritize resources strategically.
Let’s examine each component in detail and explore actionable strategies to improve performance.
Profitability measures how much of an association’s revenue remains as surplus after expenses:
Profitability = Change in Net Assets / Total Revenues
| Association | Change in Net Assets | Total Revenues | Profitability |
|---|---|---|---|
| Georgia | 0.2 | 8.5 | 2.4 |
| Michigan | 1.4 | 8.8 | 15.9 |
| New York | 1.0 | 9.3 | 10.8 |
| Ohio | 0.7 | 8.8 | 8.0 |
| Virginia | 0.0 | 9.5 | 0.0 |
Key Insight: Virginia’s 0.0% profitability signals a critical issue. Without generating surplus, the association lacks the resources to reinvest in its mission or build reserves.
Actionable Items:
Efficiency measures how effectively an association's resources generate revenue:
Efficiency = Total Revenues / Total Assets
| Association | Total Revenues | Total Assets | Efficiency |
|---|---|---|---|
| Georgia | 8.5 | 18.3 | 0.46 |
| Michigan | 8.8 | 22.1 | 0.40 |
| New York | 9.3 | 27.5 | 0.34 |
| Ohio | 8.8 | 15.4 | 0.57 |
| Virginia | 9.5 | 25.4 | 0.37 |
Key Insight: Virginia’s asset turnover of 0.37 is below the median for its peers, indicating an opportunity to more efficiently use assets to generate revenue.
Actionable Items:
Leverage measures the extent to which assets are financed through liabilities:
Leverage = Total Assets / Net Assets
| Association | Total Assets | Net Assets | Leverage |
|---|---|---|---|
| Georgia | 18.3 | 15.0 | 1.22 |
| Michigan | 22.1 | 18.3 | 1.21 |
| New York | 27.5 | 21.4 | 1.29 |
| Ohio | 15.4 | 9.5 | 1.62 |
| Virginia | 25.4 | 19.5 | 1.30 |
Key Insight: Virginia’s leverage of 1.30 is stable and comparable to its peers. There is no immediate need to adjust its financing strategy.
Actionable Items:
DuPont analysis transforms financial data into actionable insights, empowering CFOs to understand the specific drivers of their organization’s financial performance. By benchmarking against peers and addressing weaknesses, associations can achieve healthier RONA levels and strengthen their ability to fulfill their missions.
For the CFO of the Virginia association, the numbers suggest profitability and efficiency are the most pressing issues, while leverage appears stable and requires no action. Addressing these areas with targeted strategies will enable the organization to achieve a stronger financial position, support its mission, and create opportunities for reinvestment and growth.