In this health care financial concepts discussion, I have chosen Mental Health of America (MHA), which is a community based entity that addresses the needs of the people with mental illnesses. The organization was started in 1909 with a major goal of promoting mental health as a key component of overall wellness. The organization believes mental health conditions should be taken care of before they reach worst situations. They conduct mental health education and outreaches, collaborate with policy makers who support in legislation of mental health policies and participate in ensuring mental health support and services are not influenced by race, economic inequality and other discriminating factors. I will use this organization financial report of 2019 financial year to discuss profit vs non-profit and income statement concepts. This report was prepared by an independent auditor who gave the organization a clean bill of health.
Several factors distinguish profit and non-profit entities. In this case MHA is a non-profit entity. One, the purpose of an entity shows the difference. For profit entities are formed to generate profit through offering products or serves, whereas, non-profit entities are started to promote a given course which benefits a specific group or to advocate for a certain opinion, profit is not a priority in this case. For example, MHA purpose is to promote mental well-being. Two, the source of funding is another factor. The for profit organization are funded by people who expect to reap from it, for example, through loans, angel investors, venture capitalists and so forth. But, non-profit organizations are majorly funded by donations, grants, sponsorships, among others. The people who fund non-profit organizations do not expect to earn profit or dividends at the end of the year. In our case of MHA, from their income statement their source of revenue is contributions, fundraising, federal grants and the like (Norwich University, 2016).
The third factor that differentiate for profit and non-profit entities is taxation. The for profit organizations are subject to income tax deductions and other applicable taxes, but, non-profit entities enjoys tax exemption under Section 501 (c) (3) of internal Revenue Code. A careful look on the MHA financial statement shows that for the year ending December 31, 2019, the entity was not deducted any tax as it has no business income that was subject to taxation (MHA, 2020). The other factor is the workforce. Whereas, for profit entities operates with paid employees and interns, non-profit organizations depend on volunteers to achieve their missions. In our case of MHA, the statement shows there was salaries and benefits that were paid during the 2019 financial year. This is because the entity is well established and its activities are carried out every day. This salary is not paid like in for-profit entities. It is given as a token of appreciation of services offered in helping the entity achieve its mission (Norwich University, 2016).
The income statement (P & L statement) shows whether an entity is making profit or a loss. When analyzing the income statement of non-profit organization, the major purpose is to know whether the entity is healthy or not (Chron, nd). From the MHA statement one can note that the organization had a revenue of $5,610,537 in 2019 and total expenses of $4,478,084, and therefore the entity had a gross profit of;
Gross profit = revenue – expenses (the costs of achieving the MHA mission)
= $5,610,537 - $4,478,084
= $ 1,132, 453
This shows that the organization is able to raise enough amount of funds to cover its expenses. If this figure was a negative value, then it could mean the organization is having unpaid expenses to third parties (University of Washington, 2015).
The assets and liabilities of MHA can be used to find its worth. The assets are what an entity owns that can be sold to generate cash and liabilities are amount payable by an organization. In this case from statement of financial position of MHA as at December 31, 2019, the assets were $ 6,796,022 and liabilities were $1,025,283. To get the MHA worth;
MHA worth = assets – liabilities
= $ 6,796,022 - $1,025,283
= $ 5, 770, 739
If the worth of an organization is divided by average monthly expenses, the result is how long the entity can operate with its current resources. For example, MHA had a total of $4,478,084 functional expenses during 2019 financial year. Divide this figure by 12 months to get average monthly expense, that is;
Average monthly expenses = yearly expenses/12 months
= $4,478,084/12
= $373,173.67
And therefore, the duration MHA can operate with its current resources = MHA worth/average monthly expenses.
= $ 5, 770, 739/$373,173.67
= 15.4 months.
Using MHA financial report, we can be able to determine if its profit is growing or declining, that is;
Net asset growth = (current year total net assets-previous year total net asset)/ previous year total net asset
Net asset growth = ($5,770,739 - $ 4,681,804)/ $ 4,681,804
= $ 1, 088, 935/$ 4,681,804
= 0.23
Contribution ratio which is a measure of solvency, in this case it is used to measure how much MHA depends on the donors. It is calculated as follows;
Contribution ratio = contributions/total revenue
= $2,070,069/$5,610,537
= 0.37
In conclusion, the income statement of a non-profit organization like MHA is analyzed to determine how the organization is performing and its future and not to make investment decisions as it is the case with for profit entities. Whereas, in for profit entities the stakeholders like investors can use the income statement to make a decision of whether to invest in the entity or not, the stakeholders like donors of non-profit entities interest is to know whether their contribution is helping the organization achieve its goal.
Several factors distinguish profit and non-profit entities. In this case MHA is a non-profit entity. One, the purpose of an entity shows the difference. For profit entities are formed to generate profit through offering products or serves, whereas, non-profit entities are started to promote a given course which benefits a specific group or to advocate for a certain opinion, profit is not a priority in this case. For example, MHA purpose is to promote mental well-being. Two, the source of funding is another factor. The for profit organization are funded by people who expect to reap from it, for example, through loans, angel investors, venture capitalists and so forth. But, non-profit organizations are majorly funded by donations, grants, sponsorships, among others. The people who fund non-profit organizations do not expect to earn profit or dividends at the end of the year. In our case of MHA, from their income statement their source of revenue is contributions, fundraising, federal grants and the like (Norwich University, 2016).
The third factor that differentiate for profit and non-profit entities is taxation. The for profit organizations are subject to income tax deductions and other applicable taxes, but, non-profit entities enjoys tax exemption under Section 501 (c) (3) of internal Revenue Code. A careful look on the MHA financial statement shows that for the year ending December 31, 2019, the entity was not deducted any tax as it has no business income that was subject to taxation (MHA, 2020). The other factor is the workforce. Whereas, for profit entities operates with paid employees and interns, non-profit organizations depend on volunteers to achieve their missions. In our case of MHA, the statement shows there was salaries and benefits that were paid during the 2019 financial year. This is because the entity is well established and its activities are carried out every day. This salary is not paid like in for-profit entities. It is given as a token of appreciation of services offered in helping the entity achieve its mission (Norwich University, 2016).
The income statement (P & L statement) shows whether an entity is making profit or a loss. When analyzing the income statement of non-profit organization, the major purpose is to know whether the entity is healthy or not (Chron, nd). From the MHA statement one can note that the organization had a revenue of $5,610,537 in 2019 and total expenses of $4,478,084, and therefore the entity had a gross profit of;
Gross profit = revenue – expenses (the costs of achieving the MHA mission)
= $5,610,537 - $4,478,084
= $ 1,132, 453
This shows that the organization is able to raise enough amount of funds to cover its expenses. If this figure was a negative value, then it could mean the organization is having unpaid expenses to third parties (University of Washington, 2015).
The assets and liabilities of MHA can be used to find its worth. The assets are what an entity owns that can be sold to generate cash and liabilities are amount payable by an organization. In this case from statement of financial position of MHA as at December 31, 2019, the assets were $ 6,796,022 and liabilities were $1,025,283. To get the MHA worth;
MHA worth = assets – liabilities
= $ 6,796,022 - $1,025,283
= $ 5, 770, 739
If the worth of an organization is divided by average monthly expenses, the result is how long the entity can operate with its current resources. For example, MHA had a total of $4,478,084 functional expenses during 2019 financial year. Divide this figure by 12 months to get average monthly expense, that is;
Average monthly expenses = yearly expenses/12 months
= $4,478,084/12
= $373,173.67
And therefore, the duration MHA can operate with its current resources = MHA worth/average monthly expenses.
= $ 5, 770, 739/$373,173.67
= 15.4 months.
Using MHA financial report, we can be able to determine if its profit is growing or declining, that is;
Net asset growth = (current year total net assets-previous year total net asset)/ previous year total net asset
Net asset growth = ($5,770,739 - $ 4,681,804)/ $ 4,681,804
= $ 1, 088, 935/$ 4,681,804
= 0.23
Contribution ratio which is a measure of solvency, in this case it is used to measure how much MHA depends on the donors. It is calculated as follows;
Contribution ratio = contributions/total revenue
= $2,070,069/$5,610,537
= 0.37
In conclusion, the income statement of a non-profit organization like MHA is analyzed to determine how the organization is performing and its future and not to make investment decisions as it is the case with for profit entities. Whereas, in for profit entities the stakeholders like investors can use the income statement to make a decision of whether to invest in the entity or not, the stakeholders like donors of non-profit entities interest is to know whether their contribution is helping the organization achieve its goal.
