Problem:
United Way of Metropolitan Chicago is a nonprofit, tax exempt corporation. Because it receives significant revenue in its annual campaign from large corporations, a recent reform of the board of directors resulted in a majority of directors from the Civic Committee of the Commercial Club that were corporate Presidents. The Civic Committee consists of representatives of large corporations in the area of manufacturing, banking, utilities and business.
The organization attempts to maximize its benefit to the community by minimizing its overhead expenses so that $1 raised in the general campaign results in close to $1 allocated for health and human services. When the board of directors saw that the 13.9% overhead rate for 2005 did not reflect staff costs in the Community Building Division where planning, assessment, monitoring, and evaluation activities are performed, some directors were concerned. They felt that, in the zeal to report a favorable number, the truth was not being told to the community.
Other directors argued that these staff efforts benefit the community in a similar way to the health and human services supported by United Way funding. It was determined that the latter argument was technically correct because of the accounting rules on program related services that apply to nonprofit corporations. The compromise was to report the 13.9% overhead rate with a footnote that 16% was the total overhead rate but that the accounting rules for nonprofits allow the exclusion of program related expenses.
Some of the board members from the nonprofit sector began to discuss other organizational matters that reflect a difference in business and management culture and philosophy. For example, the business sector members rely heavily on financial ratio analysis to understand United Way's financial position in relation to industry standards.
Question 1. What are some of the limitations of financial ratio analysis as a tool for understanding operations that might validate the concern of these board members?
Question 2. List and discuss two factors that limit an organization's ability to replace a depreciated capital asset even if the organization has set aside funds equal to the depreciation schedule for the asset in question.
Question 3. Look at "The Cost of Chronic Disease" slides by Jack Zwanziger, PhD. As Director of the Illinois Department of Public Health, discuss management actions you would initiate to address the implications of this presentation.
Attachment:- Costs of Chronic Disease.rar