Financial Analysis of the American Red Cross | Quick Homework Help

Financial Analysis of the American Red Cross
Name
Institution

Financial Analysis of the American Red Cross
Mission
The American Red Cross organization mission is to alleviate and prevent sufferings of humans during emergency cases through marshaling of volunteers’ power and donors’ generosity in the country (A.R.C, 2014). The organization has come up with five key mission programs to implement its objective in saving humanity, which are disaster relief, lifesaving blood, military families’ assistance, international services, safety and health services (A.R.C, 2014). The programs of the American Red Cross organization are designed to meet the core mission of the organization in alleviating and preventing human sufferings during emergencies. This is because the five programs have the capacity of alleviating sufferings to the community by offering life supporting services. In aIDition, assistance it offers to military families and safety and health services are crucial in protecting suffering in the community to the members affected. To finance its programs, the American Red Cross raises its funds from donors. The organization’s main sources of funding include individual major donors, community partners, as well as the foundation and corporate supporters.
Financial Analysis
The financial statements of American Red Cross for the years 2012 and 2013 reflect an increasing trend in the organization’s revenues. The revenue amounts in 2012 and 2013 in the consolidated statement of the organization activities are $ 3,170,517 and $ 3,435,941 respectively, which indicates that the revenue base of the organization has the potential of expanding in future. This is a critical financial strength since it will help the organization in implementing its mission effectively in future. Similarly, the total operating expenses for the firm expanded between the two financial years. The total operating expenses in 2012 and 2013 are $ 3,345,133 and $ 3,380,583 respectively. This reflects that the total operating expenses expanded by a margin of $ 35,450, indicating a high potential of the organization’s operating expenses increasing in future (Seidner, Zietlow & Hankin, 2013). This has the capacity of hindering the organization in meeting its core mission in alleviating and preventing sufferings due to increasing cost of operation if the revenue available is not able to match its expected expenditures.
The latest financial statement of 2013 reflects that the percentage of fundraising expenses to the total charges is (189,431/ 3,380,583 * 100 = 5.6%). In 2012, the percentage of fundraising expenses to total charges was (172,407/ 3,345,133 * 100 = 5.15%). This implies that the cost of fundraising is increasing, which has the potential of increasing the operation costs of the organizations in future (Coe, 2011). Similarly, the percentage of management cost to total charges is (136,283/ 3,380,583 * 100 = 4.03%). The percentage of the management cost to total expenses in 2012 is (140,847/ 3,345,133 * 100 = 4.21%). The management cost for the organization is declining, which signals a potential decrease the operation cost of the organization in future. These ratios depict that the organization incurs high cost in raising operation funds compared to the cost it incurs in managing the funds raised. Consequently, the management of the organization needs to reevaluate its fundraising criteria to reduce the cost of seeking donors’ funds and minimize the operation costs in future. In aIDition, the organization faces a rising cost of salaries and wages. The percentage of the salaries and wages to the total expenses is (204,414/ 3,380,583 * 100 = 6.05%). The salaries and wages costs incurred by the organization are segmented into management and fundraising segments. The fundraising salary costs percentage to the total salary expenses is (106,699/ 204,414 * 100 = 52.2%). The percentage of the management salary cost to the total salary cost is (97,715/ 204,414 * 100 = 47.8%). The firm incurs high remuneration costs in fundraising activities compared to the management activities.
To evaluate the financial condition of the organization, there are two different types of financial ratios that should be employed. One of the types that should be used is the liquidity ratios. Liquidity ratios measure the ability of an organization to meet its current financial obligations. One of the liquidity ratios is the current ratio that measures the ability of an organization in meeting its current financial obligations through current assets. The company’s current ratios for the years 2013 and 2012 are (1,150,432/ 502,178 = 2.29) and (1,105,103/ 463,524 = 2.38) respectively. This implies that the organization has 2.29 dollars and 2.38 dollars of current assets for every one dollar it owes to current creditors, an indication that it is in a good liquidity position since it is able to meet its current financial obligations through current assets (Seidner, Zietlow & Hankin, 2013). However, the two ratios of 2012 and 2013 reflect that the organization’s ability to meet its current financial obligations using current assets is declining. If this trend continues, the company may be constrained in meeting its recurrent financial obligations in future. Another measure of liquidity is the quick ratio that measures the ability of a firm in meeting current financial obligations using immediate current assets. The quick ratios for the organization in 2012 and 2013 are (1,105,103 – 113,876/ 463,524 = 2.14) and (1,150,432 – 112,950/ 502,178 = 2.06) respectively. This implies that the organization in the two years possesses 2.14 and 2.06 dollars of immediate current assets for every one dollar it owes to current creditors (Coe, 2011). Consequently, the firm is at a good financial position and can meet its current financial obligations through current assets. It will be able to acquire raw materials from the suppliers on credit to meet its operational objectives since the suppliers are satisfied with its ability to meet its current financial obligations.
Leverage ratios are the other financial ratios that should be used in evaluating the financial health of the organization. They measure the financial risk based on the probability of an organization defaulting in its long-term financial obligations. One of the leverage ratios is the debt-assets ratio that measures the proportion of the debt employed in acquiring the assets of the organization. Consequently, the debt-asset ratios of the organization in years 2012 and 2013 are (2,182,738/ 3,777,961 * 100 = 57.78%) and (1,908,778/ 3,898,835 * 100 = 48.96%) respectively. These ratios imply that in 2012, the firm’s acquisition of assets was financed by debts at 57.78% while in 2013 the debt financing was 48.96%. The decline in the proportion of debt finance for the two years indicates that the firm is reducing its debt financing in acquiring assets. This is essential in enabling the organization to seek credit from the financial institution at a low interest rate since its financial risk of defaulting is reducing (Coe, 2011). Debt-equity ratio is another leverage ratio that measures use of equity and debt in financing an organization’s assets. The debt-equity ratios for the organization in 2012 and 2013 are (2,182,738/ 12,595,223 = 1.36) and (1,908,778/ 12,990,057 = 0.96) respectively.
The debt-equity ratios for the two years reflect that the organization utilized debts 1.36 times and 0.96 times in 2012 and 2013 respectively, in relation to its use of equity in financing its operations. This implies that the organization uses more debt in running its activities. However, the proportion of the debt being utilized by the firm compared to the equity is declining. Similarly, long-term debt to assets ratio is utilized in measuring the solvency position of an organization. This type of leverage ratio measures the amount of an organization’s assets that are financed by long-term debts. The long-term debt to assets ratios for the organization in 2012 and 2013 respectively are (1719214/ 3777961* 100 = 45.5%) and (1,406,600/ 3,898,835* 100 = 36.1 %). The percentages of the assets that are financed by long-term debts in the organization are declining (Seidner, Zietlow & Hankin, 2013). This is crucial since it reflects the financial risk of the organization in failing to honor its long-term financial obligations, which is reducing.
Based on the financial analysis undertaken, the American Red Cross organization appears capable and viable in meeting its mission and objectives in future as manifested by its financial ability to meet its current financial obligations with much ease. The firm depends highly on credit supply of inventories to respond to emergency cases when they arise. Consequently, if the firm has constrained financial position that is likely to prevent it from meeting its current financial obligations, suppliers of the inventories will not supply the much needed supplies. This will hinder the organization from meeting its core mission objective in future and cause a possible collapse because the inability of the organization to respond to emergencies when they arise has the potential of influencing donors against funding its operations in future. A healthy financial position that allows the organization to respond to emergency cases is essential in influencing donors to increase their funding due to the significance assistance the organization gives to the community. The increment of donors’ finance will enable the organization to survive in future since it will have adequate finance to meet its operation expenses. In aIDition, the improving solvency position of the company will allow it to access cheap credit in the market, which is essential for the growth and development of the firm. From the above analysis, the American Red Cross organization appears well positioned to meet its future operations.
Guided by the organization’s mission statement as reflected in form 990 Report, I would contribute to the organization’s kitty. This is because the mission statement depicts that the organization utilizes the revenue it collects to save lives and extend a helping hand to individuals in dire need of humanitarian aid. The vulnerable individuals in the society require the support to continue with their life normally. Consequently, it is essential for one to contribute in facilitating the organization to alleviate sufferings in the American and global community. One area of interest in the 990 Report of the organization in 2013 returns is the declaration that the organization had $1,000 gross income from unrelated activity. This raises the question on the kind of activity that is unrelated to the functions of the organization that helped in generating such a significant amount of revenue. The management of the organization should provide information to the public on the kind of activity that is unrelated to the normal operations of the business that brought the revenue.

References
A.R.C. (2014). How We Help. Retrieved February 18, 2014, from What We Do: http://www.redcross.org/what-we-do
A.R.C. (2014). Mission Statement. Retrieved February 18, 2014, from Mission, Vision, and Fundamental Principles: http://www.redcross.org/about-us/mission
Coe, C. K. (2011). Nonprofit financial management: A practical guide. Hoboken, NJ: Wiley.
Seidner, A. G., Zietlow, J. & Hankin, J. A. (2013). Financial management for nonprofit organizations: Policies and practices. Hoboken, N.J: Wiley.