Financial statement justification for a substance abuse non profit

1. Donation, Grant, and Gift revenue

The organization will focus primarily in the Framingham, MA area. The population is roughly 72,208 and grows along the national average of 1% per year. 9% of Framingham residents have experienced some form of mental health illness. 23% of Framingham adolescents said they felt sad or helpless, about 6% higher than what was reported across MetroWest. As a result, the organization will focus heavily on mental health issues in this market. Initially, our budget is generating $500,000 in revenue for the first year of operations. This will be derived from a variety of sources included donations, grants and gift revenue. As a startup entity with limited resources our ability to command large portions of this revenue stream is very limited. In addition, we suspect the revenue growth will be limited as the COVID-19 pandemic has lowered revenues throughout the broader economy. We believe we will see continued donations to mental health related to COVID-19 once vaccinations are widely available and distributed. We believe the population is well suited to support the organizations as the demographics are very appealing. For one half of the residents have their bachelor’s degree or higher, indicating a highly educated workforce. Also the median household income is roughly $85,000, much higher than the national average of $65,000. We assume that revenue growth will coincide with overall GDP growth of 2% to 3% per annum (Agyemang, 2019).

2. Interest and Investment Income

A portion of donations will be invested in a portfolio of securities. These securities are intended to provide additional income that can be used in the operations of the business. Currently the portfolio will be constructed of half equity securities and half bond securities. The equity portion is expected to generate 6% to 9% growth per year. This growth comprises 2-3% GDP growth, 2-3% Dividend Yield, and 2-3% of Price Inflation based on the federal reserve's mandate. The bond portion will be allocated to investment grade securities yielding 2%-3%. As a result, we expect the portfolio overall to yield between 4-6% per annum off an initial investment of $20,000.

3. Sales Revenue

Periodically, the company will engage in sales efforts to help support the business. These sales efforts will include selling of company merchandise such as clothing, coffee mugs, magnets, bumper stickers, and other misc. goods. There is no research or precedent to determine this figure. The estimate will be $10,000 of sales

1. Advertising

As a startup, advertising will be critical to the success of the operation. As resources are limited, we intend to use gorilla marketing tactics to help generate awareness on the part of donors and potential clients suffering from substance abuse that need our services. The initial advertising budget will be $25,000. $5,000 will be spend on a donor’s banquet to thank large contributors to the organization. The remaining $20,000 will be used to create flyers, posters, and other materials to generate interest in the organization. The amount will also consist of online marketing and advertising on prominent social media websites.

4. Cost of goods sold

Cost of goods sold relate to the cost of material used in merchandise clothing, coffee mugs, bumper stickers and so forth. For major retailers such as Walmart and Target, gross margin ranges from 20%-30%. To be conservative we will estimate gross margin at 25% meaning that costs of goods sold will be 75% of the sales revenue. As a result, COGS will be $7,500

5. Rental Expense

As a startup, we don’t intend to purchase land or a building and will instead look to rent. Commercial rental rates in Framingham, MA on a per square foot basis range from $15 to $30 depending on location. Our location is critical to serving clients and should therefore not be inaccessible. Therefor the office will be located in Framingham Center which is accessible by highway. Due to this location rental rates are higher than average at $23 per square foot. Our office will be roughly 2000 square feet resulting an annual rental expense of $46,000. This does not include any rent abatements or incentives that could arise through rental negotiations and thus only serves as an estimate.

5. Depreciation

The major capital costs for the organization will be primarily chairs, desks, computers, microwaves, coffee machines, furniture and other appliances. We intend to depreciate these costs over 10 years, on a cost basis of $10,000 resulting in a depreciation expense of $1000.

1. Employee benefits

To attract, retain and empower employees, benefits must be near industry standard. Industry paid in the non-profit sector is lower than the for-profit sector. Likewise, employees are typically motivated both intrinsically and extrinsically by factors not necessarily associated with salary. As such we intend to pay market rate salaries and market rate benefits. The median employee salary is between $32,000 and $70,000 per year according to day from PayScale. We initially intend to hire 4 personnel to work in the office. Janitorial and cleaning duties will be outsourced and not on our payroll specifically. These expenses will be included in the “Maintenance and Repairs” line item. We assume a median salary of $50,000 per year for each employee with the manager being higher and the entry level position being lower. The benefits portion will include an employee much for HSA contributions of $600 per employee or $1200 per year for 2 employees. We will also match defined benefit contribution plans up to 6% of salary or $3,000 per employee per year. To be conservative total benefits will be roughly $10,000 per year (Acton, 2012)

1. Furniture and equipment

Furniture and equipment are needed to provide services to patrons to frequent the facility. This will include tables, chairs, couches, desks, and other equipment. As initially, only 2 employees will be working in the facility. Researching an online typical desk cost a minimum of $1,000. Apple computers new can cost roughly $2,000. Couches to administer services and greet guests can cost $1,500. In total, the estimate for furniture and other equipment will be $10,000

1. Interest expense

As a startup, the company anticipates operating at a loss for the first few years of operations. Periodically the company will engage in debt transactions designed to help facilitate liquidity for the company. This is particularly useful in the current low interest rate environment. As interest rates are low, the company can borrow and service a large amount of debt. However, as the company is a start-up, very conservative debt levels must be utilized in order to ensure the company can continue as a going-concern. In addition, debt financing typically comes with a variety of covenants in which the owner must adhere to or risk facing severe consequences. As such, heavy restrictions will be placed on the company as it relates to access to the debt capital markets by the owners to ensure the company will be viable as a going concern. Here, the company will look to have very large interest coverage ratios to ensure the company can withstand a significant economic downturn which could reduce contribution amounts to the company. Currently interest will be $0 as the company will not engage in a debt transaction until the magnitude of a budget shortfall is known with certainty.

1. Maintenance and repairs

Maintenance and repairs should be conducted during the initial tenant improvement buildout process once the lease was signed. Although major tenant improvements will be conducted prior to the start of operations, we will allocate a $4000 for minor repairs that may occur throughout the year.

1. Office supplies

Annual limit of $3,000 per year.

1. Payroll taxes

1. 6.2%- Social Security

1. 1.45% - Medicare

1. 7.65% - Combined Employer contribution

1. Gross Pay of $180,000 * 7.65%= $13,770

15. Research and development

Research and development costs are related to research related to new and innovative treatment programs for patients in the facilities. This includes studies related to new intervention techniques. Much of the research and development budget will be outsourced until the facility can bring these capabilities in house.

16. Salaries and wages

To attract, retain and empower employees, benefits must be near industry standard. Industry paid in the non-profit sector is lower than the for-profit sector. Likewise, employees are typically motivated both intrinsically and extrinsically by factors not necessarily associated with salary. As such we intend to pay market rate salaries and market rate benefits. The median employee salary is between $32,000 and $70,000 per year according to day from PayScale. We initially intend to hire 4 personnel to work in the office. Janitorial and cleaning duties will be outsourced and not on our payroll specifically. These expenses will be included in the “Maintenance and Repairs” line item. We assume a median salary of $50,000 per year for each employee with the manager being higher and the entry level position being lower. The benefits portion will include an employee much for HSA contributions of $600 per employee or $1200 per year for 2 employees. We will also match defined benefit contribution plans up to 6% of salary or $3,000 per employee per year. To be conservative total benefits will be roughly $10,000 per year (Acton, 2012)