The MLK Case: Ratio Analysis

1. Conduct a financial analysis of the MLK Agency. Answer these questions in your memo using ratio analysis.

1. How does the liquidity of MLK compare from year to year?
2. How does the long term solvency compare from year to year?
3. How does the efficiency compare from year to year?
4. What is the profitability for each year and what are the implications?
5. Are present resources sustainable?
6. Are there any red flags that should be considered?

2. Please write a memo to the board from the executive director explaining your analysis, conclusions and recommendations. Also attach a spreadsheet with the ratios.

Some of the terms used on the chapter are
a. Liquidity
b. Long term solvency
c. Efficiency
d. Profitability, matching, revenue diversification
e. Current ratio and working capital ratio
f. Quick ratio, debt to asset ratio, debt to equity ratio, asset turnover ratio, days receiving ratio, profit margin ratio. ( topic was on Financial analysis)

The MLK Agency, Inc.

MLK Agency, Inc. (MLK) was founded in 1946 by Jonathan Clark, a returning veteran from MLK Agency World War II. Its original mission was to provide a site for foster care to children in the greater metropolitan area. It was originally funded from a gift of a mansion and money from the Thomas Fitzpatrick family. Its operations were limited for the next twenty years but began to increase substantially in scope and size with the Great Society programs of the 1960s. Mr. Clark died in 1974 and three others had led the House before the present executive director, David Jackson, took over in early March.

By the time Jackson became executive director MLK was greatly changed from the original post war foster care home and had been transformed into a significant multi-program child welfare and social services organization. Its programs were well regarded and the opinions of its professionals were respected. MLK had a leadership position in the area and was listened to by all.

The fiscal front, however, was not so positive. Funding sources and philanthropy had by no means kept up with the area’s needs for services to children and the gap had been only partially filled by MLK’s attempt to fill it (and in the process running down its reserves).

The present program consisted of the following:

I. At MLK Agency itself (or on grounds)

1. General Administration of all programs including accounting, personal contract administration, executive director’s office, etc.
2. Substance Abuse program day programs. The in-residence program was located at a different site. Day program enrollees visited the House for an average of three hours and one meal per day.
3. Boys and Girls Sports program, space included an indoor gymnasium, changing rooms and showers. Field sports activities took place across the street at a large public park and playground.
4. After School Care for children with working parents for ages 8 and above.

II. At Adams and Jefferson Homes

5. In-residence programs for retarded children.

III. At Dubie Baxter House

6. An in-residence substance abuse program.

IV. At Bridger Home

7. Foster care children awaiting placement in foster care homes.

V. At Foster Care Homes (not owned by MLK)

8. Thirty-one foster care homes which provided foster care for between 35 and 50 children.

The homes were all close together. MLK was across the street from the main playgrounds. Bridger home was across a side street, and the Adams and Jefferson were about one-half block away. The Dubie Baxter house was two blocks away.

The Financial Situation

MLK had operated at a break-even or a small surplus over most of the turbulent Reagan years but had run into trouble recently in the face of cutbacks by federal and county governments. Last year it had operated at a significant deficit and this year promised no better. Financial statements for last year are contained in Exhibits I-III.

Not only was the last year in deficit but the pressure on finances due to slow payments by the federal and county governments added to the problem. On top of that, program funding cuts had made the program for retarded children very difficult to manage. It didn’t
help that the number of children qualifying for the program had dropped off over the last three years. There was space for twelve additional children in the Adams and Jefferson homes.

Space was a problem in some areas and not in others. The substance abuse program was bursting at the seams, and could easily use twice the amount of space. The MLK Agency itself was at full capacity with some clerical activities occupying hallway space. In fact certain activities such as payroll had to be contracted with outside service providers partly in order to save space in the house.

There was controversy within the staff and on the board about how MLK should solve its financial problems. On one hand all felt that the mission of MLK included all children’s services, on the other there was concern that while the retardation program had been appropriate when fully subscribed and funded, it was not any longer. The staff associated with the Adams and Jefferson house programs tended to be very different in temperament and outlook than all the others. They seemed to suffer burnout more frequently than most of the others. In addition to the suspicion that the financial problems centered on the retarded children programs, the extra space was envied, especially by the substance abuse program (for which funding was far more readily available).

One persuasive argument made by these others was that alternative coverage for retarded children was available via two different church groups within ten blocks of MLK. It was felt that the care provided by these services was equal to the Adams-Jefferson programs, and probably at a cost no higher than MLK’s.

The combination of space needs and program financial pressures had let to two significant responses on the treasurership side of things. First, the acquisition of the Dubie Baxter House had been made in part by a $400,000 mortgage loan. In addition a renovation program on all the buildings had just been completed at a cost of $600,000. A portion of this had come from cash reserves, and $491,000 had come from a mortgage loan. Both loans were provided by Fidelity Federal Savings Bank and was on an adjustable rate, interest-only basis for the first five years. Interest was at 2.75% above the one year treasury rate. After the first five years the loan was to be repaid with equal payments over ten years.

The endowment management had been tilted to accommodate the financial straits of MLK. The endowments had been established by Colter Fitzpatrick, the son of Thomas Fitzpatrick, the original philanthropist. The son was an active member of the board and chaired the finance committee. The investment mix had been shifted from an equal mixture of common stocks and bonds to 100% bonds in order to increase the current yield. Any suggestion that the endowments principal might somehow be used to alleviate the operating cash flow problems was met by an icy stare from Colter Fitzpatrick. The trustees as well were content to spend “income” (dividends and interest income received) but were firmly against any spending of principal.

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The aim of any organization is to ensure that the operations can be conducted in a sustainable manner. Having optimal funds is a pre-requisite to obtain this objective. This report is based on the financial analysis of a non-profit organization, MLK Agency. Even though it does not aim to make profits, it is important to ensure that the financial position is healthy so that the vision of the organization can be obtained.

Financial analysis
The ratios were computed for the periods 1996 and 1997 and the table has been shown in Appendix 1.

Liquidity analysis
Liquidity is important to ensure that the organization is able to meet the short term debt without liquidating the fixed assets. For the agency, both the liquidity measures had declined in 1997, which is not good. The current ratio decreased from 3.02 to 1.70 while the quick ratio decreased from 2.69 to 1.67. This can create working capital management issues.
Solvency analysis
In terms of solvency and the use of debt in the financing structure, the agency did not make any significant change in its financing policy. The long term debt to equity ratio declined slightly to 40.56% in 1997 compared to 41.23% in 1996....

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