Corporate Strategic Plan

For

Child and Family Guidance Center

A Non-Profit Mental Health Corporation
in Northridge, California, U.S.A

Prepared by:

Jose JP Pentecostes
April 1, 2012

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Table of Contents 2

Executive Summary 4

1 Introduction 6

II. Research Design and Methodology 7

III. External Factors 8

Macro - U.S. Economy and Global Outlook
Overview- Mental Health Industry
For-Profit Mental Health Industry
Mental Health Industry - Financing Aspects
California Mental Health Industry
State and County Funding
Los Angeles County Mental Health
Unfilled Demand - LA County Mental Health

IV. Internal Factors 19

Governance and Organizational Structure
Financial History
Prior Years
FY 10-11
Internal Issues - Contract Billings

V. Strategy Analysis 34
Vision and Mission evaluation
Mckinsey 7 - internal evaluation
Financial evaluation
Competitieve Profile Matrix (CPM)
External Factor Evaluation (EFE)
SWOT
SPACE
Grand Strategy
Internal-External Matrix(I-E)
Summay of Strategies
QSPM
BCG

VI. Strategy Formulation 68

Strategy Formulation and Perspective

Strategic Options & Conclusions

VII. Recommended Strategies and Implementation 74

Recommended Strategies
Financial Projections
Strategic Statement Review
Balanced Scorecard

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 Contingency Planning

VII. References 83

VII. Appendix 85

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 Corporate Strategic Plan for Child and Family Guidance Center
Prepared by: Jose Pentecostes
April 1, 2012

Executive Summary

Child and Family Guidance Center or CFGC (formerly known as San Fernando Valley Child
Guidance Clinic) is a nonprofit private corporation based in Northridge, California, providing
primarily outpatient mental health counseling and treatment to clients. With a professional staff of
over 300 employees including Doctors-Psychiatrists, Psychologists, Nurses and Licensed
therapists, it serves patients through its nine (9) locations in the Southern California area. Since
its inception in 1962, it has grown currently to $23 million annual revenues. By the June 30, 2011
fiscal year end, however, it has an unprecedented operational deficit of almost half a million
dollars.

With the backdrop of the apparent mental health-related shootings in Arizona (victims include
U.S. Rep. Gifford), Fort Hood, Virginia Tech and Columbine school, the market for CFGC is
driven by the increasing demand for mental health services. According to a government study,
20% of all adults aged 18 or older in the U.S. (or an estimated 45.1 million) has mental illness in
the past year. An estimated 8.4 million adults (3.7 percent) aged 18 or older had serious thoughts
of suicide in the same period.

A multi-billion dollars industry, annual mental health spending in U.S. is around 135 billion dollars.
CFGCs funding is primarily from the Los Angeles County Department of Mental Health (DMH).
The funding is shared through contracts with over a hundred facilities (a highly fragmented
industry) of which CFGC is among the largest. County Funds are leveraged along with Medi-Cal
for matching federal fundings. The External Evaluation has shown that despite the threats from
weakness in the economy and the government funding uncertainties, CFGC has maintained good
competitive position in optimizing the opportunities, most significantly, the high demand for mental
health services backed by government funding and the Healthcare Reform.

Internally, CFGC has adequate strengths (i.e. mental health expertise, systems and technology)
and is constantly resolving perceived weaknesses (i.e. weak capitalization, dependence on a
major funder, maintaining cost efficiency and controls with limited staff, tighter competition for
decreasing pool on philanthropic contributions, etc.).

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Presently, the Center is responding to the required and potential changes in the contract/market
scenario. Productivity/cost-revenues mix improved in the last half of FY 10-11 and seem to
jumpstart the new FY 11-12 in a strong position.

Recommended Strategies

th
On its 50 anniversary, CFGC is at the crossroads. On one hand, it is proud of half a century of
being of service to thousands of children and their families and having survived where many
others have failed.

But it has come to a point where survival is not good enough. The safe choice is doing exactly
what it was doing, living precariously on a year-to-year contract, not knowing where fundings are
cut and services altered. The other choice is to take itself on the next level, expanding the reach
and quality of its services, financially independent, and more confident in the pursuit of its
mission.

It has become a generally accepted truth in the nonprofit world that nonprofits, like CFGC, should
embrace the best practices of the for-profit business world in order to survive, and prosper. The
saying no money, no mission, seems like a catch phrase but it is a truism in the sense that the
noblest mission will fail if the organization lacks the stability to stay afloat. An increasingly
competitive business environment, with shrinking support from government and private donors,
dictates that nonprofits acquire the efficiency, flexibility, innovativeness, and discipline traditionally
represented in the competitive for-profit sector (Landsberg, 2004).

For many years, CFGC got stuck in the comfort zone, an earned income model mostly dependent
on cost reimbursement in which costs are capitated and the best business scenario is break-even
and contributed income or donations are present but hardly sufficient.

The prevailing best practices literature professes that ideally, an organization must have both a
sustainable business model as well as solid capitalization. Without a sustainable business model,
organizations will steadily eat into their reserves over time, putting their survival at risk. A
sustainable business model is likely one that generates a surplus rather than simply breaking eve
each year. Organizations require an annual surplus in order to build fund reserves (Tuckman,
1991).

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Based on strategy evaluation and analysis, proposed strategies for CFGC are anchored on two
goals:

Financial stability and expansion through sustainable business model and improved
capitalization
Attaining mission-critical objectives of being among the major industry leaders.

Specific strategic objectives are as follows:

1. Year 1 (ending June 30, 2012) Stabilize and maintain the $19 million DMH funding
at breakeven without a loss. Generate contributions to maintain net surplus for the
agency of $303,000 for FY 11-12. Explore and initiate Venture Philanthropy to raise
working capital and long term reserves.

2. Year 2 Expand DMH Contract to $23 million and deliver services without a loss.
Generate net donations/contributions of $456,000. Obtain Venture Philanthropy
capital for working capital and long term reserve.

3. Year 3 Expand DMH Contract to $30 million deliver services without a loss.
Generate net donations/contributions of $714,000. Obtain venture philanthropy
capital.

4. Year 4 Expand DMH Contract for $40 million and deliver services without a loss.
Generate net donations/contributions of $724,000. Obtain venture philanthropy
capital.

5. Year 5 Be among the industry leaders by obtaining DMH Contract for $50 million
and deliver services without a loss. Generate net donations/contributions of
$734,000. Obtain venture philanthropy capital.

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I. INTRODUCTION: COMPANY BACKGROUND/BRIEF HISTORY

In an era where mental health institutions for adults in the United States were the norm, the special
needs of children prompted the early founders (Lila Berman, Pauline Hirsh and others) to establish
San Fernando Valley Child Guidance Clinic, which opened in July 2, 1962 to a waiting list of 300
children and a professional staff of three.

On June 11, 1974, Los Angeles Mayor Tom Bradley initiated the groundbreaking of the new building
in Northridge, CA which was completed and opened on January 5, 1976, enabling the Clinic to
expand its day treatment and out-patient programs.

In 1979, additional facility was opened in Van Nuys and in 1985, a satellite facility was opened in
Lancaster and eventually moved to the neighboring Palmdale.

On October 1, 1998, the name San Fernando Valley Child and Family Guidance Clinic officially
changed to Child & Family Guidance Center. In the decade that followed, CFGC experienced growth
and expansion from a $10M to a $22M budget.

Presently, CFGC has around 317 employees serving patients through its nine (9) locations in the
San Fernando Valley and Southern California area.

CFGCs organizational structure consists of Board of Directors exercising governance and

oversight in accordance with by laws. Operations are headed by President/CEO and under him
are the three major Divisions: 1) Programs, which is the production arm and the support arms 2)
Operations/Administration and 3) Finance.

CFGCs funding is primarily from the Los Angeles County Department of Mental Health (DMH),
which is shared through contracts to over a hundred facilities (a highly fragmented industry) of
which CFGC is among the largest. County Funds are leveraged along with Medi-Cal for matching
federal fundings. Other revenues are derived from small programs and contributions.

Beginning January 2010, DMH announced drastic and significant decrease in funding to CFGC
and other providers. These changes are on top of the already complicated DMH cost
reimbursement scheme, where CFGC cost reimbursements are capped by the State Maximum
Allowance (SMA). This, combined with the labor intensive cost structure typical of the industry
complicates CFGCs financial and cash flow management. While most revenues are derived from

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government contracts, the best that the Center can expect is break-even (lower of cost or
contract maximum).

The net result of the funding changes was a drastic drop in the billable hours of services for the
first six months of FY 10-11. While the center management reacted quickly to create and
implement action plans and subsequent productivity increased significantly over the second half
(FY ending June 30, 2011), it was not able to recover all of the lost revenue during the first half.
Consequently, the Center suffered nearly half a million deficit as of June 30, 2011.

Presently, the Center is responding to the required and potential changes in the contract/market
scenario. Productivity/cost-revenues mix is improving and seemed poised for recovery and
growth in the current FY 11-12. Nevertheless, the continuing changes and uncertainty in the
mental health and internal environment still present serious challenges in the companys survival
and viability.

II. RESEARCH DESIGN AND METHODOLOGY

Information gathering for the assessment external and internal environment were based on public
documents and open domain sources in the internet. Industry and competition data were from the
IRS 990 returns and company websites. As much as possible, primary sources through informal
interviews and questionnaires were used.

Company internal financial data was gathered from the audited financial statements and the IRS
form 990 federal filings. Data used were limited to public information which are readily available
from websites such as Guidestar, Dunn and Bradstreet and various mental health association.

While the author, as Finance manager, has access to a wealth of expertise within the company,
and strategic planning could have been a collaborative effort with the company management, this
strategic plan has been the output of this author alone and the resulting strategies (which may or
may not be consistent with management thinking) is the authors responsibility. While this is
designed as a capstone project and is limited in scope to the application of the strategic
management principles, the analysis and recommended strategies are grounded on actual, live
business environment and are implement able. A copy will be given to the management which
could a basis for a full blown strategic plan for the company.

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As a part of the internal analysis, the Mckinsey 7s adapted for Non-profit organization known as
the Mckinsey Capacity Assessment Grid was used. Whenever applicable, strategic tools and
models were utilized and applied to non-profit setting.

III. EXTERNAL FACTORS

The mental health industry environment for Child and Family Guidance Center (CFGC) is unique
and complicated. Its market is segmented and affected both by profit and not for profit, by private
and public/government, by private and public funding. Its market is further segmented
demographically by location, by age, by socio-economic/poverty level and by prevalence of
serious emotional disturbance (SED) and Serious Mental Illness (SMI). The industry scanning will
briefly summarize the current environment from the macro/national level and cascading down to
the county level where CFGCs current market immediate are situated. Such perspective will be
relevant not only in understanding the industry but in also in determining or revising strategies
with regards to possible alternative markets or business models.

Macro Environment Current U.S. Economy

CFGCs market is inextricably connected to the private and public environment affected by the
state of the US economy, specifically the current US debt crisis and economic outlook.
Based on the Kiplinger Outlook report on April 2, 2012, the U.S. economy grew at 2.8 percent
annual rate in the fourth quarter of 2011, slower than previously calculated and less than forecast
as state and local governments made deeper cuts in spending. The outlook report projects that
the U.S. economy will grow at 2%-2.3% in 2012, faster than the 1.7% expansion in 2011 but short
of the pace needed to significantly lower the unemployment rate.

In the March 2012 report, the UCLA Anderson California Forecast projects steady decrease in the
California unemployment rate over the next two years towards single digit unemployment by the
end of 2013 and reaching 7.7% by the end of 2014. Employment will grow at 1.9% in 2012, 2.0%
in 2013 and 2.6 percent in 2014. Payrolls will grow slowly a, at 1.3%, 1.9% and 2.5%,
respectively. Real personal income growth is forecast to be 2.4% in 2012, followed by 2.1percent
in 2013 and 3.2% in 2014. The forecast claims that when the economy picks up in 2013 and
2014, health care will be among the drivers of the state economy, along with technology, exports,
professional, scientific and business services.

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Not for Profit Environment (NFP)

The Not for Profit sector, where CFGC belongs, play a significant role in the world economy. U.S.
Treasury IRS records currently shows 1.5 million NFPs. Total revenues in the sector approached
$2 trillion, and assets topped $4.2 trillion, as of October 2009. According to the U.S. Department
of Labor (DOL) statistics, 26.8 percent of the population, or 63.4 million people in the United
States, did volunteer work for NFPs, which is slightly up from 2008.

Contributions to nonprofit entities in 2008 exceeded $307 billion. More recent data is the
Blackbaud Index of Charitable Giving which indicates that overall giving increased by 6.8% for the
3 months ending August 2011 as compared to the same period in 2010. However, this is a drop
from 9.8% reported in the Philanthropic Giving Index in 2009. This reflects the moderating
economy during that period.

The economic downturn has severely affected the nonprofits. Although contributions to the NFPs
are flat, demand for the services they provide is increasing. Among the concerns are: lack of
availability of affordable lines of credit; increase in delayed or uncollectible pledges, grants, or
accounts receivable.

While CFGCs main revenue source is mental health, the philanthropic giving market is an
important secondary market for CFGC, as the only viable source of surplus or reserve as
compared to its revenue-neutral DMH contracts.

Mental Health Industry Description (for Profit)

With combined annual revenue of more than $20 billion, there are about 15,000 establishments
(single-location companies and units of multi-location companies) in the US mental health and
substance abuse services industry. Highly fragmented, the industry top 50 companies account for
only about 20 percent of industry revenue.

The availability of new drugs and treatments and funding policies of healthcare insurance
programs drive the demand for mental health and substance abuse services. Controlling costs
and attracting physician referrals determine the profitability of individual facilities. Compared to
small companies, large companies have advantages in group purchasing and in marketing to
physicians and managed healthcare companies. To compete, small facilities try to provide
superior patient service, integrating treatment with follow-up procedures, and specializing by
treatment or demographic group. The mental health and substance abuse facilities are labor-
intensive with average annual revenue per worker of less than $60,000.

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The for-profit mental health industrys target market are clients with private insurance from
employers as opposed to Non profits whose main market are the low income, predominantly
Medi-cal/Medicaid clients. This industry analysis will focus on non-profit, publicly funded mental
health industry.

Mental Health Industry Financing/Funding aspects

Mental health spending in the United States is estimated at $135 billion for the year 2005 (which
is the most recent official census data). This is about 7.3% of the $1.85 trillion-plus health care
total in 2005 or slightly less than 0.1 percent of the $8 trillion or so GDP. The reasons for the
mental health spending growth are: There is increasing acceptance of mental disorders as real,
treatable illnesses, and has gained legitimacy through a movement to frame the disorders in
diagnostic and biological terms. Insurance coverage has expanded and technology has
progressed rapidly, particularly for prescriptions medications. Managed care appears to have
been especially effective in reducing behavioral health costs. In terms of technology use,
however, a lot of the best mental health treatments are still low-tech interventions, such as
behavioral therapy.

Government public funding has accounted for large and increasing source of mental health care.
In contrast, public funds contribution to overall health care has remained less that 50%. Some
observers would argue that that the relatively large public presence in mental health funding is a
self-perpetuating historical oddity: Public funds are provided because private funding is poor, and

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private funding is poor because public funding is ample. At the state and local levels in particular,
public providers constitute a safety net for the mentally ill more so than public providers do with
other illnesses.

The original source of funding at the state and local levels has predominantly been federal
programs, i.e. Medicare, Medicaid. Medicaid accounted for 50% of local health spending in 2007
and may grow to two-thirds by 2017. This is largely due to expansion of eligibility terms for
recipients, as well as efforts by states to maximize federal revenue by shifting state funded items
to Medicaid funded items. Set up as a matching grant, the federal government matches the
states contribution at a rate determined by the states per capita income (poorer states receive
more favorable matching).

Affecting the mental health industry are significant trends. Outpatient care has increased relative
to in patient care. Medication has been on the rise relative to therapy. The proportion of mental
health costs spent on medication has approximately doubled in 10 years or less. Depression
treatment is a prime example of this trend. (Olfson et. al. 2002). Drugs such as Prozac are highly
effective for certain people, with modest side effect profiles. Financial incentives within the mental
health system are sometimes heavily biased toward prescribing medications. For example,
psychiatrists can typically receive much higher reimbursements by seeing multiple patients for
short medication management visits as opposed to one patient for a therapy visit (West et. al.,
2003). Also pharmacy costs are frequently off budget) for mental health providers; their profits
are not diminished when they prescribe medications, whereas, they bear the costs of providing
therapy.

California Mental Health Industry

Over a million Californians are estimated to suffer from serious mental illness. Researchers at
the UCLA Center for Health Policy Research found that nearly one in five adults in the state
about 4.9 million people said that they needed help for a mental or emotional health
problems. In addition, approximately one in 25, or more than 1 million, reported symptoms
associated with serious psychological distress (SPD), which includes the most serious kinds of
diagnosable mental health disorders.

While many Californians receive treatment through their medical benefits, those without
insurance, estimated at 19% of the population, do not always get the care they need. They
must rely on county health care agencies to provide psychiatric assistance, hospitalization,

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substance abuse treatment and other needed services. The county health care agencies
depend on public or state and federal funding. CFGC is one of these agencies.

State and County Public Funding

CFGCs market and source of funding are primarily public funds from the State and County,
usually with federal matching support. CFGCs target clients or market are therefore Medicaid
or Medi-cal eligible clients who do not private insurance and are usually low income

Counties like Los Angeles are responsible for providing public mental heath services to their
residents. The services are funded by a portion of state sales tax dollars and vehicle license
fees as well as funds received from Medicare and other third party payers. In addition, the Short
Doyle/Medi-Cal program, established in 1972, provides cost-based reimbursement for mental
health services and was designed to organize and finance services through locally controlled,
county operated mental health systems.

In November of 2004 California voters approved Proposition 63, entitled the Mental Health
Services Act (MHSA), making California the first state in the country to levy a special tax to
finance mental health services. The tax is 1% of personal incomes exceeding one million dollars,
and will result in $2.53 billion dollars over the first three years, sustainable into the future, for
mental health treatment and related services (California Mental Health Planning Council, 2003).

Los Angeles County Mental Health Market

Despite the immensity of the global and national demands for mental health services, CFGCs
immediate market, by reason of its location is narrowed down to the Los Angeles County.

The County of Los Angeles is the most populous County in the United Sates with an estimated
population of 10,418,695 people in CY 2009. The estimated population by Age Group is the
highest among Adults at 47.4% followed by Children (0-15 years old) at 23.2%, Transition Age
Youth (16-25 years old) at 14.9% and Older Adults (26+) at 14.4%. The Estimated Population by
ethnicity is the highest among Latinos at 47.3%, followed by Whites at 29.8%, Asian/Pacific
Islanders at 13.4%, African-American at 9.1% and Native Americans at .4%. These
demographics breakdown is essential to determining the market size for CFGC.

CFGCs mental health market determination is parallel to its major contractors allocation the
Los Angeles County Department of Mental Health. From the base total population data, the
market is segmented in a cascading sequence by Age Group, by estimated population Living of
below 200% Federal Poverty Level, by Estimated Prevalence of SED and SMI. These data

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combined with the DMH data on Medi-Cal Enrollment rates and Consumer served provide a basis
for assessing the immediate and potential market for CFGCs services.

The most recent official census data available is more than decade old. Based on the 2000
census, it has a total population of 9.5M of which 2.6M are youth thru age 17. It is estimated that
1.3M of these youth are living below the poverty line, of which 118,895 are deemed to have
prevalence of persons with serious emotional disturbance(SED) and serious mental illness(SMI)
which are qualifying criteria for Medi-cal eligibility. This 118,000 clients are the immediate market
base for CFGC and the over a hundred facilities in the Los Angeles county.

More recent data is from the DMH Quality Improvement Work Plan published January 2011 which
further narrow down the target by service areas. Of the 8 service areas (SA) in LA County, two
SA1 and SA2are assigned and relevant to CFGC.

Service Area 1 is Antelope Valley While SA1 is the largest service area geographically, it has
the smallest population. Latinos are the majority ethnic group followed by Western European
Whites and African-Americans who constitute 10%. SA1 has a younger population (31.6% aged
0-15 years), has the highest Child Abuse and Neglect rate, and has the highest rate for school
suspension and expulsion throughout the country.

SA2 San Fernando Valley is the most populous service area in Los Angeles County. Latinos
account for 38.4% of the population. The percentage of children ages 0-15 living in SA2 (23.9%)

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is about county average (25%) but because of the population size, SA2 has more children in this
age category than the other service areas. English and Spanish are spoken in 42.8% and 31.4%
respectively; this means that a full quarter of the remaining population speaks other languages.

Unfilled Demand for Mental Health Services

During FY 2009-2010, the DMH through its providers (including CFGC) provided mental health
services in the eight service areas to approximately 205,000 persons in outpatient Short Doyle
Medi-Cal facilities that included adult with Serious Mental Illness (SMI) and children with Serious
Emotional Disturbance (SED). Compared to the total population in LA County with estimated SED
and SMI (741,848), this represents 27.8%. Compared to total population with SED and SMI and
at or below 200% Poverty, this represents 62.3%.

Based on foregoing, the unfilled demand in all areas of Los Angeles County for mental health
services is 72.2% or 535,868 for persons with SED/SMI. For those with SED/SMI and living at or
below the 200% poverty level, the unfilled demand is 37.7% or 124,482.

For SA1 Antelope Valley, the unfilled demand for mental health services is 43.1% or 14,618.
For those with SED/SMI and living at or below 200% poverty level, this represents 1.6% or 182.

For SA2 San Fernando Valley, the unfilled demand for mental health services is 80.2% or
123,328. For those with SED/SMI and living at or below 200% poverty level, the unfilled demand
is 51.58% or 28,284.

The above unfilled demand are over and above the current clients of the industry.This suggest an
adequate market for strategic expansion of the quantity and location of CFGCs mental health
services.

Industry Participants/Competition - Southern California Mental Health Industry

The chronology of the formation of the various mental health nonprofit organizations in California
show that the San Fernando Valley Child and Family Guidance (now Child and Family Guidance
Center) was founded a year after the establishment of the Los Angeles County Department of
Mental Health (DMH). It was the first of the many that now totals over a hundred facilities.

The publicly funded mental health market in California is highly fragmented with the top ten
having annual revenues of from 15-30 million dollars. Asset wise, most of the participants has
little reserve with net assets mostly composed of cash from advances from DMH. Donations are

15
marginal and some are fortunate to have some donated assets, i.e. buildings acquired from
couple of years ago. Endowment funds are rare.

Major Industry Participants and Competition

The biggest among DMH contractors is Pacific Clinics. Pacific Clinics' history as an outpatient
community mental health agency began in 1926 when, as Pasadena Child Guidance. The Clinic
became Pasadena Guidance Clinics in 1981 since, although its child and family programs
continued to grow, it had begun serving adults as well. In 1987 the agency name was changed to
Pacific Clinics. Over the past two decades it has grown from a $10 million budget in 1992 to the
current $95 million level. Pacific is among the biggest employers in 2010 with 1,130 employees,
has $21.9M in total assets and $86.3M in total revenues. Its DMHs top contractor with $74M
revenues, comprising 85% of its revenue sources

A few miles from CFGC is San Fernando Valley Community Mental Health Center - In 1970,
SFVCMHC was incorporated and has since developed into one of the largest mental health
centers of its kind in Los Angeles County, with 35 programs across 24 program sites, serving
clients of all ages from infants to older adults. The Center also provides more specialized services
for the homeless mentally ill; monolingual populations; victims of domestic violence; and, dually
diagnosed consumers. As of 2010, it has 499 employees, $11.2M total assets, $32.8M revenues,
a net surplus of $97,463 and net asset of $3.5M.

Didi Hirsch - Didi Hirsch Mental Health Services was founded by Didi and I. Kingdon Hirsch, in
1974 and became one of the first federally approved community mental health centers in greater
Los Angeles. It provides mental health support, substance abuse treatment and suicide
prevention and helps over 70,000 children, adults, older adults and families in 11 centers, in more
than 60 schools, from Pacoima to Los Angeles to Orange County and points in between. As of
2010, it has 414 employees, $11.4M total assets, $22.9M total revenues and net asset of $16.1M.

LA Child Guidance (LACGC) - Since its inception in 1924, LACGC was founded as one of eight
demonstration clinics by the Commonwealth Fund of New York and is the oldest, continuously
operating agency of its kind in the Western United States. As of 2010, it has 241 employees,
$14.8M total revenues. Although it has a loss of $117,000 in 2010, LAGC is one of the few with
good balance sheets with $22.9M net assets and with $8.1M investment portfolio.

Penny Lane - Named after the upbeat Beatles song, Penny Lane was founded in 1969 to serve a
handful of abused teenage girls. Since that time, Penny Lane programs and services have

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 INDUSTRY PARTICIPANTS/COMPETITION - SO.CALIFORNIA MENTAL HEALTH

CFGC SFVCMC LACGC Penny Lane

Employees 317 499 241 504

Volunteers 29 10 20
Contributions 22,960,377 75,089 14,474,499 20,017,807
Program rev 277,821 32,726,512 36,992 13,125,621
Investment 6,091 10,177 225,315 74,024
Other Rev 40,874 8,333 128,449 543,497

Total Rev. 23,285,163 32,820,111 14,865,255 33,760,949

Grants paid 1,249,179 0 3,597,045

Salaries 18,546,360 22,662,148 11,521,120 22,944,080

Other expenses 4,687,873 8,811,321 3,461,971 6,505,681

Total Expenses 23,234,233 32,722,648 14,983,091 33,046,806

Rev. less Exp. 50,930 97,463 -117,836 714,143

Assets 5,039,329 11,824,907 25,019,556 29,920,643

Liabilities 1,256,278 8,374,402 2,020,518 16,044,899

Net Assets 3,783,051 3,450,505 22,999,038 13,875,744

Salaries/Expense 79.82% 69.26% 76.89% 69.43%

Ave. Salaries/employee $58,505.87 $45,415.13 $47,805.48 $45,523.97
Expenses/employee $73,294.11 $65,576.45 $62,170.50 $65,569.06
Revenues/employee $73,454.77 $65,771.77 $61,681.56 $66,986.01
Net Assets/Total Asset 75.07% 29.18% 91.92% 46.38%
Expense/Revenue 99.78% 99.70% 100.79% 97.88%
Surplus(Deficit)/Revenues 0.22% 0.30% -0.79% 2.12%
Investment/Revenue 0.03% 0.03% 1.52% 0.22%

expanded to serve thousands of children, youth, and families each year. As of 2010, it has 504
employees, $33.7M revenues, $714,000 surplus and a net asset of $13.8M.Its source of
revenues is well diversified, with DMH comprising only about 38%, and the rest spread to schools
and grants.

Childrens Institute - Founded in 1906, it was originally designed to help troubled young women
and offered preventive childcare and other services to at-risk children then began receiving state
funding to provide child abuse prevention, intervention and treatment services. Over the past 25
years, CII has doubled its staff and quadrupled the clients served, reaching more than 17,000 a

17
year at present. During the same period, the annual budget has grown from nearly $1 million to
$29 million. As of 2010 has 484 employers and 1,226 volunteers (the highest). It has $41.3M in
net asset and seems to be the most profitable with $1.9M in net surplus. DMH revenues is
$11.3M (30% of total), with the rest diversified in other funding sources.

Vista del Mar Founded in 1908 as The Jewish Orphans Home of Southern California, Vista Del
Mar began serving children in Los Angeles whose parents could not care for them because of
illness, poverty, or death. Despite its $549,000 loss in 2010, Vista del Mar appears to have the
best Balance Sheet. With a net asset of $60.6M, it has a $43M investment portfolio, a $9M net
fixed asset and only $4.3M in liabilities. Vistas sources of funds are well diversified with only a
third coming from DMH, and the rest spread through its schools, residential foster homes and
other sources.

The Special Group (Los Angeles) SSG began during World War II, when the Community Chest
(United Way) formed a special services unit to attend to the youths recreational and social
issues. SSG programs include safety net programs, youth programs, homeless services, mental
health services and HIV/AIDS education and intervention. With 716 employees, it has generated
$40.6M revenues and net surplus of $1.5M in 2010. While it has $12.5M in total assets, its net
asset is only $2.3M, with more than $8.5M in liabilities and $1.4M mortgage payable. With
$23.5M DMH revenues (57% of total) it has other funding sources.

Child and Family Center (often mistaken for CFGC for the name similarity) is located in Valencia.
As of 2010, it has 201 employees, generating $11.8M revenues and a net surplus of 108,711. It
has 9.5M total asset and a net asset of $4.9M.

The top 20 agencies showed generally positive results with net profits in the range on 1%-2% of
the revenues. While Hathaways Sycamore is one of the biggest, generating $43.5M revenue in
2010, it registered a deficit of $1.06M. The three agencies which recorded the biggest surplus
were Penny Lane ($714k), the Special group ($1.5M) and the Childrens Institute ($1.9M). Due to
lack of details from the 990 form, it is hard to pinpoint the reason or specific programs responsible
for the surplus. These three however are highly diversified companies, which not only have DMH
programs (which CFGC is highly dependent on) but also residential and non-DMH programs not
based on cost reimbursements. Also, they seem to be relatively successful in soliciting donations
and contributions.

Based on the comparison of the least common denominator on these agencies with CFGC, which
is DMH programs, it appears that CFGC doing comparatively well with regards to DMH contract

18
utilization. There are no sufficient data to compare cost per unit, but of those agencies that have,
CFGCs average cost per unit ($2.50) is within the industry average.

In terms of asset and net asset and long term sustainability, Pacific Clinics, Hathaways, Penny
Lane, Didi Hirsch and Vista del Mar seem to be good models for CFGC. For strategic planning
and evaluation purposes, some of these agencies will be compared with CFGC for the
benchmarks and competitive analysis.

INDUSTRY PARTICIPANTS/COMPETITION - SO.CALIFORNIA MENTAL HEALTH

VISTA Children's
DIDI DEL MAR
CFC PACIFIC HATHAWAY Institute Kedren
HIRSCH
Inc

Employees 201 414 1,130 794 612 484 700

Volunteers 150 125 300 500 1,226 3,154
Contributions 11,766,571 22,568,078 518,949 42,261,797 31,608,653 37,025,396 563,982
Program rev 29,046 162,203 85,279,134 1,202,264 1,339,765 162,687 48,048,141
Investment 33,046 56,598 124,576 38,896 703,428 529,158 4,676
Other Rev 1,162 121,406 424,321 41,518 266,371 97,139 769,893

Total Rev. 11,829,825 22,908,285 86,346,980 43,544,475 33,918,217 37,814,380 49,386,692

Grants paid 0 251,817 0 993,587 47,172 0 0

Salaries 9,179,927 18,099,280 60,155,997 32,683,133 24,919,172 22,936,763 17,530,719

Other expenses 2,541,187 4,478,414 26,164,661 10,929,512 9,501,037 12,945,129 31,780,415

Total Expenses 11,721,114 22,829,511 86,320,658 44,606,232 34,467,381 35,881,892 49,314,134

Rev. less Exp. 108,711 78,774 26,322 -1,061,757 -549,164 1,932,488 72,558

Assets 9,526,626 11,442,249 21,934,633 12,723,470 64,973,342 62,412,405 11,724,170

Liabilities 4,601,449 5,985,222 17,907,431 4,085,098 4,355,156 21,080,535 6,749,881

Net Assets 4,925,177 5,457,027 4,027,202 8,638,372 60,618,186 41,331,870 4,974,289

Salaries/Expense 78.32% 79.28% 69.69% 73.27% 72.30% 63.92% 35.55%

Ave. Salaries/employee $45,671.28 $43,718.07 $53,235.40 $41,162.64 $40,717.60 $47,390.01 $25,043.88
Expenses/employee $58,314.00 $55,143.75 $76,389.96 $56,179.13 $56,319.25 $74,136.14 $70,448.76
Revenues/employee $58,854.85 $55,334.02 $76,413.26 $54,841.91 $55,421.92 $78,128.88 $70,552.42
Net Assets/Total Asset 51.70% 47.69% 18.36% 67.89% 93.30% 66.22% 42.43%
Expense/Revenue 99.08% 99.66% 99.97% 102.44% 101.62% 94.89% 99.85%
Surplus(Deficit)/Revenues 0.92% 0.34% 0.03% -2.44% -1.62% 5.11% 0.15%

More detailed analysis of industry participants and competition are discussed in Strategy analysis
chapter.

19
IV. INTERNAL FACTORS

Governance

Child and Family Guidance Center (CFGC) was organized pursuant to the General Non-Profit
Corporation Laws of the State of California. CFGC is exempt from federal income tax, California
franchise tax, county and city property taxes and Federal unemployment tax. Its legal basis is the
U.S. IRS Code section 501(3) which grants tax-exempt status to commonly referred to as
charitable organizations which must not be organized for the benefit of private interests and no
part of the earnings may inure to the benefit of any private shareholder or individual.
The highest governing body of the Center is the Board of Directors. The President /CEO is
responsible to the Board of Directors in running the organization. Major executive decisions and
actions are subject to the oversight and approval of the Board within the guidelines of the bylaws.

FUNCTIONAL ORGANIZATIONAL STRUCTURE

Under the President/CEO are major functional areas such as Programs, Finance, and Operations
as shown in the Organizational Chart.

Child and Family Guidance Center

Organization Chart

Board of
Directors

President/
CEO
Development
Fundraising

OPERATIONS PROGRAMS FINANCE

DMH
HR CONTRACT

NON-DMH
IT CONTRACTS

GRANTS
FACILITIES

20
The Programs is the production arm of the organization which covers the mental health services
functions which includes Psychiatry, and DMH contract services by Location. It also covers non-
DMH programs such as the School and the small programs or grants. Quality assurance is also
included in this functional area.

The Finance Division responsible for the Financial Management of the company operations
including management of the contracts and grants, preparation of required Cost Report and
documentation to DMH, compliance with auditors, contractual and regulatory monitoring and
requirements.
The Operations Division covers the Facilities, Human Resources and Information Technology.

Outpatient Mental Health Programs and related Programs

CFGCs mental health programs interventions include: Assessment, Evaluation, Collateral
Contacts, Individual, Group and Family Therapy, Therapeutic Behavioral Services (TBS),
Rehabilitation, Plan Development, Consultation, Crisis Intervention, Medication Support Services,
Outreach, Case Management/Linkage and Coordination with other community resources. Each
service has specific rates based on the DMH contract and state Maximum Allowance (SMA) rates
guidelines, which are the basis for billing and revenues.

All clients must be severely emotionally disturbed and meet Medical Necessity and Community
Functioning Impairment Criteria as established by LAC DMH. Program referral sources include
DMH, Department of Children and Family Services (DCFS), Probation, Schools, Foster Family
Agencies, pediatricians, psychiatric hospitals, self-referral, and community referrals. Clients are
admitted to the program during the business hours normally 8:30 am - 5:00 pm.

The geographic areas served include the San Fernando, Santa Clarita, and Antelope Valleys.
The population served is primarily low income, high risk families living in high risk, densely
populated communities. The center serves a culturally and ethnically diverse population. Over
70% of the population served is Latino with 50-70% of the parents/caregivers in the San
Fernando Valley programs requiring Spanish speaking services.

Services are provided by a multidisciplinary team of doctoral and masters level therapists,
psychiatrist, case managers, family advocates, behavior specialists, paraprofessionals, and
parent partners. Over 70% percent of our clinical staff is bilingual (English/Spanish). All staff is
highly trained and skilled in their positions.

21
In the San Fernando Valley programs (Northridge, Van Nuys, and North Hills); access for all
outpatient programs is centralized. Clients or caretakers access an admission specialist via a
dedicated phone number. Admission specialists screen clients and based on the information
provided, schedule the family for an initial assessment at one of the San Fernando Valley sites.

Clients are prioritized for intake based on severity of symptoms. The average wait time varies
depending on the volume of referrals at any given point in time. Typically, the average wait time
is 5-10 business days; otherwise, the families are offered referrals to other DMH directly operated
and contract agencies.

Medication Support Services are provided on an as indicated basis. Interventions include

psychiatric consultation and assessment, and on-going medication monitoring. Clients are seen
for ongoing medication support on a regular basis, as medically indicated for each individual
client.
Aside from the main DMH contract, CFGC has other smaller programs (around 8-10% of total
revenues funded by County and City. Unlike DMH, revenue is not based on cost reimbursement
but on fee for service with fixed contract amounts. CFGC is paid based on monthly billings
supported by actual invoices/expenditures. The school program consists of students with
emotional problems who are referred to CFGC by other schools. Wraparound program are
funded through the Dept. of Children and Community Services (DCFS) providing assistance to
abused and at risk children. The other similar programs are called GRYD (Gang Related and
Youth Development) SRI funded by the City of Los Angeles and contribute around 1-2% of CFGC
revenues.

Financial Management Structure

On top of the hierarchy is the Board of Directors exercising oversight and review of the policies
and operations of the Child and Family Guidance Center. The Board delegates this oversight
responsibility to the Finance Committee, of which the Treasurer is the Chair. The CEO of the
organization acts as the primary fiscal agent, with responsibility for implementing all financial
management policies and procedures on a day to day basis. On a functional basis, this
responsibility is delegated to the Finance Staff or qualified professional staff for managing various
aspects of financial management.

The financial management objectives of the Child and Family Guidance Center are to: 1) Maintain
the financial solvency and going-concern status of the agency in order to attain its mission and
purpose 2) Ensure the long-term financial viability of the agency by generating surplus reserves,
and general funds. 3) Preserve and conserve financial assets needed for mission-critical

22
purposes. 3) Exercise appropriate care and due diligence in the handling of incoming funds and
disbursement of outgoing funds 4) Strive for transparency and accountability in fiscal operations.

The Finance Committee and the Finance Department in coordination with the Senior
Management Team work collaboratively to prepare a budget for the fiscal year that will begin on
July 1st and ends on June 30th. An Initial Budget is presented to the Finance Committee and the
full Board by the First Quarter of the Operating Fiscal Year.

When necessary, a January-revised budget update is made to take into account the six-month
trend from July to December actual revenue and expenses and to adjust budget for known
significant changes in funding and expenses for the remaining six-month (January to June) of the
fiscal year.

The Center utilizes the Microsoft Great Plain Solomon Accounting package software. Payroll
processing is done through ADP (Automated Data Processing) which supports the General
Ledger. Accounting procedures adhere to Generally Accepted Accounting Principles (GAAP),
OMB-133, A-122 and other government regulatory requirements.

Financial reporting is made monthly, quarterly and annually. The Finance Manager prepares and
sends monthly reports with a cover executive summary to the Executive Committee, which, along
with other Center data is used for decision-making together with the Senior Management
Committee (composed of Directors from major functional area). Reports include the monthly
income statement comparing actual YTD Revenues and Expenses versus budget, a balance
sheet, a comparative report of the YTD current month versus the YTD of same month in the prior
fiscal year. Actual and Projected Cash flow and Liquidity Reports are provided periodically. Other
interim financial reports are generated and are available when needed. Year-end financial
reporting is finalized after the completion of the Cost report for DMH, the agencys major
contractor. After a successful review of submitted schedules and various tests, and subsequent
approval by the Board, a certified audited report for fiscal year is issued.

Internal Controls system is in place. Pre-approvals by duly authorized management/director and

supervisors are required. Purchased and leased assets are safeguarded and movable
equipments are tagged and monitored through an equipment tracking database. Vendor selection
is based on competitive bidding and contract requirements. Major capital assets acquisitions and
salary changes are approved by the Finance Committee and the Board.

23
The Finance department implements internal control via segregation of duties and maintains
accounting records. Bank reconciliations are reviewed regularly and outstanding items are
resolved proper and timely manner. Unallowable costs that are prohibited under the contracts and
grants are identified and disallowed. Selected schedules are maintained in the share drive for
transparent checking of accounting information. The Finance Department maintains strict
confidentiality of records in accordance with HIPAA and legal privacy requirements.

Management reviews cash flows, budget and financial reports and monitors actual performance
versus budget. Every payroll period, management reviews report on credit line status and cash
balance and disbursements status.

After the close of each fiscal year, the books, records and accounts of the agency are audited by
a duly approved independent certified public accounting firm in accordance with the applicable
standards and legal requirements. The current auditor has specialization in Non-profit
organization.

The audit is conducted in compliance with generally accepted governmental auditing standards,
the Federal Single Audit Act, OMB-133, and the auditing requirements of contractors and
grantors of the agency. The Board approves the audit report as required. The management
reports to the Board any actions necessary to correct deficiencies or exceptions noted in the
audit.

Copies of the Final Audited Financial statement are provided to the Board of Directors, to federal,
county or state agencies and various contractors and grantors of the agency as required.
As a recipient of funds from government (e.g. Department of Mental Health) as well as various
private donors and grantors, the Center is periodically subjected to audits.

The Center investment policy is to provide conservative Growth of Capital and Income while
employing diversification to reduce risk. The objectives have been established after a
comprehensive review of current and projected financial requirements, market returns and risks
and any special requirements of the Center Board.

24
OPERATIONS FUNCTIONS (HUMAN RESOURCES/FACILITIES/IT)

The Center has one owned building and 8 leased facilities. The main building located at 9650
Zelzah Avenue, Northridge, California was built for the Center and was partially funded by a
federal grant. The building is now owned free and clear and almost fully depreciated.

With fully integrated Human Resources systems, the Center includes employee recruitment,
maintenance, training, benefits. Although a nonprofit, the company has employee benefits
comparable to for profit companies which include: 401k with 50% company matching
contributions, company-subsidized health insurance, life insurance and long term disability
insurance. It offers generous vacation benefits ranging from 1 to 2 days per month depending on
length of service.
The Center has the Information and Technology Department which maintains the company billing
network with direct interface with the county LA County DMH billing system. Intranet and internet
connections are maintained and upgraded to enhance flow and accessibility of information.

FINANCIAL CONDITION PRIOR YEARS

CFGCs financial performance has been consistent with the revenue and cost trends generally
flat and stable. Below is the summary for the current and the past five years

CFGC Financial Summary

FY 2006-07 thru FY 2011-12 (Partial)

25
 FY 11-
FY 06- 12 (9
07 FY 07-08 FY 08-09 FY 09-10 FY 10-11 mos) 1

Revenues 20,618 20,969 22,514 23,285 21,815 16,340

Expenses 20,417 21,414 22,457 23,234 22,326 16,395
Net Assets 4,120 3,675 3,733 3,783 3,272 3,387

Net Asset Growth trend% -10.80% 1.58% 1.34% -13.51%

Revenues doubled from around $10M in FY2000 to $22M in FY2010. Net operating results were
generally positive, except for a few years with deficit, biggest of which was in 2005 with almost
half a million loss. Net assets (or retained earnings) are generally in the $3.6M-$4.6M range with
the highest in 2004 and steadily declining to $3.7M in 2010.

In May 1998, the Center entered into a facility lease in North Hills, California. In 1999 the Centers
Residential program (Foster homes) was closed and homes used for the program were sold.
During the year 2004, the Center sold a building in which certain of its programs were conducted
and moved the program to a larger leased facility.

Government service contracts for the year ended June 30, 2004 was increased of previously
earned but reserved revenue applicable to prior year contracts in accordance with the Centers
revenue recognition policies.

During the year ended 2005, the Center closed its residential family homes programs and
subsequently sold the residential house. On the same year, government service revenue was
reduced to reflect the final settlement of a portion of Los Angeles County service contracts for
prior years.

Operations from 2007 through 2009 operation was steady particularly with respect to earned
income from contracts. Contributed income from donations however were on the decline (from
roughly $500,000 in 2007) through present.

FY 09-10

The most current industry participants data that are publicly available are the FY 2010 990S
which were used for industry analysis. Nonprofits normally have one year from Fiscal Year end to
file the report. The IRS 990 is the publicly available version of what is known as the Single Audit
Report which is required of Non-Profits with over $500,000 in revenues. The 990s will be

26
available June 30, 2012 which are beyond the timing of this report. It is deemed that the 2010
comparative data are reasonably adequate and timely for the purpose of this paper.

The FY 09-10 ended with a modest surplus (change in net asset) of $50,455. The auditor gave an
unqualified opinion and no negative findings in the management letter. In their footnotes to the
financial statements however, they noted the risk concentration due to significant portion (85%) of
funding coming from DMH. Regarding contributions, they noted that economic downturn could
cause a decrease in contributions and grants that coincides with an increase in demand for
CFGCs services.

The Single Audit Report is submitted to the contractors, including DMH which issues an
evaluation based on the report. CFGC passed the benchmarks per the Financial Viability Analysis
annually prepared: Current Ratio (2.0), Quick Ratio (1.5), Net Assets ($3M) and Income to
Expense ratio.

CFGC PROFIT & LOSS (Statement of Activities)

Years 2007 2008 2009 2010 2011

Revenue
Government service contracts $19,915,396 $20,303,579 $21,934,354 $22,901,821 $21,411,379
Program Service Fees 91,517 97,353 215,830 277,821 209,967
Interest income and dividend income 69,210 92,583 34,202 6,091 10,461
Gain on sale of Family Home 0 0 0 0
Unrealized gain (loss) on marketable
securities 0 0 0 -475
Other income 42,835 79,885 110,048 40,874 49,777
Contract Settlements 0 0 0 -96,779 183,959
$20,118,958 $20,573,400 $22,294,434 $23,129,353 $21,865,543
Support
Membership and contributions 437,360 345,678 169,977 107,835 109,836
Allocation from United Way 61,731 50,000 50,000 47,500 47,500
499,091 395,678 219,977 155,335 157,336

Restrictions Released 0 0 0 0 0

Total revenue, support and restrictions

released 20,618,049 20,969,078 22,514,411 23,284,688 22,022,879

Expenses
Program Services 18,452,730 19,430,860 20,696,626 21,402,661 20,091,891
Supporting services-administration 1,964,580 1,983,192 1,761,044 1,831,572 2,385,402
Total Expenses 20,417,310 21,414,052 22,457,670 23,234,233 22,477,293

Increase (Decrease) in unrestricted net

assets 200,739 ($444,974) $56,741 $50,455 ($454,414)
Temporarily Restricted Net Assets

27
 Support
Private Grants 20,834 170,834 170,834 - -
Restricted released -20,834 -170,834 -170,834 - -
Change in Temporarily Restricted Net
Assets 0 0 0 0 0
Change in Total Net Assets 200,739 -444,974 56,741 50,455 -454,414
Net Assets - beginning of year 3,920,090 4,120,829 3,675,855 3,732,596 3,783,051
Net Assets- end of year 4,120,829 3,675,855 3,732,596 3,783,051 3,328,637
Increase(Decrease) 5.12% -10.80% 1.54% 1.35% -12.01%

CFGC Balance Sheet

Year 2007 Year 2008 Year 2009 Year 2010 Year 2011
ASSETS
Cash in bank 3,097,379 4,062,260 3,492,427 2,961,695 3,698,466
Cash in money market funds 0 0 0 0
Contracts and fees receivable 1,435,917 962,832 1,513,946 795,608 618,043
Marketable Securities 0 0 0 0
Prepaid Expenses and deposits 133,301 113,382 120,214 123,822 120,024
Property-net of depreciation 429,154 321,428 246,920 210,382 209,052
Accounts Receivable 0 0 339,872 372,297 211,045
Short Term Investment 0 0 0 575,525
Total Assets 5,095,751 5,459,902 5,713,379 5,039,329 4,856,630

LIABILITIES AND NET ASSETS

Note Payable bank 0 0 0 0
Accounts Payable 197,138 146,465 145,353 195,383 95,739
Accrued Payroll and rel. 577,663 590,919 788,767 883,384 916,005
Mortgage payable 0 0 0 0
Contract Advances 200,121 1,046,663 1,046,663 177,511 516,249
Total Liabilities 974,922 1,784,047 1,980,783 1,256,278 1,527,993

COMMITMENTS/CONT.
NET ASSETS -454,414
Unrestricted 3,822,147 3,377,173 3,604,748 3,655,203 3,655,203
Temporarily restricted 298,682 298,682 127,848 127,848 127,848
Total Net Assets 4,120,829 3,675,855 3,732,596 3,783,051 3,783,051
Total Liabilities and net assets 5,095,751 5,459,902 5,713,379 5,039,329 5,311,044
Growth Trend 10.74% 7.15% 4.64% -11.80% 5.39%

FY 10-11 - Financial Highlights and related Accounting Policies

For the FY ending June 30, 2011, CFGC has a negative net asset change of $ 454,414, a deficit.
Change in Net asset is equivalent to net income (loss) or net surplus (deficit) in a for profit
company. ASC Topic 958, Not for Profit Entities, section 210 and 225, requires classification of
CFGCs net assets, revenues as well as expenses into three classes of net assets permanently
restricted, temporarily restricted, and unrestricted -- in the statement of financial position and the
amounts of change in each of those classes in the statement of activities. The basis for the

28
classification is the existence or absence of donor-imposed restrictions. As June 30, 2011, CFGC
has $3.2M in unrestricted asset, $127k in temporarily restricted and no permanently restricted.

Total revenues was $22.023M majority of which ($21.411M) is from governmental service
contracts. Government revenue is recognized when the qualifying costs are incurred for cost
reimbursements grants or contracts or when a unit of service is provided for performance grants.
Government revenue from federal agencies is subject to independent audit under the Office of
Management and Budget (OMB) Circular A-133 and review by grantor agencies. The review
could result in the disallowance of expenditures under terms of the grant or reductions of future
grant funds. CFGCs management expects to collect from outstanding balances.

Of the total revenues, around $157,336 is from contributions or donations. Contributions,

including unconditional promises to give, are recognized when received. All contributions are
reported as increases in unrestricted assets unless use of the contributed assets is specifically
restricted by the donor. Amounts received that are restricted by the donor to use in future periods
or for specific purposes are reported as increases in either temporarily restricted or permanently
restricted, consistent with the nature of the restriction. For 2011, all contributions were
unrestricted.

The total expenses for the fiscal year are $22.477M. The cost of providing CFGCs programs and
other activities is summarized on a functional basis in the Statement of Activities and Statement
of Functional Expenses. Expenses that can be identified with a specific program or support
service are charged directly to that program or support service. Cost common to multiple
functions have been allocated among the various functions benefited.

Salary expenses comprise the bulk of the cost, $14.868M or 66% of total. Fringe Benefits which
includes payroll taxes and benefits totaling $2.907M comprise 19.55% of direct salaries (This is
close to the mental health industry benchmark).

General operating non-salary expenses total $4.7M. Total indirect or support services (including
indirect payroll & related) is $2.3M. These expenses include those costs that are not directly
identifiable with any specific program, but which provide for the overall support and direction of
CFGC. This is considered overhead costs, ratio of which is critical ratio among nonprofits.

CFGCs fundraising costs are nominal amounting to $14,013 in 2011. Fundraising costs are
expensed as incurred, even though they may result in contributions received in future years.
CFGC generally does not conduct its fundraising activities in conjunction with its other activities.

29
In the few cases in which it does, such as when the annual report or donor acknowledgements
contain requests for contributions, joint costs have been allocated between fundraising and
management and general expenses in accordance with standards for accounting for costs of
activities that include fundraising. Additionally, advertising costs are expensed as incurred.

Total assets for 2011 was $4.856M, of which $3.698M is cash. CFGC has short term investments
which are reported at fair value. The fair value for investments under Morgan Stanley is estimated
using maturity based on interest rates.

CFGC has $ 829,088 in receivables, majority of which is from DMH. Receivables are primarily
unsecured amounts due from grantors on cost reimbursements or performance grants. They are
stated at the amount management provides for probable uncollectible amounts through a
provision for bad debt and an adjustment to a valuation allowance based on its assessment of the
current status of individual accounts. Balances which remain outstanding after management has
used reasonable collection efforts arts are written off through a charge to the valuation allowance
a credit to accounts receivable. CFGC receivables aging is mostly current but some DMH
balances have been uncollected for more than 5 years.

CFGCs fixed assets net of depreciation has net book value of $209,052. This includes the main
building at Zelzah Avenue in Northridge, CA and the lease improvements at leased locations in
Palmdale and San Fernando Valley. Fixed assets are reported in the statement of financial
position at cost, if purchased, and at fair value at the date of donation. All land, buildings and
property are capitalized. Equipment is capitalized if it has a cost of $5,000 or more and a useful
life when acquired of more than 1 year. Repairs and maintenance that do not significantly
increase the useful life of the asset are expensed as incurred. Depreciation is computed using the
straight line method over the estimated useful lives of the assets. Property and equipment are
reviewed for impairment when a significant change in the assets use or another indicator of
impairment is present. No impairment losses were recognized in the financial statements in the
current period.

CFGC has no mortgage payable or long term obligation. As of 2011, CFGC has a $2M line of
credit arrangement expiring March 29, 2012 bearing interest rate at 1.75 above the banks
reference rate (3.25% at June 2011).The note is collateralized by accounts receivable of CFGC
and other property as defined. As of June 30, 2011, there is no balance on the credit line. The
credit line was recently renewed with the same terms up to March 29, 2013.

30
CFGC leases facilities and equipment under several operating leases with terms expiring at
various dates through August 2014. Certain facility leases contain operating cost increases. The
approximate minimum future annual rental commitment for each of the next five years in
aggregate is as follows: 2012 - $1,373,552; 2013 - $210,327; 2014 - $39,632. Rent expense,
which is included in the statement of functional expenses, was $1,319,583 for the year ended
June 30, 2011.

CFGCs major liability is the accrued employee vacation (included in the $916,007 accrued
payroll) as of June 30, 2011. Vacation benefits are accrued on a monthly basis. Full-time and
part-time employees accrue vacation time based upon years of service to CFGC as follows:
months 4-12: 1 day/month; 1-9 years-1.5 days/month; 10+=2 days/month. Unused vacation leave
will be paid at the time of termination.

The other major liability is the Contract Advances amounting to around $516,249 which
represents the excess of advances received from DMH over the actual realized DMH revenues
for the period. This is recorded as payable to pending settlement with DMH, in which case DMH
will send a demand letter for repayment. This is usually netted out from future payments due from
DMH.

Major Issues DMH Contract and Billings

Any discussion of the CFGC financials should involve analysis and understanding of the
Department of Mental Health (DMH) contract billing and cost reporting. The single most important
factor for the CFGC deficit is the dismal performance of the DMH Contract services. The DMH
contract accounts for the majority of the $454,000 loss.

Measured by Units of Service (UOS) production, mental health counseling is normally billed on
minutes (60 seconds) increment. The DMH contract specifies the rates which are summarized as
follows: Mental Health - $2.57, Medication Support - $4.69, Case Management -$2.60. These are
broken down into Service Function Codes (SFC), which conforms with the standard mode of
service common to all DMH contracts.

Unique to the Mental Health industry, the DMH billing and costing systems is by itself an intricate
and complicated system, subjected to various permutations and changes. The fundamental billing
variables however, remains which are the rates, the units and the services. The billing
computation however is not a simple rate multiplied by the cost per unit. The cost per unit should

31
not exceed the State Maximum Allowance (SMA), in which case, the lower of the cost or SMA
rate.

The contract provisions involve two major components: the categorical and the non-categorical
services. Categorical funding is limited and any billings in excess are not reimbursed or
uncompensated. Non-categorical which are mainly EPSDT have more flexibility and can be
subject to matching with counterpart federal funds.

The Federal government provides mental health services through Medicaid program designed for
certain groups of people with limited income and resources and the aged, blind and disabled.
States operate and administer Medicaid. In the case of Californias Medicaid program (known as
Medi-Cal), the Department of Health Care Services (DHCS) is the single responsible State
agency. DHCS delegates administrative responsibility for specialty mental health services to the
Department of Mental Health (DMH).

Mental Health Medi-Cal claiming is a reimbursement system in which counties are

provided an interim cash flow of State and Federal funding (pending cost settlement and
audits) on a claim-in, payment-out basis. Funding is made available through the
Federal Medicaid program and California provides matching state and county funds.

The DMH makes payment to contract providers under two mutually exclusive mechanisms for two
differing purposes. First, the DMH, for cash flow purposes, makes available to contract providers
advance payment, which is similar to a banks line of credit. These advance payments are not for
services provided, but instead are intended to provide working capital for the contractor. These
advances must be repaid, customarily by means of providing the contracted services. Second,
the DMH makes payment for the provision of the contracted services. These payments are
reimbursement for actual services rendered and claimed to the DMH.

Counties must meet claiming requirements in order for the State Controllers Office to
make interim payments to county treasuries. This allows counties to obtain a percentage
of the funding necessary to continue providing services to Mental Health Medi-Cal
clients.

Counties must assure that claims submitted to DMH for mental health services to Medi-
Cal eligible individuals have met all necessary requirements for Medi-Cal reimbursement
of these services by certifying their costs in the year-end cost report.

32
Figure 6-2 from the DMH Medi-cal Billing Manual provides a visual perspective example of a
claim as it relates to a broader funding process.

33
DMH-related recent issues and problems

CFGCs DMH billings for the first half of FY 10-11 nosedived by 25% compared to the same
period the previous year. The second half showed improvement but not enough to compensate
for the first half loss. The reason for this is mainly attributed to external factors, i.e. contract
changes made by the funding source (DMH), specifically in the mode of delivery of mental health
services.

Beginning in January 2010, the second half of Fiscal Year 2009-10, the LA County Department of
Mental Health announced unprecedented cuts in funding to their contract providers due to sharp
declines in the California state sales tax and vehicle license fee revenues that fund many of LA
County mental health services. For CFGC, the curtailment figure was over $9.8 million dollars of
our $23.8 million dollar contract or approximately 51% of our DMH funding. The cuts were to take
full effect July 1, 2010. All DMH contract agencies faced similar cuts.

In announcing these cuts, the County recognized the potential loss of mental health services to
the community and the serious financial impact on agencies. So, in an attempt to partially
mitigate the loss of services and funding, the County provided contract providers with the
opportunity to access alternative funds up to the amount curtailed from the Mental Health
Services Act (MHSA) Prevention and Early Intervention (PEI) plan.

While the PEI funding stream afforded contract agencies such as CFGC with an opportunity to
access alternative funds, this new funding stream required the implementation of a limited
number of approved Evidence Based practices (EBPs). Thus, the centers outpatient mental
health programs underwent an unprecedented transformation to EBPs to align with the
Department of Mental Healths Prevention and Early Intervention funding requirements. The
required shift in our programs from traditional, long-term outpatient services to short-term,
evidence based practice models presented numerous challenges.

First, these required EBPs placed significant restrictions on what and how services were to be
delivered, such as who can provide the services, how long and often clients can be seen and
what types of issues can be addressed. Consequently, services to over 200 clients had to be
terminated resulting in a dramatic drop in caseloads across the agency. The outpatient programs
had to conduct targeted outreach to referral sources for clients fitting the criteria of the EBPs.
The center had to reorganize its intake and admission policies and procedure to facilitate easy
and quick access for a higher volume of clients. At this point, CFGC has sufficient numbers of
requests for services to fill caseloads.

34
Second, before any of these new services could be implemented, all clinical staff who would be
providing these EBP services were required to attend intensive trainings. This meant that the
agency needed to have over 180 clinicians trained in one or more EBP. The cost of training
ranged from $1,000 $5,000 per clinician per practice and required 1- 5 days of initial training,
extra supervision, required consultation calls with the developer of the practice and follow-up
training days. Most clinicians needed to be trained in more than one practice. Although DMH
provided funding for the cost of many of the trainings, the center lost thousands of service hours
(and hence revenue) due to the time spent by clinicians in trainings. In addition, DMH could not
provide timely training for all clinicians so some clinicians could not begin providing services until
trained. Currently, CFGC has had sufficient numbers of clinicians trained in a range of practices
in order to meet the needs of the community and fill caseloads.

The net result of implementing these new EBP practices was a 25% drop in hours of billable
services to clients over the first six months of the fiscal year which resulted in a significant deficit
for FY 2010-11. While center management worked quickly to create action plans to address the
challenges outlined above and productivity increased significantly over the second half of the
fiscal year, it was not possible to recover all of the lost revenue due to the drop in productivity for
the first half of the year.

VI. STRATEGY ANALYSIS

MISSION AND VISION EVALUATION

The strategy analysis process begins by defining or reviewing the mission and vision which
provide the focus and direction of the organization. The mission specifies what purpose to
achieve and what value to produce. The mission is the fundamental reason the organization
exists. It is broad and enduring, and expresses the core of what the organization is about. The
mission rarely changes, although strategies for achieving it may vary over time.

While a mission describes why an organization exists, a vision indicates how the future will be
better because the organization exists. A vision provides an imaginable picture of the desired
future. It is about possibilities and describes the means and ends among many that may satisfy
the mission.

Vision Statement (Actual)

The Child and Family Guidance Center envisions a community where all children are given the
opportunity to grow and develop in a supportive and nurturing family environment. We seek to

35
have children maximize their potential as productive members of society. We also envision a
community where parents are empowered to become advocates for the needs of their children.

Vision Statement
Evaluation

Parameter Yes/No Why

Does it clearly answer
the question: What
Do we want to become?
Is it concise enough
yet inspirational?
No It answers to certain extent what the company wants to
become. However, the statement is too general and
generic.
It needs unique and imaginable standards.
No It is inspirational but not concise enough to be a good
Company slogan.

Is it aspirational? Yes The statement is forward-looking and is something

to aspire for.
Does it give a clear No The vision statement, while aspirational, is vague on the
indication as to when it timeline.
should be attained?

Mission Statement (Actual)

The Child and Family Guidance Center serves vulnerable and at-risk children, as well as their
families. We provide a continuum of quality mental healthcare, supportive social services and
links to needed resources. The Center embraces a family-strengthening philosophy aimed at
helping clients to become empowered, overcome challenges and flourish within the community.

The Center is committed to remaining responsive to the ever-changing needs of our families,
developing innovative programs and training professional staff members to work in a community
setting.

Mission Statement Evaluation

Parameter Yes/No If yes, which part of the statement?

1. Customers Yes serves vulnerable and at risk children, as well as
their families

2. Products and Services Yes quality mental healthcare, supportive social services
and links to needed resources

Mission is vague on target market (should indicate if

3. Markets No target market is local, national, global, etc.)

36
 4. Technology No

5. Concern for survival, growth, No

profitability.

6. Philosophy Yes embraces a family strengthening philosophy aimed at

helping clients

7. Self-concept No

8. Concern for employees Yes training professional staff members to work in

a community setting

8. Concern for public image No

9. Concern for nation building No

CEOs opinion on the Centers vision and mission:

And so you have to be a leader in the field, but that doesnt mean you want to jump on every
new fad. You have to make sure it is the real deal and you do research and you understand that
is something that you know. For example, when family-focused therapy first started they said, Oh
you cant treat the kids in the office. Its a sterile environment. Youve got to go into the childs
home. Thats the way we do it. All of our services are in the childs home. Thats the only way we
do it. Well, thats the pendulum swinging too far the other way. The pediatrician doesnt go into
their home. And so there has to be a balance. You do some services in the field, whether it is the
home or the school.

37
Recommended Vision and Mission Statement

Vision Statement (Proposed based on new strategy)

We, at Child and Family Guidance Center envisions a community where all children, regardless
of individual differences and family background, are given the opportunity, with our help, to grow
and develop as productive members of society. Our vision shows a world where all parents are
able with our help, to provide the needs and well being of their children within the community.

Mission Statement (Proposed based on new strategy)

Child and Family Guidance Center strives for a total approach in providing quality mental health
counseling, supportive social services, and linkages to needed resources. We aim to expand the
quality and reach of our services. With enhanced expertise and resources, we will help families
overcome challenges and flourish within their community. The Center is committed to responding
and adapting to ever-changing needs of our families, developing innovative programs, and
training professional staff members. The Center is committed to attaining financial sustainability
to deliver its mission many years into the future.

INTERNAL EVALUATION

Strategic Management Concept

Through manuals and an employee orientation program, company goals are communicated
frequently beginning with the hiring of new employees. Internal website or intranet emphasizes
company goals, its vision, mission, core values and other organizational information. Each head
of the Department or Division are responsible for communicating strategies down the line. CFGC
could further improve the communication of its objectives based on the mission and vison
evaluation.

CFGC has a top to bottom decision structure. Giving consideration to the recommendations and
information emanating from the lower level managers, major decisions are made by upper
management. The decision making process involves the lower level managers through planning
sessions done periodically involving all levels of management. Department heads and managers
are held accountable (through performance appraisals) for implementing action points which are
delegated to them during and after strategy/budget meetings and sessions.

38
Motivational Factors

Employee motivation is tied to performance versus individual job objectives through Job
descriptions that are well defined showing both the knowledge and skills needed as well as the
specific duties of each positions. Annual performance appraisals are given to managers to
measure the individual achievements and to have the opportunity to direct the behavior of the
employee towards the execution of the companys objectives.

CFGCs staff retention strategy includes employee development, recognition, compensation and
managing company culture. Staffs are trained based on their development plans. This includes
classroom training and on the job mentoring and coaching. Recognition through service
excellence awards are given to high potential employees.

To attract and retain talent, CFGC provides compensation and benefits package that are
competitive to both nonprofit and for profit corporation. To encourage team building and promote
work-life balance, various activities and company sponsored events are regularly held.

Overall attrition rate at CFGC is low with significant number of employees having been with the
company for significant number of years which may suggest the effectiveness of the internal
environment within the company.

INTERNAL EVALUATION (based on Mckinseys 7-S Model for Non-profits)

In order to have formal metrics to measure the internal workings of CFGC, the Mckinseys
Organizational Capacity Assessment tool (a nonprofit derivative of Mckinseys7) was used. It was
designed for nonprofits to identify capacity strengths and weaknesses/challenges and establish
capacity building goals on ten areas of organizational capacity. Using 4 levels rating scale (1 as
the lowest, 4 highest), CFGC was rated highest on CEO/Sr. Management, Financial
Management, IT. It was rated lowest on Fund Development (2) (i.e. highly dependent on few
funding, weak fundraising). It was rated average or Level 3 on most of the factors such as
Program design & Evaluation, Human Resources, Board Leadership, Legal Affairs, Marketing,
Communications, & External Relations. Most of these findings were subsequently used in the
SWOT analysis. Details of the survey results/descriptions are in the Appendix.

Below are the ratings and corresponding descriptions based on Mckinseys scale:

39
 Organizational Capacity Assesment (Mckinsey 7 for Non-Profits)
Capacity Areas Score

1 Mission, Vision, Strategy & Planning 2.63

2 Program Design and Evaluation 2.40
3 Human Resources 2.83
4 CEO/ED/Sr. Management Team Leadership 2.88
5 Information Technology 3.25
6 Financial Development 3.50
7 Fund development 2.00
8 Board Leadership 2.57
9 Legal Affairs 2.00
10 Marketing, Communications, & External Relations 2.83
Average 2.69

Mission

1 Mission Level 3 -Clear expression of organizations reason for existence which reflects its
values and purpose; held by many within the organization and often.
2 Clarity of Vision Level 3 Clear and specific understanding of what organization aspires to
become or achieve, held by many within the organization and often used to direct actions
and set priorities.
3 Boldness of Vision Level 2 Vision exists but fall short of reflecting an inspiring view of the
future and of being demanding yet achievable.
4 Overarching Goals Level 3 Vision translated into small set of concrete goals, but goals
lack at most two of following four attributes: clarity, boldness, associated metrics, or time
frame for measuring attainment; goals are known by many within the organization and
consistently used by them to direct actions and set priorities.
5 Overall strategy Level 2 Strategy exists but is either not clearly linked to mission, vision,
and overarching goals, or lacks coherence, or is not easily actionable; strategy is not broadly
known and has limited influence over day-today behavior.
6 Strategic Planning Level 3 Ability and tendency to develop and refine concrete, realistic
strategic plan; some internal expertise in strategic planning or access to relevant external
assistance; strategic planning carried out on a near regular basis; strategic plan used to
guide management decisions.
7 Planning Systems Level 3 Regular planning complemented by ad hoc planning when
needed; some data collected and used systematically to support planning effort and improve
it.

40
8 Goal/Performance Targets Level 3 Quantified, aggressive targets in most areas; linked
to aspirations and strategy; mainly focused on outputs/outcomes (results of doing things
right) with some inputs; typically multiyear targets, though may like milestones; targets are
known ad adopted by most staff who usually use them to broadly guide work.
9 Operational planning Level 4 Organization develops and refines concrete, realistic, and
detailed operational plan; has critical mass of internal expertise in operational planning, or
efficiently uses external sustainable, highly qualified resources, operational planning
exercise carried out regularly; operational plan tightly linked to strategic planning activities
and systematically used to direct operations.
10 Use and Development of Organizational Processes Level 2 Basic set of processes in
core areas for ensuring efficient functioning of the organization; use of processes is variable,
or processes are seen as ad hocs requirements (paperwork exercises); no monitoring or
assessment of processes.
11 Decision Making Framework Level 3 - Clear, largely formal linear/systems for decision
making but decisions are not always appropriately implemented or followed; dissemination of
decisions generally good but could be improved.
12 Monitoring of Landscape Level 2 Basic knowledge of players and alternative models in
program area but limited ability to adapt behavior based on acquired understanding.
13 Knowledge Management Level 2 Systems exist in a few areas but either not user friendly
or not comprehensive enough to have impact; systems known by only few people or only
occasionally use.
14 Inter-functional coordination Level 2 - Interactions between different programs and
organizational units are generally good, though coordination issues do exist; some pooling of
resources.
15 Shared Beliefs and Values Level 3 Common set of basic beliefs held by many people
within the organization; helps provides members a sense of identity; beliefs are aligned with
organizational purpose and occasionally harnessed to produce impact.
16 Shared References & Practices Level 2 - Common set of references and practice exists in
some groups within the organization, but are not shared broadly; may be only partially
aligned with organizational purpose or only rarely harnessed to produce impact.

Performance Design & Evaluation

1 Performance Measurement Level 1 Very limited measured and progress partially

tracked; organization regularly collects solid data on program activities and outputs.

41
2 Performance Analysis and Program Adjustments Level 2 Some efforts mad to
benchmark activities and outcomes against outside world; internal performance data used
occasionally to improve organization.
3 Program Relevance & Integration Level 3 Core programs and services well defined and
aligned with mission and goals; program offerings fit together well as part of clear strategy.
4 Program growth and replication Level 3 Occasional assessment of possibility of scaling
up existing programs and when judged appropriate, action occasionally taken; able to scale
up or replicate existing programs.
5 New Program Development Level 3 Occasional assessment of gaps in ability of existing
program to meet recipient needs, with some adjustments made; demonstrated ability to
modify and fine-tune existing programs and create new programs.

Human Resources

1 Recruitment, Development & Retention Level 2 Some tailoring of development plans for
managerial development; annual reviews incorporate development; limited willingness to
ensure high-quality job occupancy; career paths in place without considering managerial
development; limited training, coaching, and feedback; some regular performance
appraisals; no systems/processes to identify new managerial talent.
2 Recruitment, Development & Retention of General Staff Level 2 No active development
tools/programs; feedback and coaching occur sporadically; performance evaluated
occasionally; limited willingness to ensure high quality job occupancy; sporadic initiatives to
identify new talent.
3 Human Resources Planning Level 2 Some ability and tendency to develop high-level HR
plan either internally or via external assistance; HR plan loosely or not linked to strategic
planning activities and roughly guides HR activities.
4 Incentives Level 2 Some basic elements of incentive system in place; may include one of
following: competitive salary (possibly partly performance-based), attractive career
development options, or opportunities for leadership; some evidence of motivational effect
on staff performance.
5 Performance as Shared Value Level 1 Employees are hired, rewarded and promoted for
executing a set of tasks/duties or for no clear reason, rather than for their impact; decisions
are mostly made on gut feeling.
6 Individual Job Design Level 3 All key roles have associated positions; most individuals
have well-defined roles with clear activities and reporting relationship and minimal overlaps;
job descriptions are continuously being redefined to allow for organizational development
and individuals growth within their jobs.

42
7 Organizational Design Level 2 Some organizational entities are clearly defined, others
are not; most roles and responsibilities of organizational entities are formalized but may not
reflect organizational realities; organization chart is incomplete and may be outdated.
8 Staffing Levels Level 2 Most critical positions within and peripheral to organization (e.g.
staff, volunteers, board, senior management) are staffed; experience limited turnover or
attendance problems.
9 Senior Management Team Level 3 Team has significant experience in nonprofit or for
profit management; some relevant capabilities and track record from other fields; good track
record of learning and personal development; highly energetic and committed.
10 Staff Level 3 Staff drawn from diverse backgrounds and experiences, and bring a broad
range of skills; most are highly capable and committed to mission and strategy; eager to
learn and develop and assume increase responsibility.
11 Volunteers Level 3 Very capable set of individuals, bring required skills to the
organization; work easily with most staff, but do not generally play core roles without
substantial staff supervision; volunteers are managed and contribute to the overall success
of the organization.

CEO/Senior Management Leadership

1 Experience & Standing Level 3 Significant experience in nonprofit management; many

relevant capabilities from other field(s); significant evidence of social entrepreneurial-like
skills.
2 Personal & Interpersonal Effectiveness Level 4 Is viewed as outstanding people
person; uses diversity of communication styles, including exceptional charisma, to inspire
others and achieve impact; continually self-aware, actively works to better oneself;
outstanding track records of learning and personal development.
3 Passion & Vision Level 3 Good energy level; visible commitment to organization and its
vision.
4 People & Organizational Leadership/Effectiveness Level 3 - Actively and easily builds
rapport and trust with others; effectively encourages others to succeed; gives others freedom
to work their own way; gives people freedom to try out ideas and grow.
5 Impact Orientation Level 3 Sees financial soundness as essential part of organizational
impact, together with social impact; focuses on ways to better use existing resources to
deliver highest impact possible; has sense of urgency in addressing issues and rapidly
moves from decision to action; develops and implements actions to overcome resistance to
change.

43
6 Analytical and Strategic Thinking - Level 2 - Is able to cope with some complexity and
ambiguity; able to analyze strategies but does not yet generate strategies.
7 Financial Judgment - Level 2 Draws appropriate conclusions after studying all the facts;
understands basic financial concepts and drives for financial impact of major decisions.
8 Dependence of Management & Staff on - CEO Level 3 Limited dependence on CEO;
organization would continue in similar way without his presence but areas such as fund-
raising or operations would like likely suffer significantly during transition period; no member
of management team could potentially take on CEO role.

Information Technology

1 Telephone/Fax Level 4 - Sophisticated and reliable, includes around-the clock individual

voice mail; supplemented by additional facilities (e.g. cell phones) for selected staff.
2 Computers, Network, Email Level 3 -Solid hardware and software infrastructure.
3 Web site - Level 3 Comprehensive web site containing basic information on organization
as well as up to date developments; most information is organization-specific; easy to
maintain and regularly maintained.
4 Databases & Management Reporting Systems Level 3 Exist in most areas for tracking
clients, staff, volunteers, program and financial information; commonly used and help
increase information sharing and efficiency.

Financial Management

1 Financial Position Level 2 Cash available for timely payment and obligations, board has
not designated an operating reserve, but periodic surpluses could begin to support a
reserve, minimal attention paid to the designation of unrestricted vs. restricted funds.
2 Accounting Systems & Procedures Level 4 Robust systems in place governing all
financial operations, clearly documented procedures ensure all accounts are reconciled each
month; all internal and external accounting functions are fully integrated with budgeting,
decision making and organizational goals; comprehensive chart of accounts tracks full range
of financial activities; documented procedures in place for allocation of all joint/indirect costs.
3 Budgeting Level 4 Based on multiple years of data, budget is integrated into all
operations and reflects steady gradual growth or contraction; conservative revenue
projections any changes justified by infrastructure changes); well understood divisional
(program or geographical) budgets within central budget; performance-to-budget closely
monitored.

44
4 Financial Planning & Analysis - Level 3 Solid financial plans, regularly updated, board
reviews financial information at each meeting; cash flow projections regularly updated and
monitored closely; trends including year-end revenue and expense projections are monitored
to assist in making sound decisions; program unit costs monitored through documentation of
staff time and other joint expenses, board and staff encouraged to pursue financial tracking.
5 Financial Policies Level 4 Comprehensive written financial policies outline authority over
all assets and provide guideline for controlling their accumulation and consumption; annual
independent audit arranged by the board, which institutes any required changes; insurance
need reviewed by the board at least annually for appropriate levels and types of coverage;
staff and volunteers are well informed about confidential means (e.g. CFGC Whistleblower
policy) to report suspected financial impropriety and are protected against retaliation.
6 Internal Controls Level 4 Fully secure accounting data storage and retrieval are in place;
written internal controls include all these policies a) authorized check signers b) counter
check signature c) cash receipts recorded and endorsed with separation of functions d)
delinquent assets periodically reviewed e) fixed assets regularly inventoried.

Fund Development

1 Funding Stability Level 2 Organization has access to multiple types of funding (e.g.
government, foundations, corporations, individuals, special events) but only a few funders in
each type, or has many funders within only one or two types; little attention paid to growing
the individual donor base; funding base still relatively unstable.
2 Fundraising infrastructure Level 2 Donor information is retained and managed sufficiently
to track donor histories and produce basic reports showing funding trends but system is not
well documented; donor acknowledgements are prompt but done inconsistently; donor
management system is insufficiently integrated with accounting and other internal systems to
facilitate information gathering for grant and other reports.
3 Fundraising Skills Level 2 Main fundraising needs covered by some combination of
internal skills and expertise, and access to some external fundraising expertise; staff time
devoted to fundraising is inadequate; ineffective use of board for fundraising or cultivating
donor contacts.
4 Fund Development Planning & Evaluation Level 2 Recognize need to develop systems
for long term planning, revenue diversification, outlining and managing to target goals, and
evaluation of fund development program; fund development strategy includes several

45
 activities, but is not well connected to long term strategic plan and budget projections;
fundraising activities more opportunistic than strategic.
5 Revenue Generation Level 2 Some internal revenue generation activities, however
financial net contribution is marginal; revenue generation activities distract from
programmatic work and often tie up some members of the senior management team.

Board Leadership

1 Core Financial & Legal Responsibilities of the Board Level 2 Board carries out and
understands basic legal and fiduciary responsibilities (including establishing and following b-
laws; complying with federal, state, and local financial reporting requirements and tax
payments; hiring and supervising the CEO); board is involved in budget preparation and
reviews financial statements regularly; CEO performance reviews conducted periodically.
2 Board Strategic Direction Level 2 General agreement on mission; but vision may not be
formalized; infrequent discussion of mission/vision or program performance against mission;
little active involvement in mission/vision review or strategic planning beyond approving
periodic staff-driven plans.
3 Board/Staff Balance of Leadership Level 3 Board provides some direction, support, and
accountability to staff leadership and is informed about most organizational matters; informal
process of developing and selecting board leadership; board input on most major decisions
is sought and valued; occasional disagreement on the distinction between board-level and
staff-level decisions; members understand most leadership roles and responsibilities,
including the need for participation in reputation building activities.
4 Board Participation in Fund Development Level 2 - Members accept that the board has
some fundraising responsibilities, but concerns exist regarding the ability of board to be
successful in this area; some understanding of the organizations resource needs; several
members have made some financial gifts to the organization; board fundraising activities not
yet underway.
5 Board Composition and Commitment Level 3 Good diversity in fields of practice and
expertise including most of the skills and experience needed by the organization;
membership represents most constituencies; solid commitment to organizations success,
vision and mission.
6 Board Development & Self Evaluation Level 3 Development Committee meets regularly
to assess board composition and identify and recruit new members to fill specific gaps in
needed skills or attributes; orientation held for new board members; well understood policy
on member tenure; board conducts on-going training and skill development; regular
performance evaluations against board-established goals in some areas (e.g. fundraising),

46
 but results not well utilized to formulate plans for improvement; board assesses individual
director performance at the time of re-nomination.
7 Board Infrastructure Level 3 Board size appropriate for organizations needs; written
board member job descriptions; attendance is good at regular, purposeful, well-planned
meetings; meeting calendar set and publicized in advance; agendas prepared and minutes
recorded for every meeting; meetings generally start and end on time; committee system in
place with generally understood division of roles and responsibilities between full board and
subcommittees; regular committee meetings support work of the full board.

Legal Affairs

1 Management of Legal & Liability Matters Level 2 Legal support resources identified,
readily available, and employed on as needed basis; major liability exposures managed
and insure (including property liability and workers compensation).

Marketing, Communications, & External Relations

1 Communications & Outreach Effectiveness Level 3 Organization has a packet of

marketing materials that it uses on a consistent basis; information contained in the materials
is up to date and reflects new programs, activities and outcomes; materials are reasonably
professional in presentation and aligned with established standards.
2 Communications Strategy Level 3 Organization has a communication plan and strategy
in place; key messages are defined and stakeholders are identified; communications to
stakeholders are generally consistent and coordinated.
3 Public Relations & Marketing Level 3 - Organization considers PR/marketing to be useful
and actively seeks opportunities to engage in these activities; critical mass of internal
expertise and experience in PR/Marketing or access to relevant external assistance.
4 Presence & Involvement in Local Community Level 3 - Organization reasonably well-
known within community and perceived as open and responsive to community needs;
members of larger community (including a few prominent ones) constructively involved in
organization.
5 Development & Nurturing of Partnerships & Alliances Level 3 Effectively built and
leveraged some key relationships with few types of relevant parties (for-profit, public, and
nonprofit sector entities); some relations may be precarious or not fully win-win.
6 Influence on Policy-making Level 3 Organization is fully aware of its possibilities in
influencing policy-making and is one of several organizations on state or national level.

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FINANCIAL EVALUATION

FY 11-12 CURRENT FINANCIAL CONDITION

The FY 10-11 negative results have triggered concerns and imperativeness for FY 11-12
recovery which prompted the formulation of the FY 11-12 Budget. The budget was initiated by
Finance under the direction of the Executive Committee composed of the Finance Director,
President/CEO and the Program Directors.

Recent comparative metrics of budget versus actual performance are encouraging. As mentioned
by the authors memo to the Executive Committee, the 2nd quarter (December 2011) results
($225,000 deficit) is a marked turnaround from the $1.893M deficit for the same period the
previous year. The driving force behind the turnaround is the improved production of units of
service. December 2011 YTD units increased by 28% compared to the same period last year.
This is a reversal from the 27% decrease of the same period the previous year and parallels the
positive performance of that FY 09-10. A critical success indicator is the low ratio of DMH costs to
Contract reimbursement rate (SMA), which is far below at 93% (compared to the 124% for same
period last year). Compared to budget, December 2011 units are 2.6% short of the YTD budget.

This author noted in the executive memo that while the results/indicators are encouraging, the
most critical success factors are adherence to the budget, (specifically attaining the budgeted
units) and the Cost to SMA. The lower the units budget gap, the lower is the SMA ratio, and the
greater is the room for employee salary adjustments and motivation. Also substantial increase in
contributions is imperative to generate the year-end surplus.

As of March 31, 2012, CFGC has a YTD net deficit of $55,788, a major turnaround from the
$1.381M deficit for the same YTD period last year. The deficit is broken down by major funding as
follows:

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 CFGC Surplus(Deficit) by Major Programs
March 2012 YTD
NET
PROGRAMS REVENUES DIRECT COSTS CONTRIBUTION INDIRECT SURPLUS
MARGIN COSTS (DEFICIT)

DMH 13,635,574 11,561,392 2,074,182 2,134,806 (60,624)

WRAPAROUND AV 761,147 589,112 172,035 116,727 55,308

OCJP 172,509 160,778 11,731 32,167 (20,436)

MHATAY 31,262 34,449 (3,187) 6,571 (9,758)

GRYD 225,667 205,247 20,420 35,466 (15,045)

SRILA5 93,421 74,944 18,477 17,955 522

NORTHPOINT SCHOOL 1,214,206 1,031,289 182,917 176,902 6,015

GENFUND 205,726 185,193 20,533 32,303 (11,770)

COMBINED TOTAL 16,339,512 13,842,405 2,497,108 2,552,896 (55,788)

GROWTH
Units of Service Growth
The driving force behind the turnaround is Units of Service (UOS) which is the most critical
measure of CFGC production. The 9-month production surged past the halfway mark with more
units compared to the same period last year and parallels the positive performance of two years
before (FY 09-10). CFGC has maintained its growth over 2011 and is projected to increase in
2012 through 2016.

For the 3rd Qtr YTD operations, the Center produced 16.1% more units compared to same period
last year. This is down from the comparative 30% (1st Qtr YTD) and 28% (2nd Qtr YTD).

DMH Production - March 2012 YTD

FY 10-11 FY 11-12 Increase Percent
YTD Total YTD Total in Units Increase

County 278,501 363,217 84,716 30.42%

AB3632 412,746 88,448 (324,298) -78.57%
Healthy Families 255,776 417,105 161,329 63.07%
Medi-Cal 3,728,305 4,559,756 831,451 22.30%
Total 4,675,328 5,428,526 753,198 16.11%

Trend-wise, units increased 7.8% over previous month. When compared with same month last
year (March 2011), units dropped significantly at 11.93%. While this could be a temporary lull in
the momentum, this is the first time a monthly production is lower than the previous year.

49
 CFGC DMH Production - FY 10-11 to FY 11-12
As of March 2012

UNITS July August Sept Oct Nov Dec Jan Feb March

FY 10-11 404,731 413,680 509,517 470,379 488,893 425,816 559,345 628,679 774,289
FY 11-12 546,296 595,472 605,655 640,695 654,275 452,392 619,277 632,581 681,883

INCREASE (DECREASE) CURRENT YR VS. PRIOR

YR.
Change 141,566 181,792 96,138 170,316 165,383 26,576 59,932 3,902 -92,406
-
Change % 34.98% 43.95% 18.87% 36.21% 33.83% 6.24% 10.71% 0.62% 11.93%

For the 9-month operations, the Center produced 16.1 more units compared to same period last
year.

Profitability
In 2011, CFGC had almost half a million deficit (most of which attributed to prior years write off
contract receivables) and expected to bounce back into a surplus starting 2012.

50
CFGC COMPARATIVE FINANCIAL REPORT MARCH 2012 VS. MARCH 2011 YTD

DESCRIPTION MARCH MARCH

2011 2012 PERCENT
FY 10-11 FY 11-12 VARIANCE CHANGE
INCOME
TOTAL PURCHASE SERVICES & CONTRACTS 14,979,848 16,071,173 1,091,325 7.29 %
TOTAL FEES & THIRD PARTY PAYMENTS 80,981 18,700 -62,281 (76.91) %
TOTAL OTHER REVENUE 44,809 56,785 11,976 26.73 %
TOTAL CONTRIBUTION INCOME 87,389 167,855 80,466 92.08 %
UNITED WAY 23,750 25,000 1,250 5.26 %
GRAND TOTAL INCOME 15,216,777 16,339,513 1,122,736 7.38 %

EXPENSES
TOTAL SALARY & RELATED EXPENSES 14,028,011 13,708,616 319,395 2.28 %
TOTAL OCCUPANCY EXPENSES 1,372,728 1,399,962 -27,234 (1.98) %
TOTAL OPERATING EXPENSES 1,185,778 1,286,373 -100,595 (8.48) %
TOTAL FUNDRAISING EXPENSES 11,835 350 11,485 97.04 %
GRAND TOTAL EXPENSES 16,598,351 16,395,301 203,050 1.22 %
-1,381,574 -55,788 1,325,786
OPERATING SURPLUS / (DEFICIT) 95.96 %
Change in Temp. Restr. Asset 0
N/A
NET SURPLUS / (DEFICIT) -1,381,574 -55,788 1,325,786
95.96 %

Compared to previous year actual, revenues are over by 7.38% and expenses are under by
1.22%.

Salary costs reflect the bulk of staff salary adjustments. Also included are accrued expenses and
YTD incentives.

DMH Revenues are recognized after submission of annual DMH Cost Report. This, however, is
subject to disallowance until County and State final DMH settlement. This complies with the
International Accounting Standards of full accrual.

The Balance Sheet indicates reasonable liquidity with 1.66 and 1.43 current ratio and quick ratio,
respectively. Contract Advances, which are mostly advanced contract payments from DMH is
$3.9M.

51
 CFGC BALANCE SHEET - FY 11-12
March 31, 2012
ASSETS
CASH AND CASH EQUIVALENT 6,919,102
FEES AND GRANTS RECEIVABLE 1,032,006
PREPAID EXPENSES AND
92,786
DEPOSITS
PROPERTY NET OF
181,649
DEPRECIATION
TOTAL ASSETS $8,225,543

LIABILITIES AND NET ASSETS

ACCOUNTS & OTHER PAYABLE 86,452
ACCRUED VACATION PAYABLE 807,846
CONTRACTS ADVANCES/PAYABLE 3,943,921
TOTAL LIABILITIES 4,838,220
NET ASSETS
SURPLUS(DEFICIT) -55,788
UNRESTRICTED NET ASSET 3,315,264
TEMPORARILY RESTRICTED 127,848
TOTAL NET ASSET 3,387,323

TOTAL LIABILITIES AND NET

ASSETS $8,225,543
Current ratio 1.66
Quick ratio 1.43

Accounts Receivable Turnover

Current receivable turnover for DMH is good since payments are received in advance. For small
contracts, payments are received within 2-3 months of billing.

Units Budget vs. Actual

Maintaining the production momentum, the Center has closed the gap (.19%) between the actual
YTD units (5.428M) versus the March YTD budgeted units (5.418M).

52
 CFGC DMH Units Production - Actual vs. Budget

ACTUAL VS. BUDGET-Over(Under)-% Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

DMH COST CENTERS:

AVD 0.48% -7.73% -0.92% -5.48% 4.94% -8.73% 5.14% 2.63% 1.36%
- -
CRS 31.12% 37.06% -21.65% -20.54% -27.25% -33.42% -34.53% -27.16% -16.35%

NHD 1.77% 3.74% 4.14% 5.78% 14.67% -3.15% 5.66% -3.52% -6.93%
-
NPD 20.48% 34.42% -3.14% -3.01% 15.52% -6.44% 28.28% 20.23% 12.32%
-
NRD 15.90% -4.43% -3.61% 8.15% 14.37% -2.88% 7.71% 11.77% 10.30%

PSY1(Payroll) -2.01% 12.16% 12.46% 10.32% 4.00% -15.93% 15.76% -8.50% -29.49%
-
PSY2(Non-payroll) 13.73% 10.13% 1.95% 7.92% 31.58% 8.19% 38.52% 21.32% 7.12%
-
TRA -9.28% 43.57% -45.53% 42.20% 40.08% 38.87% 64.66% 68.69% 74.73%

Total Over(under) Budget-% -8.81% -6.31% -3.24% 1.26% 9.22% -6.66% 7.60% 5.00% 2.84%

Cumulative/YTD -7.52% -6.08% -4.22% -1.62% -2.30% -0.93% -0.18% 0.19%

EXTERNAL EVALUATION

CPM Competitive Profile Matrix

From the identified critical success factors, CFGC and its key competitors are assigned the
following ratings:

COMPETITIVE PROFILE MIX(CPM)

CFGC SFVCMC LACGC Penny Lane CFC DIDI HIRSCH

Critical Success Factors(CSF)

Weight Rating Score Rating Score Rating Score Rating Score Rating Score Rating Score

Market Share 16.00% 2.00 0.32 2.50 0.40 2.00 0.32 2.50 0.40 1.00 0.16 2.00 0.32

Funding Sources 14.00% 2.00 0.28 2.50 0.35 2.00 0.28 2.00 0.28 2.00 0.28 2.00 0.28

Financial Position 13.00% 2.00 0.26 3.00 0.39 3.00 0.39 3.00 0.39 2.50 0.33 2.00 0.26

Net Asset/Working Capital 12.00% 1.00 0.12 2.00 0.24 3.00 0.36 3.00 0.36 2.00 0.24 2.00 0.24

Management- Sr. & Staff 11.00% 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33

Client/Customer Satisfaction 10.00% 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30

Technology/Facilities 9.00% 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27

Product Quality/QA Feedback 8.00% 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24

Promotions/Advertising 7.00% 2.00 0.14 3.00 0.21 3.00 0.21 3.00 0.21 3.00 0.21 3.00 0.21

Fundraising

Total 100.00% 2.26 2.73 2.70 2.78 2.36 2.45

53
Comparative Growth Rate

Comparing to the industry, CFGC is growing at a competitive rate in terms of units of service and
revenues.

COMPETITIVE PROFILE MIX(CPM)

VISTA DEL
Critical Success PACIFIC HATHAWAY Children's Inst. Kedren Hillsides Special Service
MAR
Factors(CSF)

Rating Score Rating Score Rating Score Rating Score Rating Score Rating Score Rating Score

Market Share 4.00 0.64 4.00 0.64 3.50 0.56 3.00 0.48 4.00 0.64 2.00 0.32 3.00 0.48

Funding Sources 3.00 0.42 3.50 0.49 4.00 0.56 4.00 0.56 3.00 0.42 2.00 0.28 3.00 0.42

Financial Position 3.00 0.39 3.00 0.39 4.00 0.52 4.00 0.52 2.50 0.33 2.50 0.33 3.00 0.39

Net Asset/Working Capital 2.00 0.24 2.00 0.24 4.00 0.48 4.00 0.48 2.00 0.24 3.00 0.36 1.50 0.18

Management- Sr. & Staff 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33 3.00 0.33
Client/Customer
Satisfaction 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30 3.00 0.30

Technology/Facilities 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27 3.00 0.27
Product Quality/QA
Feedback 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24 3.00 0.24

Promotions/Advertising 3.00 0.21 3.00 0.21 3.00 0.21 3.00 0.21 3.00 0.21 3.00 0.21 3.00 0.21

Fundraising

Total 3.04 3.11 3.47 3.39 2.98 2.64 2.82

Positioning

Compared to the major competitors, CFGC is not well positioned. Due to its lower capitalization
and location, it has a lower Critical Success Factor (CSF) compared to its key competitors.
CFGCs lower funding/market share relative to other mental health agencies, indicate its weaker
position.

CFGC has average position relative to its external environment as quantified by its EFE rating
mainly due to its weak capitalization and dependence on government funding.

Market share

Market share is measured by the ratio of CFGCs Maximum Contract Amount or Revenues
versus the total DMH contract allocation/funding. The market leaders are Pacific Clinics,
Hathaway Sycamore, Vista del Mar, Pacific Clinics, Hathaway Sycamore, Vista del Mar, with
revenues of over $30M. CFGC is among the market followers with $15$-$25M revenues.

54
Product/Services

CFGC has a Quality Assurance staff that ensures compliance with the highly regulated
government rules on mental health treatment.

Pricing/Cost Per Unit

CFGC service pricing is based on State Maximum Allowance Cost Per Unit Rate determined by
the government as reimbursement rate.

Promotions
CFGC promotions is limited mainly because of insufficient budget and strict rules on fundraising
and promotions which are unallowable expenses by government auditing rules. Brochures,
solicitations materials are utilized and are comparable with other industry participants.

Internal Factor Evaluation Matrix

Importance Rating Weighted

Weight (1-4) Score
Strengths
1 Stable funding source 0.11 4 0.44
2 Planning, Systems & Procedures 0.05 3 0.13
3 Program Quality Control and Evaluation 0.05 3 0.13
4 Human Resources 0.10 3 0.28
5 Sr. Management Team Leadership 0.09 3 0.26
6 Information Technology 0.06 3 0.20
7 Financial Development 0.09 4 0.32
8 Board Leadership 0.06 3 0.16

0.62 1.92

Weaknesses Importance Rating Weighted

Weight (1-4) Score
1 Weak capitalization/low reserve 0.08 1.00 0.08
2 Dependence on main funder 0.07 1.00 0.07
3 Fundraising development 0.07 2.00 0.14
4 Tight credit availability 0.06 2.00 0.12
5 Few owned assets/ facilities 0.04 2.00 0.10
6 Cashflow/liquidity 0.06 2.00 0.12

0.38 0.63

Total 1.00 2.55

55
Summary of CFGC Environment and Strategic Issues

The following is a brief summary of opportunities, threats, strengths and weaknesses

of Child and Family Guidance Center. They represent a small portion of the complete
environmental scan attached to this strategic plan.

Strengths

CFGCs key strengths are: Reliable funding source, good financial management, information
technology, Management Team Leadership, external and public relations, good mission/vision,
board leadership and skilled and experienced human resources. Included is the organizations
demonstrated ability to provide high quality mental health services. Staff is committed. Quality
assurance is applied to programs and services. Challenges to the organization are met through
innovation and hard work. Although not among the biggest in size and assets, CFGC has good
reputation and is looked to as a leader by other service providers.

Weaknesses

Based on internal assessments, the common weaknesses are: weak capitalization, funding
source dependence on DMH, weak fundraising, old buildings and facilities and average employee
morale. CFGCs significant growth has led to challenges to human resources, supervision, lack of
structure for coordination among departments, and inconsistent administrative and clerical
support and ineffective development and fundraising structure. There is a perceived need for
improved management practices, use of technology, and improved fundraising efforts. Greater
visibility in the community is needed. A major weakness is lack of adequate reserves and weak
capitalization.

CEOs Perceptions on company Threats/Weakness

Despite its strengths, CFGC CEO Roy Marshall during an interview for the DMH webpage gave a
pragmatic of the Centers vulnerabilities:the agency is one check away from demise. We dont
have a lot of reserves and things like thatso the agency survives and thrives.

In order to maintain our funding, we have to use a different source of money from the Mental
Health Services Act to leverage Medi-Cal. We used to use the County General fund(CGF) to
leverage Medi-Cal at like five cents on the dollar. For every nickel we put up we got a dollar (in

56
matching funds), which is pretty good. But now we have to use different funding to do that, and
that different funding has big strings attached to it. Its really tied to prevention and early
intervention, which means you have to use evidence-based practices (EBP) for their diagnoses,
so its going to be a challenge to try and provide them services under the new model.

Strategic Issues Based on Internal Factors

CFGC delivers cost-efficient, high quality services by leveraging skilled and experienced staff and
technology backed systems and procedure. The past 3 years of no salary increases however has
taken its toll on the morale of staff resulting in turnover, absenteeism and low productivity. The
rd
recent salary adjustments implemented during the 3 quarter of FY 11-12 has alleviated the
morale issue but uncertainties prevail among the staff on whether such raises will be consistently
implemented in the future.

The white elephant in the room rearing its ugly head is CFGCs weak capitalization (which
essentially could be both internal and external weakness). Its limited capital prevents CFGC from
taking risks, actively bidding for other fundings and aggressively competing in the mental health
industry. CFGC should increase its capital base, depend less on break-even contracts and grants
and should actively pursue expansion activities.

Porters Five Forces Model

Rivalry among Competing Firms While not as intense as for-profit companies, CFGC competes
with other mental health providers for market share, specifically for contract allocations from
government funding such as DMH, for clients, for human resources expertise, donors &
contributions, and Board membership

Potential entry of new participants Barriers to entry is weak with over 100,000 nonprofits and
almost anyone can fill out an application online, draw up an article of incorporation and be
considered for approval as nonprofit corporation.

Bargaining Power of Suppliers Supply among mental health nonprofits take the form of supply
of human resources with professional expertise, and licensing requirements (i.e. Board of
Psychology).
Bargaining Power of Consumers Consumers in mental health industry could take the form of
the end clients as well as the Governments funders and grantors. The contractors determine the

57
allocation of contracts which give them strong bargaining power in influencing CFGCs and its
competitors in the industry.

Substitute Products/Services CFGC and the industry participants are vulnerable to changes in
mental health mode of service changes. A case in point is the Prevention and Early Intervention
(PEI) which is relatively new compared to the traditional treatment form of services where most of
CFGCs expertise and training were concentrated. Most of the participants which were not able to
adapt to the changed methods fall out of competition. Also, the increasing use of therapeutic
drugs as a substitute for therapy has affected the competition among the industry participants.

External Factor Evaluation (EFE) Matrix

External Factor Evaluation (EFE) Matrix summarizes and evaluates various external factors
including competitive factors to facilitate strategy formulation (David, 2009).
A set of priority factors that has the greatest impact to CFGC were selected and importance is
given based on its potential impact to bottom line.

External Factor Evaluation Matrix

Importance Rating Weighted

Weight (1-4) Score
Opportunities
1 Government funding 0.15 4 0.60
2 High demand for mental health services 0.15 4 0.60
3 Alternative mental health funding 0.08 3 0.25
4 Availability of mental health expertise 0.07 3 0.21
5 Use of technology/IT 0.06 3 0.18
6 Capital ization funding/donations for nonprofits 0.05 3 0.15

Total 0.56 1.99

Threats Importance Rating Weighted

Weight (1-4) Score
1 Changes/reduction in medi-cal funding 0.15 3 0.45
2 Changes in type of mental health services 0.08 2 0.16
3 Changes in government regulations 0.05 1 0.05
4 Low contributions/philanthropy 0.05 1 0.05
5 Economic uncertainty/unemployment 0.04 1 0.04
6 Competition from for profit agencies 0.07 1 0.07
Total 0.44 0.82

Total 1.00 2.81

58
Opportunities

The opportunities considered most important include:

Government Funding - Government DMH funding through Medi-cal will be expanded.

Implications: This will provide opportunity to expand the reach of the Center services consistent
with the Center mission and services. CFGC will need to be more visible, marketing and
promoting the organizations brandits high quality services. This will accelerate the
development of niches of different service providers.

Other opportunities are: the presence of stable market/clients (based on external analysis),
availability of related funding opportunities, availability of mental health expertise, Information
Technology, which enhance cost-efficiency in delivering services, and possible capital funding for
non-profits.

Some concerns about the change include: There may be pressure to provide services that are
not well funded. There will be an increased need to seek other funding streams. There will be
hidden costs and indirect expenses. to any particular organization.

It may be necessary to reduce services to be sustainable. Audit requirements may change

bringing more regulations. There may be a need for advocacy around quality of services
purchased. Other opportunities include: Expanding services from current focus on children to
adults Transitional Age Youth (TAY).

Threats

The threats considered most important include:

Dependence on government funding. Funding, particularly the DMH funding

stream, doesnt keep up with needs. Implications: CFGC needs to assess the real demand for its
services, increase private pay options, and be prepared to explore other opportunities for
generating revenue. The question of what happens when private money is gone needs to be
addressed.

According to a research group, Medi-Cal will expand beginning 2014 and could cover as many as
10.5 million Californians by 2019 because of the expanded eligibility and enrollment under the
federal health reform or Affordable Care Act.

59
However, in an article dated July 2011 by the California Budget Project entitled President
Obamas Proposed Framework for Medicaid Would Shift Cost to California, the government
proposes to reduce spending, including cutting federal Medicaid costs by $100 billion over 10
years. Consequently, California would be forced to scale back Medi-Cal coverage for 7.4 million
individuals, reduce payments to health care providers, or increase state spending.

The potential threat of competition from or being taken over by for profit organization is a major
concern. In a recent discussion from the ACHSA, some providers have raised concerns about the
role of the Accountable Care Organization under the Healthcare reform and the possibility of an
ACO (e.g., Kaiser and/or a for-profit organization) taking over the County system of care, which
would put County providers and clients at risk. The Healthcare reform consultant does not think
that Kaiser or similar organization would be interested in the County systems client population.
She believes for profit organization will compete for new patients with private insurance first and
that County providers will actually end up with more Medicaid patients.The DMH Director made it
clear that the County mental health system stands in a very stron competitive position as a public
provider in the post-2014 environment.

Staffing challenges and lack of supply of mental health expertise. Implications: Although
increased efficiency and technology may help, high turnover, especially among clinical staff leads
to increased hiring costs. CFGC needs to maintain and train employees and increase their
opportunity for growth, and develop a pay structure for different services.

Other threats mentioned included: there are a lot of nonprofits in the county, and staff, volunteers
and donors may not be engaged forever with a single service provider. Rising housing prices
make affordable housing increasingly difficult to find and maintain.

Some of the identified SWOT factors are double-edged items. Funding source, for example could
be both a strength (by having the government as contractor and a funding source through medi-
cal), a weakness (due to dependence in a single major find source, breaking the conventional
rules), opportunity (government is a strong and powerful ally for major changes) and even a
threat (recession and economic downturn might lead to reduced government spending).

Strategic Issues Based on External Factors

The single most important opportunity for CFGC has been and still is the Government funding
through the Department of Mental Health (DMH) contract. This is essentially a captive market

60
with the confirmed prevalence of mental health illnesses. Hence, the main strategic challenge is
how to manage the DMH contract to the best advantage of the CFGC mission maintain, modify
and/or expand the contract. While competition is not a significant factor based on current contract
share, expansion of the contract amount will require significant competitive advantage versus
other major players in the industry. It will require expanded resources which presents
opportunities for greater payback in terms of greater asset and industry leverage. However, it also
presents risks of being saddled with unutilized resources just in case of contract difficulties due to
delayed or cut back in funding or change in mode of service.

Based from the CPM, CFGC is behind its major competitors due to its lower capitalization. A
major strategic challenge is for CFGC to find ways to improve its capital base to be able to fund
its expansion activities.

61
SWOT Strategies

The SWOT matrix helps develop four types of strategies: Strengths Opportunities,
Weaknesses-Opportunities, Strengths-Threats and Weakness-Threats.

SWOT Strategies

Strenghts Weaknesses

1 Stable funding source 1 Weak capitalization/low reserve

2 Planning, Systems & Procedures 2 Dependence on main funder

3 Program Quality Control and Evaluation 3 Fundraising development

4 Human Resources 4 Tight credit availability

5 Sr. Management Team Leadership 5 Few owned assets/ facilities

6 Information Technology 6 Cashflow/liquidity

7 Financial Development

8 Board Leadership

Opportunities S-O Strategies W-O Strategies

Opportunities

1 Government funding 1 Maintain current DMH funding at break-even

High demand for mental health
2 services Expand DMH funding to $22-$50 million in 1-5 years

3 Alternative mental health funding (S1,O1,02)

4 Availability of mental health expertise 2 Improve productivity by improving employee morale 1 Modernize the company's webpage to enhance

5 Use of technology/IT through salary adjustments and incentives. public and attract more donors(W3,O6)

6 Capital ization funding/donations for (S4,O4)

nonprofits 2 Obtain increased capitalization through Venture

Philanthrophy(W1,O6,

Threats S-T Strategies W-T Strategies

Explore other funding sources. Tap into capacity building

1 Changes/reduction in medi-cal funding 1 and 1 Intensify fundraising to promote the organization
Changes in type of mental health (i.e. Corporations, Foundationand individual
2 services unrestricted grants. donors)

3 Changes in government regulations (W3,T4)

4 Low contributions/philanthropy 2 Implement Development Marketing Plan with more

5 Economic uncertainty/unemployment Board involvement(D8,T4) 2 Improve the website by offering actual client

6 Competition from for profit agencies testimonies and success stories of clients served

(W1,T4)

62
SPACE Matrix

The Strategic Position and Action Evaluation (SPACE) matrix allows for the company to choose
the most appropriate set of strategies. The four possible sets of strategies in the SPACE Matrix
can be conservative, aggressive, defensive, or competitive strategy. As in input, internal factors
pertaining to financial strength and competitive advantage are selected along with external factors
pertaining to environmental stability and industry strength.

FS
Conservative Aggressive
7

CA IS
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7

-1

-2

-3

-4

-5

-6

-7 Competitive
Defensive

ES

63
Financial Stability (FS) Environmental Stability (ES)
Weak Fundraising 2 Economic uncertainty/unemployment -2
Dependence on main funder 3 Technological Changes -2
Debt-leverage 4 Government Funding -5
Working Capital 3 Mental health expertise -4
Cash Flow/liquidity 4 Demand for mental health services -5

Financial Stability (FS) Average 3.2 Environmental Stability (ES) Average -3.6

Competitive Stability (CA) Industry Stability (IS)

Technological know-how -3 Changes/reduction in funding 2
Planning, Systems & Procedure -3 Demand for mental health services 5
Human Resources -2 Supply of mental health expertise 3
Sr. Management Leadership -2 Change in government regulations 3
Program quality/evaluation -2 Contributed income 3

Competitive Stability (CS) Average -2.4 Industry Stability (IS) Average 3.6

Y-axis: FS + ES = 3.2 + (-3.6) = -0.4

X-axis: CS + IS = (-2.4) + (3.6) = 1.20

Based from the strategic management tool, the company belongs in the competitive quadrant. It
should market penetration, market development, product development and integration strategies.

Grand Strategy Matrix

Using the Grand Strategy Matrix, firms are grouped into four quadrants depending on the
firms competitive position and the industrys growth.

GDP is expected to be at 2.8%. Government spending which drives the Medi-cal/Mental

health industry is flat but demand for mental health services will remain high which will
spur the industry growth.

Competitive Position Moderately weak

CFGC has a weak competitive position brought about by its lack of adequate capital and
limited distribution network. Although it is among the well positioned and market share is
stable, it still lags behind key competitors.

64
 Rapid Market Growth
Quadrant II Quadrant I

Strong
Weak
Competitive
Competitive
Position
Position

Quadrant IV
Quadrant III Slow Market Growth

1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Related diversification

CFGC falls under the second quadrant in the grand strategy matrix. Under this quadrant,
market development, market penetration, product development and horizontal integration
are available. Divestment and liquidation is not an option given the improving competitive
position of CFGC.

65
 The Internal-External (IE) Matrix

The internal-external matrix assigns positions to the firm in a nine cell display based on
its IFE and EFE scores. If the firm falls in cell 1, 2 and 4, grow and build strategies are
commended. Hold and maintain strategies are advised for firms falling in cells 3, 5 and 7.
Firms should consider harvest or divest strategies if they fall in cell 6, 8 and 9.

The IFE Total Weighted Score (2.55)

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
I II III

High
3.0 to 3.99

IV IV VI

The EFE
Total Medium
Weighted 2.0 to 2.99 CFGC
Score
(2.81)

VII VIII IX

Low
1.0 to 1.99

Based on IE matrix CFGC falls in cell 5. Hold and maintain strategies are recommended under
this group. Intensive strategies such as market penetration and development can be used.

66
 The various recommended strategies of the SPACE, IE and Grand matrices are tallied to
determine the most common strategy options available to CFGC.

Among the strategy options, market penetration, market development and product
development are consistently recommended by SPACE, IE and GRAND matrices.

SUMMARY OF STRATEGIES
STRATEGY OPTIONS SPACE IE GRAND TOTAL

Forward Integration X 1

Backward Integration X 1

Horizontal Integration X X 2

Market Penetration X X X 3

Market Development X X 2

Product Development X X X 3

Related Diversification 0

Conglomerate Diversification 0

Joint Venture 0

Retrenchment 0

Divestiture X 1

Liquidation X 1

QSPM

The Quantitative Strategic Planning Matrix is a tool to determine the relative attractiveness of
feasible alternative actions. Based from the summary of strategies, product development, market
development and market penetration are the three strategies to consider which lead to two main
strategies 1)Expand DMH market and 2) Expand fundraising/capitalization. The alternatives are

67
not designed to be mutually exclusive; the matrix validates the rationale for implementing such
strategic options.

Quantitative Strategic Planning Matrix (QSPM) STRATEGIES

Expand Expand
DMH fundraising/capitalization
Key Factors Weight C TAS C TAS
Opportunities
1 Government funding 5.00% 4 0.20 1 0.05
2 High demand for mental health services 5.00% 4 0.20 1 0.05
3 Alternative mental health funding 3.00% 3 0.09 4 0.12
4 Availability of mental health expertise 4.00% 4 0.16 4 0.16
5 Use of technology/IT 3.00% 4 0.12 4 0.12
6 Capitalization/ funding/donations for nonprofits 3.00% 3 0.09 1 0.03

Threats

1 Changes/reduction in medi-cal funding 5.00% 2 0.10 4 0.20

2 Changes in type of mental health services 3.00% 2 0.06 1 0.03
3 Changes in government regulations 3.00% 1 0.03 1 0.03
4 Low contributions/philanthropy 4.00% 1 0.04 4 0.16
5 Economic uncertainty/unemployment 3.00% 1 0.03 3 0.09
6 Competition from for profit agencies 2.00% 1 0.02 3 0.06
Strenghts

1 Stable funding source 5.00% 4 0.20 1 0.05

2 Planning, Systems & Procedures 4.00% 3 0.12 4 0.16
3 Program Quality Control and Evaluation 4.00% 4 0.16 2 0.08
4 Human Resources 5.00% 4 0.20 2 0.10
5 Sr. Management Team Leadership 5.00% 4 0.20 2 0.10
6 Information Technology 3.00% 4 0.12 3 0.09
7 Financial Development 4.00% 4 0.16 4 0.16
8 Board Leadership 3.00% 4 0.12 2 0.06

Weaknesses

1 Weak capitalization/low reserve 5.00% 2 0.10 4 0.20

2 Dependence on main funder 5.00% 1 0.05 4 0.20
3 Fundraising development 4.00% 1 0.04 3 0.12
4 Tight credit availability 3.00% 3 0.09 4 0.12
5 Few owned assets/ facilities 3.00% 2 0.06 2 0.06
6 Cash flow/liquidity 4.00% 2 0.08 3 0.12

TOTAL ATTRACTIVENESS SCORE 100.00% 2.84 2.72

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The BCG (Boston Consulting Group) Matrix modified for a non-profit corporation like CFGC
shows the following distributions relative to their impact on CFGC bottomline:

Cash Cows The contract with the Department of Mental Health (DMH) and some Foundation
Grants like Weingart constitutes the reliable sources of funding for CFGC. These funding
maintains break-even operations, but not provide for long funding and capitalization.

69
Stars Major Gift Appeal such as direct solicitation to major donors and venture philanthropy are
the game changers that will have major positive impact on the bottom line and long term
capitalization of CFGC.

Dogs small fundraising and bake sale type of raising funds are considered dogs or have little
impact or net additions to funds.

Question Marks Direct Mail campaign has been the conventional marketing and solicitation
tools for encouraging donations and contributions. While this enhance visibility and awareness in
the market, the effectiveness in translating to contribution dollars is questionable.

VI. STRATEGY FORMULATION AND SYNTHESIS

STRATEGY PERSPECTIVE

CFGC is at the crossroads. On one hand, it is proud of over fifty (50) years of being of service to
thousands of children and their families and having survived where many others have failed.

But it has come to a point where survival is not good enough. The safe choice is doing exactly
what it was doing, living precariously on a year-to-year contract, not knowing where fundings are
cut and services altered. The other choice is to take itself on the next level, expanding the reach
and quality of its services, financially independent, and more confident in the pursuit of its
mission.

It has become a generally accepted truth in the nonprofit world that nonprofits, like CFGC, should
embrace the best practices of the for-profit, business world in order to survive, and prosper. The
saying no money, no mission, seems like a catch phrase but it is a truism in the sense that the
noblest mission will fail if the organization lacks the stability to stay afloat. An increasingly
competitive business environment, with shrinking support from government and private donors,
dictates that nonprofits acquire the efficiency, flexibility, innovativeness, and discipline traditionally
represented in the competitive for-profit sector (Landsberg, 2004).

For many years, CFGC is stuck to the comfort zone, an earned income model mostly dependent
on cost reimbursement from the government, i.e. DMH contract, which is essentially a self-
perpetuating model were overhead cost is always capitated and the best business scenario is
break even, contributed income or donations are almost non existent.

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The prevailing best practices literature professes that ideally, an organization must have both a
sustainable business model as well as solid capitalization. Without a sustainable business model,
organizations will steadily eat into their reserves over time, putting their survival at risk. A
sustainable business model is likely one that generates a surplus rather than simply breaking eve
each year. Organizations require an annual surplus in order to build fund reserves (Tuckman,
1991).

The scanning of CFGCs environment isolates one major fact: that it is primarily dependent on the
government, specifically DMH for survival. Conventional thinking may suggest that this is a bad
thing, but the truth is, CFGC has managed 50 years and would probably last for another 50 years
doing exactly the same thing, relying on its seemingly captive market - the prevalence of mental
illness that will probably pervade as long as the government. Funding is dependent on DMH, but
again the government always needs contractors like CFGC to treat and alleviate the prevalent
mental illness. The threat of government cut on this funding would be tantamount to ignoring the
mental health problems that are proven to cause a chain reaction of concomitant problems such
as criminality, violence, drugs that the government is committed to solving.

CFGCs internal scanning isolates a strength which is the expertise of its human resources
backed by technology. This strength combined with the opportunity of high demand for mental
health services substantiates its being a sustainable mode. The strategic question is how and
what extent and magnitude of expansion considering the risks and possibility of failure.

STRATEGIC OPTIONS

Peter Drucker wrote a decision without alternative is a desperate throw, no matter how carefully
thought through it may be.

Having scanned CFGCs internal and external environment and analyzed their implications to the
Centers perceived mission and purpose, the following are some alternatives strategies and
options:

1) Continue but improve current source of funding and market, with minimal contributions.
2) Diversify funding sources by adding 3 or more major funding.
3) Invest in Fundraising activities.
4) Invest in capital-building activities.

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While for profit and non-profit strategic principles are basically parallel, there are nuances in
CFGCs nonprofit environments. It may be relevant in strategy selection process to consider
some additional framework and literature for determining CFGCs strategy, whenever applicable.
In the study of the high failure rates of non-profits, the two factors deemed most critical are: 1)
sustainable business model and 2) capitalization.

CFGCs Sustainability Strategy

Revenue diversification is essential to have long term sustainability. The argument in favor is: it
provides an income hedge. If one source of income dries up, other sources of revenues will
continue to come (Pratt 2002), and it is assumed unlikely that all income lines would go down at
the same time (Tuckman 1991; Emerson 1999). However, the recent downturn seems to have
demonstrated that it is possible to see declines in multiple sources at the same time.

Diversification reduces an organizations exposure to risk tied to one revenue stream, which
corporate finance theory refers to us un-systemic risk. Nonprofits are generally assumed to
pursue the funding mix that allows to maximize some desirable objectives (rewards) such as
mission accomplishment or revenue attainment and to minimize undesirable aspects (risk) such
as uncertainty or outside control over mission. This idea seems to be based on Modern portfolio
Theory, first articulated by Markowitz (1952).

There are arguments that diversification is not necessarily better. Larger organizations have one
dominant type of funding, rather than a mix (Foster 2003). Foster, Dixon and Hochster further
assert that Organizations are unlikely to achieve significant scale with a balance mix of
government, corporate, individual and foundation funding (Foster 2003). Also, NFF research
shows that organization with one or three major revenue sources is typically less profitable than
those with two (Burd 2009).

Nonprofits develop core competencies in the areas that are most important to their survival. This
phenomenon, which is referred to as structural embedded ness, is also an expression of resource
dependence (Froehlich 1999).Competencies in securing one type of funding, however, may not
translate into competencies needed to secure another type of support (Young 2007).
Resource dependence on government funds found increases in professionalism and
bureaucratization and administrative standards that more aligned with government.

72
High performing nonprofits can achieve greater stability with non-diverse funding sources. A
study confirmed that the majority of large nonprofits receive an average of 90% of their revenue
from one funding source, and are only diversified within that source (Foster and Fine, 2007).

In a Masters Thesis using Cox regression analysis, Danielle Vance concluded that while
nonprofits skilled in securing many sources of funding have less failure rate, those with stable
funding base are also more likely to survive.

Given the above, a sustainable business model will depend on the mix of Revenue-Cost
variables/strategies such as 1) Earned income (Government contracts/grants) 2) Contributed
Income (Donations/contributions) 3) overhead and cost structures.

Earned income (Government Contracts, Grants, etc.)

By their very nature, nonprofits are not naturally profitable because they have arisen from a
failure in the private sector market (Nonprofit Finance Fund 2009, Miller, The Equity Gap, 2008).
Not all income-generating opportunities result in a profit, and some require subsidies (Yetmen,
2006). Non-profits may be justified in charging something in this situation, but it is reasonable to
run the operation at a loss if a source of subsidy can be found. Nonprofits can offer marketable
services that are complimentary to mission and incur little extra cost.

Many nonprofits at their core are multi-product organizations with portfolio of services that can
serve to cross-subsidize each other (Young 2004). Within one organization, a multiplicity of
business models may be at play (Levere, Capital Ideas 2007), which implies multiple revenue
streams.

Helping an organization become sustainable is not the same as helping the organization grow,
and in fact may occasionally be in conflict (Miller, Equity Capital Gap, 2008).

Relevance to CFGC: CFGC has a multi-year contract with DMH which is based on cost
reimbursement. Under this scheme, CFGC cannot make a surplus, and the best that it can expect
is break-even, if not a loss due to contract cost overrun or uncompensated care.

73
Contributed Income (Donations, Contributions, etc).

Donations or contributed income is perceived as being not sustainable or scalable model (Bolleer,
Capital Ideas 2007), as being inefficient way to raise funds (Bradley 96), difficult to rapidly
increase in the face of financial stress (Tuckman, 1991), and too subject to change in donor
tastes, economic downturns and tax law (Tuckman, 1991).

Solid levels of contributed income are also seen as potential public perception problem:
Ironically, an organization with a solid fundraising base often looks unattractive to funders, who
wonder whether the organization is already too rich and well established. Yet this kind of financial
health is what the funder may demand. The F.B. Heron Foundation believes that by providing
general operating support to improve financial management systems, a foundation can make
the organization attractive to other donors. (F.B. Heron 2006). On the flip side, contributed
income can be considered a sign of weakness: Ryan quotes J. Gregory Dess as saying that
many nonprofit leaders consider extensive dependency on donors as a sign of weakness and
vulnerability (Ryan 2001).

High in volatility, contributions are affected by overall economic trends and vary with the S&P 100
(Center on Philanthropy 2009). Nonprofits also experience variation in donated revenue with
changes in personal situations (income and wealth).

Conclusion: CFGC Sustainability Strategy is to continue major Funding with DMH but with
increased contracts amounts. CFGC will continue to pursue Contributed income through
increased fundraising. However, the main thrust will be institutional rather than individual donors.

Overhead and other Costs

The conventional wisdom has been that high overhead costs are a sign of poorly run nonprofit,
and therefore one that was unlikely to be sustainable over time. However, several authors note
that organizations require adequate levels of infrastructure in order to be effective, build capacity,
and achieve mission (Bedsworth 2008). Keating notes that a current services trap prioritizes
delivery of high quality direct services today, which results in insufficient resources dedicated to
building organizational capacity and financial sustainability (Keating, Capital Ideas 2007). A
study by Hager found that low administrative costs were associated with the demise of
organizations (Hager 1989). However, Frumkin and Kims study found that low overhead to total
expense ratio was not the primary determinant of donor giving. That said, they stated that low

74
overhead costs may be a positive indicator of an organizations ability to function efficiently and
effectively in other areas (Frumkin 2000).

Conclusion: CFGCs Cost Strategy is to maximize its DMH contract to as much as 100% of the
maximum reimbursement rate to cover and maintain the quality and quantity of its human
resources and provide reasonable maintenance of faculties. Non-essential costs will be
discouraged.

CFGCs Capitalization Strategy

Clara Miller, (President of Nonprofit Finance Fund, a leading source of financing and advice for
nonprofits nationwide) in her NFF article Hidden in plain Sight and Linking Mission and Money:
An Introduction to Nonprofit Capitalization explores the following:

Capital structure is central to the success and failure of any enterprise, and good products,
services or management systems alone dont guarantee success. (Miller 2002).

Capital structure is related to but distinct from program management or operating capacity, but it
has a strong effect on both. (Milller 2002; Nonprofit Finance Fund 2001). For example,
organizations with insufficient working capital often develop cash flow problems that end up
starving discretionary activities such as program innovation, staffing or buildings (Miller 2003).
Ignoring the balance between mission, capacity, and capital structure can upset an organizations
ability to function effectively (Nonprofit Finance Fund 2009).

Healthy capital structures are hard to maintain in the nonprofit sector due to restrictions on
assets. For any entity, cash is the primary hedge against risk and crises (Miller 2002; McLaughlin
2000). When most of an organizations resources are placed into fixed assets such as facilities,
organizations lose their capacity to adapt (Miller 2002) and therefore can be more risk averse
Miller 2002). These fixed assets can appear to strengthen the Balance Sheet, however, it is not
the total positive balance of an organizations net assets that indicates its health and flexibility, but
the liquidity of its net assets (Nonprofit Finance Fund 2001).

A healthy capital structure is increasingly being accepted as a necessary consideration for

nonprofit organizations. As Ryan found, Performance and capital are inseparable.
Conclusion: CFGCs Capitalization Strategy is to enhance Contributed Income by increased
Fundraising. However, more emphasis will be in soliciting Venture Philanthropy Capital and
unrestricted operating support from institutional funding organizations. (e.g. F.B. Heron

75
Foundation, McArthur Foundation, Edna McConnell Clark Foundation(EMCF), Nonprofit Finance
Fund).

VII. RECOMMENDED STRATEGIES AND IMPLEMENTATION

Recommendations

Year 1 Stabilize and maintain the $19 million DMH funding at breakeven without a loss.
Generate contributions to maintain net surplus for the agency of $303,000 for FY 11-12.
Explore and initiate Venture Philanthropy to raise working capital and long term reserves.

Year 2 Obtain DMH Contract for $23 million and deliver services without a loss.
Generate net donations/contributions of $456,000. Obtain Venture Philanthropy capital
for working capital and long term reserve.

Year 3 Obtain DMH Contract for $30 million and deliver services without a loss.
Generate net donations/contributions of $714,000. Obtain venture philanthropy capital.

Year 4 Obtain DMH Contract for $40 million and deliver services without a loss.
Generate net donations/contributions of $724,000. Obtain venture philanthropy capital.

Year 5 Be among the industry leaders by obtaining DMH Contract for $50 million and
deliver services without a loss. Generate net donations/contributions of $734,000. Obtain
venture philanthropy capital.

FINANCIAL PROJECTIONS

2011/2012 Financial Statements are projected assuming the firm is status quo on its strategy.
Given the timing of this paper, strategies recommended are and will be implemented starting
2012.

2012 Fiscal Year Net Income was projected based mainly on the Contract Projection
Model.
Existing credit line will be maintained and renewed based on projected contract
requirements.

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Industry Assumptions

Market size or DMH allotment will grow at expanded levels. Medi-cal funding will grow
with the maximum contract amount.

Revenue Assumptions

Base figure will be 2011/2012 revenues. This assumes that revenues and units will not
go down given the improvement in macro economic factors (see external analysis) and
continued industry growth (see industry analysis).
Cost per unit will be 98% of Maximum reimbursement rate.
Base figure for staff and salaries will be 2012 after the salary adjustment in February-
March 2012.
DMH Revenues are rate per Service Function Code multiplied by Units of Service (UOS).

Expense Assumptions

Cost per unit will follow the ratio of 2011/2012. There are no specific strategies designed
towards lowering cost, but more towards maximizing the contract reimbursement rate.
Salaries cost increases will be proportional to the contract amount expansion.
Occupancy cost will increase due to additional facility lease to accommodate additional
employees.
Other expenses will remain constant.
The following operational costs will remain constant : General Operating costs: Supplies
and General Expense, Professional fees, transportation and travel, insurance, repairs
and maintenance, Association fees Utilities Taxes & Licenses Consultants and other
operating expenses.

Balance Sheet Assumptions

77
 Accounts receivable will grow in proportion to contract amounts and revenues.
Accounts and other Payables will grow in proportion to contract and revenues.
Contract advances will grow in proportion to contract amounts.
Cash is the balancing figure to match assets with liabilities plus equity.
CFGC will capture a greater percentage of the Medi-cal/mental health market.

Balance Sheet Targets

Increased in cash levels due to increase in contract amounts.

Increase capitalization due to surplus and major contributions.

Expenses Incurred from Strategies

Promotions and fundraising expenses will increase to fund market development and
penetration strategies to enhance promotion of CFGCs services to existing and new
clients as well to maintain current donors and develop new donations and contributions.
Workforce will grow from 300 to 600 staff through 2016.

Changes in Net Assets due to Financing Strategy

Net asset is projected to increase due to increased contributed income from fundraising
and venture philanthropy campaigns.

Child and Family Guidance Center Year 1 2 3 4 5

Statement of Activities(Profit & Loss)-$ Actual Projected Projected Projected Projected Projected
Years 2011 2012 2013 2014 2015 2016
Revenues
Government service contracts $21,411,379 $22,530,194 $26,728,377 $33,677,473 $43,741,261 $54,026,723
Program Service Fees 209,967 25,625 26,394 27,186 28,001 28,841
Interest income and dividend income 10,461 11,008 13,059 16,454 21,371 26,396
Unrealized gain (loss) on marketable securities
Other income 49,777 131,030 134,961 139,010 143,180 147,475
Contract Settlements 183,959

$21,865,543 $22,697,856 $26,902,790 $33,860,123 $43,933,813 $54,229,436

Support
Membership and contributions 109,836 81,694 231,694 481,694 481,694 481,694
Allocation from United Way 47,500 50,000 50,000 50,000 50,000 50,000
157,336 131,694 281,694 531,694 531,694 531,694

78
Restrictions Released 0 0 0 0 0 0

Total revenue, support and restrictions released 22,022,879 22,829,550 27,184,484 34,391,817 44,465,507 54,761,130
Expenses
Program Services 20,091,891 22,526,481 $26,728,377 $33,677,473 $43,741,261 $54,026,723
Supporting services-administration 2,385,402
Total Expenses 22,477,293 22,526,481 26,728,377 33,677,473 43,741,261 54,026,723

Increase (Decrease) in unrestricted net assets ($454,414) $303,069 $456,107 $714,343 $724,246 $734,407
Temporarily Restricted Net Assets
Private Grants - - - - - -
Restricted released - - - - - -
Change in Temporarily Restricted Net Assets 0 0 0 0 0 0
Change in Total Net Assets -454,414 303,069 456,107 714,343 724,246 734,407
Net Assets - beginning of year 3,783,051 3,328,637 3,631,706 4,087,814 4,802,157 5,526,403
Net Assets- end of year 3,328,637 3,631,706 4,087,814 4,802,157 5,526,403 6,260,809
Increase(Decrease) -12.01% 9.10% 12.56% 17.47% 15.08% 13.29%

Child and Family Guidance Center Actual Projected Projected Projected Projected Projected
Statement of Condition/Balance Sheet-$ 2011 2012 2013 2014 2015 2016

ASSETS
Cash in bank 3,698,466 4,019,537 4,597,469 5,484,221 6,474,383 7,472,553
Cash in money market funds 0 0 0 0 0
Contracts and fees receivable 618,043 650,338 771,519 972,106 1,262,599 1,559,490
Marketable Securities 0 0 0 0 0
Prepaid Expenses and deposits 120,024 126,025 132,326 152,175 175,001 201,252
Property-net of depreciation 209,052 219,505 230,480 265,052 304,810 350,532
Accounts Receivable 211,045 222,073 263,453 331,948 431,143 532,524
Short Term Investment

Total Assets 4,856,630 5,237,478 5,995,247 7,205,503 8,647,937 10,116,351

LIABILITIES AND NET ASSETS

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 Note Payable bank 0 0 0 0 0 0
Accounts Payable 95,739 100,742 119,513 150,586 195,585 241,575
Accrued Payroll and rel. 916,005 961,805 1,143,473 1,440,764 1,871,305 2,311,329
Mortgage payable 0 0 0 0 0 0
Contract Advances 516,249 543,225 644,447 811,996 1,054,644 1,302,636
Total Liabilities 1,527,993 1,605,771 1,907,433 2,403,346 3,121,534 3,855,541

NET ASSETS -454,414 303,069 456,107 714,343 724,246 734,407

Unrestricted 3,655,203 3,200,789 3,503,858 3,959,966 4,674,309 5,398,555
Temporarily restricted 127,848 127,848 127,848 127,848 127,848 127,848
Total Net Assets 3,328,637 3,631,706 4,087,814 4,802,157 5,526,403 6,260,809
Total Liabilities and net assets 4,856,630 5,237,478 5,995,247 7,205,503 8,647,937 10,116,351
Growth Trend -3.63% 7.84% 14.47% 20.19% 20.02% 16.98%

Recommended Organizational Strategies

The tactical implementation of the recommended strategies will focus on the operating Divisions.
The current functional organization provides flexibility for expansion in contract amount and
services similar to market penetration and market and product development strategy in a for profit
company. The basic hierarchy of the organization can be retained. Additional levels or staff within
the functional divisions can be added to implement the strategy. Additional roles will be added to
existing departments.

Strategies will be implemented with monthly reviews of performance indicators; the management
will use a 3-month trend standard for initiating corrective action. Any measure which exceeds
standards for three consecutive months triggers an automatic performance improvement
response. Conversely, any negative internal finding requires corrective action plan and includes a
follow up report to the Board on corrections achieved.

A performance management system will be implemented as a measurement tool to define and

track employees job performance on an annual basis. This tool provides success criteria that
enable the employee and the manager to know expectations for good performance. At any time,
a meeting is held to counsel the employee regarding the deficiencies and an improvement plan is
implemented.

The Center will design and implement an e-recruitment process to respond more quickly to filling
vacancies and to better attract applicants. Job fairs, and target mailings will be used in the

80
recruitment of psychiatrists and other mental health professionals. Ads will be redesigned to
better position the Center benefits package as an attraction to potential applicants.

As a motivational tool for its employees, CFGC will send selected staff for outside training. It will
continue incentives for clinical staff. HR will encourage career development and will maintain the
human resources through annual cost of living and merit increases.

The information systems will be enhanced and integrated to provide a data-driven decision
making systems. The objective is to provide the right information to the right people at the right
time to improve client care and organizational performance. The strategic and tactical objectives
implementation will be monitored providing trend and comparative data across time and against
standards.

The Finance Division accounting and financial system will be integrated with the Clinical/Billing
and Human Resources systems to provide more timely and efficient analysis and reporting of
units of services as well as cost-revenues. The billing department, which is currently under
Operations, will be merged with Finance. This will improve efficiencies in contract cost analysis,
billings and financial reporting.
The Program Division will maintain and expand its current Strategic Business Units (SBU) type of
operations by locations. Each location will be managed and staffed consistent with the Contract
projection mode. Program location management will continue to be compliant with the strict
accreditation guidelines including the facilities and workplace environment. Implementing plans
are on track for developing and submitting contract negotiation packages with the government
Contract Division consistent with the contract amounts objectives in the multi-year strategies.

The design and implementation of the mental health programs will be based upon best practices,
or evidence based technology, designed to show improvement in the quality of life of patients as
well as reducing symptoms in a shorter period of time than more traditional services.

The Development Division will develop and implement tactical plans to carry out the contributed
income strategy and capitalization objectives. Target solicitation plans will be implemented for
major and institutional donors (i.e. Melinda and Bill Gates Foundation, Paul Allen Foundation,
etc.). The Division will lead in planning and execution of the integrated marketing communications
plan to raise CFGC image and brand awareness.

81
CFGC Strategy Statement Review
Expand Expand Expand
Non-
DMH DMH Contributions

Do you have the funds you need to support this strategy? Y Y N

Or are you aware of potential funding that you could secure for this
strategy? Y Y N
Is it realistic to expect to obtain the needed funds? Y Y N

Do your nonprofit's current programs support this strategy? Y Y Y

Are your programs consistent with this strategy? Y Y Y
For example: Do they serve the populations and geoographic area(s) Y Y
are referenced in your strategy statement?
In general, are there many changes to address any gaps and/or to Y Y
Better focus your work?

Do you have a track record that indicates that this strategy is Y Y Y

realistic for your non-profit?
(For example:, ask yourselves: Are we known for the
competitive advantage that we included in our strategy statement?

Does you strategy fit with the reality of external environment Y Y Y

external environment(such as, does it help you with the decisions
you need to make about challenges/opportunities posed by factors in
the external environment)?

Will this strategy truly help your nonprofit achieve the future it seeks Y Y Y
and the impact it desires. How?

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 CFGC STRATEGIC MAP
Beneficiaries/Stakeholders/Clients:
C1 Improve service delivery consistent in C3 Strengthen & reinforce government engagement
quality and value C4 Engage & Expand community support
C2 Increase public awareness and visibility C5 Deliver quality services to target beneficiaries.

Financial:

F1 Improve efficiency & effectiveness of F3 Increase administrative cost efficiency

contracting process
F2 Increase cost efficiency F4 Achieve Financial sustainability

Business Processes:
P1 Improve business practices & efficiencies P3 Manage current & potential business &
clinical risk
P2 Develop & implement an integrated
information system P4 Implement comprehensive quality control
and outcomes evaluation process
Organization Capacity:
L1 Improve organizational trust & teamwork L3 Recruit & retain a highly skilled force

L2 Build professional competencies that support L4 Ensure organizational learning based on data,
Strategy outcomes & experience

83
Contingency Planning

Contingency Planning
Downside Potential Events
Key Concerns Action Plans

Economic Crisis Extends until 2013 Determine Impact to industry Growth

Scale Back Contract Amounts
Retrenchment

Significant Cut back in Government Re-allocate resources

Contract Retrenchment

Failure of Fundraising Targets Scale back Development staff

Retrenchment

Failure in Venture
Philanthropy/Capitalization Scale back Development staff
Retrenchment

Upside Potential Events

Re-allocate resources; intensify

Contracts production higher than expected hiring

Donations/fundraising higher than

expected Maintain Development Staff

End of Paper

84
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