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Transcript of Www.kaysohlconsulting.net Nonprofit Financial Fundamentals May 21, 2015 Workshop Leader: Kay Sohl...
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Nonprofit Financial FundamentalsMay 21, 2015
Workshop Leader: Kay Sohl [email protected]
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Workshop Topics
• Budgets• Accounting system structure• Key financial info • Protection from fraud & error• Next steps
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Where Do You Get Your $$$$?
• Government• Foundations & corporations• Individuals• Fees for services/product
sales• Investment income
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Financial Management Goals
• Achieve mission• Cash when needed• Positive net worth• Compliance
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Financial Management Cycle
Plan
Execute
Record
Report
Monitor
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Annual Operating Budget
• Comprehensive financial plan for your fiscal year
• Includes all sources and uses of resources
• Provides Board authorization to obtain and use resources
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Budgets are Projections
• Estimate each source of income• Estimate each type of expense• Plan for income to exceed
expenses• Document your assumptions
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Key Budget Tip
• Focus your efforts to estimate income & expenses on the categories that matter most
• Identify your major sources of income & most significant costs
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Personnel Costs
• Generally comprise 70 to 80% of nonprofit budget
• Includes Salaries/Wages, Employer Taxes, and Employer Paid Fringe Benefits
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More Complex Budgets Include
• Info on restrictions• Functional format
ProgramAdministrationFund Raising
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Functional Budgets
• Distinguish purpose/function of all costs as well as line items
• May also include income associated with specific functions
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Total Management Fund raising Lobbying Homeless Services
Energy Assistance
Personnel Prof. Services Occupancy XXXXX Total Expenses
Cost Center Budget Format
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Functional Budget Format
• Uses columns to present management, fund raising, and program costs
• Presents major programs in separate columns
• Demonstrates your relative investment in multiple program areas
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3 Primary Functions
• Program
• Administration/Management
• Fund Raising
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Administrative Costs
• Financial management• Board support• Strategic planning• Overall public relations
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Fund Raising Costs
• Unsolicited requests for contributions
• All forms of contact with individual donors
• Most foundation grant-seeking activity
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Cost Allocation
• Systematic method for estimating the portion of specific costs which should be attributed to administration, fund raising, and special programs
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Behavior of Costs
• Direct Costs: costs which can be directly associated with a specific function.
• Indirect Costs: costs which cannot be directly associated with a specific function
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Direct Cost Examples
• Cost of a program staff position
• Cost of reproducing materials used for a program
• Cost of renting space for program staff
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Indirect Cost Examples
• Rent for an office housing staff who work on programs, administration, and fund raising
• Costs for an executive director who does work in programs, management, and fund raising.
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Common Cost Allocation Methods
• % of staff time (FTE) devoted to functions
• % of personnel costs devoted to functions
• % of square feet devoted to functions
• Negotiated Indirect Cost Rate
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New Option for Federal Funds
• Uniform Guidance – effective for awards after 12/26/14
• Allows use of 10% de Minimis Indirect Cost Rate
• Must be applied to all cost centers, not just federal
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Grant and Contract Budgets
• Budget for funds from a specific source
• Included as part of proposal for funding
• May create restrictions when included in grant or contract agreement
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Grant Budget Issues
• Funder preferences and prohibitions
• Funding core operating costs• Funding administrative costs• Relationship of project budget
to overall budget
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More Grant Budget Issues
• Multiple funders for one project
• Timing of proposals and decisions
• Multi-year proposals• Sustainability
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What Portion of Each Grant Should Go in Current Year Budget?
Line item Total Award/Contract Prior FY portion Current FY portion Next FY portionPersonnelFringe BenefitsTravelEquipmentSuppliesContractualOther
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Cash Flow Projection
• Estimates when cash will be received and must be disbursed
• Primarily a management tool• Board involvement required when
management cannot resolve cash flow problems alone
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Cash Flow Projection Worksheet7-01-09 to 12-31-09
July Aug Sept Oct Nov DecOpening Cash 7,000 29,350 6,100 200 (5,250) (23,350)Expected Receipts Client fees 8,000 8,200 6,000 4,000 4,000 3,500
Gov Contract #1 10,000 10,000 10,000 10,000 10,000 10,000
Gov Contract #2 22,500 0 0 22,500 0
Donations 500 200 200 500 800 15,000
Foundation grants 20,000 0 20,000 0 0 30,000Subtotal Receipts 61,000 18,400 36,200 37,000 14,800 58,500Loans ReceivedTotal Cash Available 68,000 47,750 42,300 37,200 9,550 35,150
Expected Disbursements Payroll 28,000 28,000 28,000 23,000 23,000 23,000 Employer taxes 2,800 2,800 2,800 2,300 2,300 2,300 Fringe benefits 3,000 3,000 3,000 2,400 2,400 2,400 Professional services 500 4,000 4,500 500 2,000 200 Rent 2,000 2,000 2,000 1,500 1,500 1,500 Utilities 400 400 400 300 400 600 Office supplies 200 100 200 100 200 100 Program supplies 1,000 800 500 100 100 100 Insurance 0 0 0 12,000 0 0 Printing 200 100 200 100 600 100 Postage 50 50 50 50 300 50 Transportation 400 400 350 100 100 100 Other 100 0 100 0 0 100 Loan repayments 0Subtotal Disbursements 38,650 41,650 42,100 42,450 32,900 30,550
Ending Cash 29,350 6,100 200 (5,250) (23,350) 4,600
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Financial Management Cycle
Plan
Execute
Record
Report
Monitor
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Accounting• Comprehensive record of everything
that happens that has financial impact on your organization
• Provides info needed to measure financial health & tell whether budget plan is working
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Accounting Records• Checks written• Funds deposited• In-kind services and products
received• Obligations to pay others • Others obligations to pay you
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Record impact of transactions in 5 categories
• Types of Expenses• Types of Income• Things you own - Assets• Things you owe - Liabilities• Your net worth – Net Assets
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Key Choices
• Method of Accounting?CashAccrualModified Cash
• Use GAAP?
Generally Accepted Accounting Principles
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Cash Basis Accounting
• Records Income when received and Expenses when paid
• Records Cash
• Doesn’t record Payables or Receivables
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Cash Basis Financial Report
• Summarizes $$$ paid out and $$$ taken in by category
• Shows beginning and ending cash balance
• Computes the increase or decrease in cash balance
• Compares the actual income and expenses to the budget plan
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• Insert the Simple sample statement
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What’s Missing in Cash Basis Report
• Info on restrictions on income• Info on use of restricted funds• Property & equipment• Amounts owed or owing• Net worth (beyond cash)• In-kind income & expenses
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Accrual Basis Accounting records
• Income – when earned• Expenses – when incurred• Cash• Payables and Receivables
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Accrual Basis Reports
• Balance SheetAssetsLiabilitiesNet Asset
• Statement of ActivitiesIncomeExpensesNet Income
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Small NonprofitBalance Sheet - Statement of Financial Position(accrual basis)
September 30, 2005with comparative totals as of June 30, 2005
9-30-05 6-30-05AssetsCash 6180 3000Fees Receivable 500 2000Total assets 6680 5000
Liabilities and Net AssetsLiabilities Accrued salaries & taxes 980 300Accounts payable 2000 400Total liabilities 2980 700
Net Assets -unrestricted 3700 4300
Total liabilities and net assets 6680 5000
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Growing Net Assets
Revenues Expenses Net Income
Opening Net Assets Net Income Ending Net
Assets
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When Cash Basis is Best
• Very small organization that has no payables or receivables
• Organization with very limited bookkeeping ability
• Accurate Cash Basis records are better than inaccurate Accrual Basis records
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When Accrual Basis is Best
• Organizations with significant payables and receivables
• Organizations which need to be sure that each program element is generating sufficient income to meet it’s costs
• Organizations at risk for not having enough cash to meet their obligations
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Know the past –Focus on the future
Yr-to-dateAnnual Budget
Actual as % of budget
Projected year end
IncomeExpenseNet Income
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Accounting Guidance
• GAAP • Federal funds requirements• IRS requirements
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GAAP• Generally Accepted Accounting Principles
• Standards used by CPAs to determine if financial statements fairly present the financial condition of the organization
• Set by the Financial Accounting Standards Board
• See sample financial statements required by GAAP at end of the slide packet
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Finding GAAP Online• http://asc.fasb.org/ • Register for the “Free Basic View”• Choose “industry” from side
navigation bar• Choose “not-for-profit” Code 958
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Nonprofit GAAP Requires
• Distinguishing whether both Contributions & Net Assets are:UnrestrictedTemporarily RestrictedPermanently Restricted
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Unrestricted Income
• Unrestricted gifts occur when donor does not specify purpose or timeframe for use of the gift
• Fees for services & product sales are considered unrestricted income
• Net Unrestricted Income builds Unrestricted Net Assets
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Growing Net Assets
Revenues Expenses Net Income
Opening Net Assets Net Income Ending Net
Assets
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Unrestricted Net Assets include funds:
Available for Operations
Invested in Fixed Assets
Board Designated Reserves
Total Unrestricted Net Assets
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Temporarily Restricted Contributions
• Donor specifies the purpose for which funds may be used
and/or• Donor specifies time period in which
funds may be used• TR Contributions after Releases from
Restrictions increase TR Net Assets
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Temporarily Restricted Net Assets
• Part of the Total Net Assets • Represent the portion of
previously received Temporarily Restricted gifts for which the restrictions have not yet been met
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Temporarily Restricted Net Assets:. . . . like a Cookie Jar
• Intended to be eaten• Need to know the
ingredients/restrictions• “Mission- focused”
cookies can keep you going
• Need to refill the jar
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Permanently Restricted Gifts & Net Assets
• Donor requires that the gift itself (corpus) be invested, not used
• Earnings on investment of the gift yield either unrestricted or temporarily restricted income
• Commonly called endowment
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GAAP for Nonprofits Requires
• Statement of Financial Position (Balance Sheet)
• Statement of Activities• Statement of Cash Flows• Statement of Functional Expenses
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Balance Sheet & Income Statement:Pathway & Destination
• Balance Sheet – one point in time• Income Statement – activity over a
period of time• Income Statement – the path we
took• Balance Sheet – where the path
took us
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Statement of Financial Position(Balance Sheet)
• Assets, Liabilities, and Net Assets• Net Assets = Equity
• Three Classes of Net AssetsUnrestricted
Temporarily Restricted
Permanently Restricted
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What Readers Learn from
Balance Sheets • Net Assets – restricted or unrestricted• Net Assets – growing or shrinking • Cash• Liabilities• Accounts Receivable and Payable• Investment in fixed assets
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Statement of Activities (Income Statement, Profit &Loss)
• Reports Revenues and Expenses for specified time period
• Distinguishes program, management, and fund raising expenses
• Distinguishes unrestricted, temporarily restricted, and permanently restricted income
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Statement of Activities-Organization-wide
Yr-to-dateAnnual Budget
Actual as % of budget
Projected year end
IncomeExpenseNet Income
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“Stacked Format”Statement of Activities
• Reports Unrestricted activity at top• Reports Temporarily Restricted activity
underneath Unrestricted• Facilitates comparison of actual Revenues
and Expenses to budget• Display expenses by line item or by
function
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Rev & Expense by Function
April, 2014 Energy Assist Housing Nutrition
Manage & General
Total
IncomeExpenseNet Income
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Expense by Program
Actual Yr-to-date
Yr-to-date Budget
Fav/ (Unfav) Variance
IncomeExpense Prog A Prog B Prog C AdminTotal ExpensesNet Income
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Expense by Line Item
Actual Yr-to-date
Yr-to-date Budget
Fav/ (Unfav) Variance
IncomeExpense Personnel Prof Services Occupancy OtherTotal ExpensesNet Income
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Program Net Income
Admin Prog A Prog B Prog C
Income
Direct Expense
Gross Margin
Allocated Expense
Net Income
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Contribution to Overhead
Admin A B C
Income
Direct Expense
Contribution to Overhead
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Statement of Cash Flows
• Explains increase or decrease in cash over time
• Distinguishes cash from operating activities, investing, and financing activities
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In All Methods of Accounting
• When Income exceeds expenses, Net Assets grow
• When income falls short of expenses, Net Assets shrink
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Growing Net Assets
Revenues Expenses Net Income
Opening Net Assets Net Income Ending Net
Assets
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Net Assets Provide:
• Ability to continue to operate despite experiencing losses
• Capacity to take risks and innovate
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Every Board Member’s Mental Map
• Major sources & uses of funds:
• Key trends:Cash position
Net Income
Net Assets
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Core Board Concerns
• Financial health & sustainability
• Progress toward strategic goals
• Risk management
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Spotting Troublebefore your cooked
• Unplanned use of unrestricted funds• Cash flow problems • Uncollectible receivables• Negative unrestricted net assets• Cost overruns & income shortfalls
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Helping Boards Understand Financial Health
• Complete, concise monthly financial statements
• Financial oversight training• Identify risks & propose solutions• Bullet point narrative• Consider dashboard approach
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Dashboards
• Concise graphic presentations of key indicators
• Provide useful comparisons to visualize progress over time
• Users identify most significant indicators
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Jan Feb Mar AprMay Jun Jul AugSep Oct NovDec$300,000
$500,000
$700,000
Cash Flow
ActualProjectedTarget = $615,000 minimum
Individual Contributions
4%
Corporate/Foundation
Grants16%
Government Grants & Contracts
56%
United Way14%
Program Fees10%
Income by TypeFinancial Indicators
TargetThis
monthLast
monthLast
year end
Income Statement
Surplus/(deficit) YTD $270,000 $390,842 $340,908($570,240
)
Surplus/(deficit) year-end forecast $270,000 $30,937 $250,987
($570,240)
Earned income ratio 11.5% 10.3% 11.8% 13.0%
New grants success ratio 50.0% 35.0% 33.0% 50.0%
Balance Sheet
Days cash on hand (unrestricted) 45 43 28 51
Reserve funds balance (1 month payroll)
$250,000 $200,000 $150,000 $250,000
Current ratio 2 to 1 5.8 4.2 6.2
AR aged over 90 days 15.0% 22.3% 23.5% 20.0%
Program Indicators Target
This month
Last month
Lastyear end
Weatherization Contracts (monthly goal) 20 21 22 15
Head Start enrollment 100 60 58 109
Monthly job placements 30 11 14 32
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Board Financial Oversight
• Approve budget• Review financial statements• Authorize debt, contracts, bank accounts• Adopt & monitor policies –investment, gift
acceptance, independent reconciliation• Select/communicate with auditor• Insist on competent fiscal management• Establish appropriate controls
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Fraud Happens!
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Fraud in a Nonprofit
• Damages reputation
• Alienates donors
• Destroys public trust
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3 Types of Fraud
• Misappropriation• Misstatement• Corruption
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Prevention Realities
• Prevention is the most cost effective way to deal with fraud
• Certainty of detection is best prevention
• Perfect controls = unreasonable cost
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Fraud Context
Attitude
Pressure
Opportunity
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Pressures on Individual Integrity
• Alcohol and drug abuse• Gambling addiction• Family health crisis• Financial crisis• Feelings of unfairness
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Pressures on Organizational Integrity
• Cash flow problems• Inadequate investment in
management• Multiple compliance
requirements• Donor demands
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Basic Protections
• Deposit all funds into a corporate bank account authorized by Board
• Pay all expenses by check • Maintain complete record of all
checks & deposits• Independent reconciliation of your
records to the bank’s records
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Essential Controls
• Independent bank reconciliation• Budget to actual comparison on
financial reports• Careful board review of financial
reports• Extreme care with credit cards
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Key Policies & Procedures
• Controls on receipts & disbursements
• Bank accounts & investments• Bank reconciliation• Monthly financial reports• Borrowing funds• Accepting gifts
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COSO Framework for Controls
• Control environment• Risk assessment• Systems, policies, procedures• Communication• Monitoring
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Your Next Steps
• Improve budget format & process?• Rethink accounting choices?• Improve financial reports?• Review policies & controls?• Rethink sustainability strategies?