Www.kaysohlconsulting.net Nonprofit Financial Fundamentals May 21, 2015 Workshop Leader: Kay Sohl...

www.kaysohlconsulting.net

Nonprofit Financial FundamentalsMay 21, 2015

Workshop Leader: Kay Sohl [email protected]


Workshop Topics

• Budgets• Accounting system structure• Key financial info • Protection from fraud & error• Next steps


Where Do You Get Your $$$$?

• Government• Foundations & corporations• Individuals• Fees for services/product

sales• Investment income


Financial Management Goals

• Achieve mission• Cash when needed• Positive net worth• Compliance


Financial Management Cycle

Plan

Execute

Record

Report

Monitor


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

6


Budgets are Projections

• Estimate each source of income• Estimate each type of expense• Plan for income to exceed

expenses• Document your assumptions

7


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


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


Functional Budgets

• Distinguish purpose/function of all costs as well as line items

• May also include income associated with specific functions

13


Total Management Fund raising Lobbying Homeless Services

Energy Assistance

Personnel Prof. Services Occupancy XXXXX Total Expenses

Cost Center Budget Format


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

16


3 Primary Functions

• Program

• Administration/Management

• Fund Raising

17


Administrative Costs

• Financial management• Board support• Strategic planning• Overall public relations

18


Fund Raising Costs

• Unsolicited requests for contributions

• All forms of contact with individual donors

• Most foundation grant-seeking activity

19


Cost Allocation

• Systematic method for estimating the portion of specific costs which should be attributed to administration, fund raising, and special programs


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


Direct Cost Examples

• Cost of a program staff position

• Cost of reproducing materials used for a program

• Cost of renting space for program staff


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.


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


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


Grant Budget Issues

• Funder preferences and prohibitions

• Funding core operating costs• Funding administrative costs• Relationship of project budget

to overall budget


More Grant Budget Issues

• Multiple funders for one project

• Timing of proposals and decisions

• Multi-year proposals• Sustainability


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


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


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


Financial Management Cycle

Plan

Execute

Record

Report

Monitor


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


Accounting Records• Checks written• Funds deposited• In-kind services and products

received• Obligations to pay others • Others obligations to pay you


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


Key Choices

• Method of Accounting?CashAccrualModified Cash

• Use GAAP?

Generally Accepted Accounting Principles


Cash Basis Accounting

• Records Income when received and Expenses when paid

• Records Cash

• Doesn’t record Payables or Receivables


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


• Insert the Simple sample statement


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


Accrual Basis Accounting records

• Income – when earned• Expenses – when incurred• Cash• Payables and Receivables


Accrual Basis Reports

• Balance SheetAssetsLiabilitiesNet Asset

• Statement of ActivitiesIncomeExpensesNet Income

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


Growing Net Assets

Revenues Expenses Net Income

Opening Net Assets Net Income Ending Net

Assets


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


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


Know the past –Focus on the future

Yr-to-dateAnnual Budget

Actual as % of budget

Projected year end

IncomeExpenseNet Income


Accounting Guidance

• GAAP • Federal funds requirements• IRS requirements


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


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

http://asc.fasb.org/


Nonprofit GAAP Requires

• Distinguishing whether both Contributions & Net Assets are:UnrestrictedTemporarily RestrictedPermanently Restricted


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


Growing Net Assets



Assets


Unrestricted Net Assets include funds:

Available for Operations

Invested in Fixed Assets

Board Designated Reserves

Total Unrestricted Net Assets


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


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


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


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


GAAP for Nonprofits Requires

• Statement of Financial Position (Balance Sheet)

• Statement of Activities• Statement of Cash Flows• Statement of Functional Expenses


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


Statement of Financial Position(Balance Sheet)

• Assets, Liabilities, and Net Assets• Net Assets = Equity

• Three Classes of Net AssetsUnrestricted

Temporarily Restricted

Permanently Restricted


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


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


Statement of Activities-Organization-wide

Yr-to-dateAnnual Budget

Actual as % of budget

Projected year end



“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


Rev & Expense by Function

April, 2014 Energy Assist Housing Nutrition

Manage & General

Total



Expense by Program

Actual Yr-to-date

Yr-to-date Budget

Fav/ (Unfav) Variance

IncomeExpense Prog A Prog B Prog C AdminTotal ExpensesNet Income


Expense by Line Item

Actual Yr-to-date

Yr-to-date Budget

Fav/ (Unfav) Variance

IncomeExpense Personnel Prof Services Occupancy OtherTotal ExpensesNet Income


Program Net Income

Admin Prog A Prog B Prog C

Income

Direct Expense

Gross Margin

Allocated Expense

Net Income


Contribution to Overhead

Admin A B C

Income

Direct Expense

Contribution to Overhead


Statement of Cash Flows

• Explains increase or decrease in cash over time

• Distinguishes cash from operating activities, investing, and financing activities


In All Methods of Accounting

• When Income exceeds expenses, Net Assets grow

• When income falls short of expenses, Net Assets shrink


Growing Net Assets



Assets


Net Assets Provide:

• Ability to continue to operate despite experiencing losses

• Capacity to take risks and innovate


Every Board Member’s Mental Map

• Major sources & uses of funds:

• Key trends:Cash position

Net Income

Net Assets


Core Board Concerns

• Financial health & sustainability

• Progress toward strategic goals

• Risk management


Spotting Troublebefore your cooked

• Unplanned use of unrestricted funds• Cash flow problems • Uncollectible receivables• Negative unrestricted net assets• Cost overruns & income shortfalls


Helping Boards Understand Financial Health

• Complete, concise monthly financial statements

• Financial oversight training• Identify risks & propose solutions• Bullet point narrative• Consider dashboard approach


Dashboards

• Concise graphic presentations of key indicators

• Provide useful comparisons to visualize progress over time

• Users identify most significant indicators


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


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


Fraud Happens!


Fraud in a Nonprofit

• Damages reputation

• Alienates donors

• Destroys public trust


3 Types of Fraud

• Misappropriation• Misstatement• Corruption


Prevention Realities

• Prevention is the most cost effective way to deal with fraud

• Certainty of detection is best prevention

• Perfect controls = unreasonable cost


Fraud Context

Attitude

Pressure

Opportunity


Pressures on Individual Integrity

• Alcohol and drug abuse• Gambling addiction• Family health crisis• Financial crisis• Feelings of unfairness


Pressures on Organizational Integrity

• Cash flow problems• Inadequate investment in

management• Multiple compliance

requirements• Donor demands


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


Essential Controls

• Independent bank reconciliation• Budget to actual comparison on

financial reports• Careful board review of financial

reports• Extreme care with credit cards


Key Policies & Procedures

• Controls on receipts & disbursements

• Bank accounts & investments• Bank reconciliation• Monthly financial reports• Borrowing funds• Accepting gifts


COSO Framework for Controls

• Control environment• Risk assessment• Systems, policies, procedures• Communication• Monitoring


Your Next Steps

• Improve budget format & process?• Rethink accounting choices?• Improve financial reports?• Review policies & controls?• Rethink sustainability strategies?

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