Agenda • 9AM – 10AM: Introductions • 10AM – 12 Noon: Presentation • 12 Noon – 1PM: Lunch • 1PM – 3PM: Q&A plus pre-submitted questions.
Things to Consider • Ask questions and interrupt! My job is to facilitate the discussion. • Network with your peers. They have experienced or are experiencing your “pain”. • Financial management topics to be covered: • Budgeting; • Reporting; • Tracking; • Decision making.
Lawyers and Accountants • I am neither. • You need both to manage your organization. • They should have experience working with nonprofits. • If you do not have one, get one. I prefer via an RFP. • Just because your Board Members are Lawyers or Accountants does not mean you should lean on or use them. Why? • Make sure you rotate your accounting and audit firms every few years. Why?
Mission and Vision At the end of the day, if your organization is not completing its mission, the best financial management system in the world will not matter. Proper financial management is a tool for you to efficiently deliver products and services to your clients.
1. Regulatory Requirements 2. Written Policies & Procedures 10. Internal Controls 3. Track Costs/Expenses EFFECTIVE FINANCIAL MANAGEMENT 9. Reporting 8. Matching Requirements & In-kind Contributions 4. Manage Cash 5. Efficient Accounting System 7. Time & Activity Documentation 6. Budget Controls
Regulatory Requirements • Federal: • Most of you are 501(C)3s. There are a total of 28 kinds of 501(C)s. • IRS (990, 990EZ, 990N, 990T): • 2009 Tax Year (Filed in 2010 or 2011): • Gross receipts normally ≤ $25,000:990-N. • Gross receipts > $25,000 and < $500,000, and total assets < $1.25 million: 990-EZ or 990. • Gross receipts ≥ $500,000, or total assets ≥ $1.25 million: 990. • 2010 Tax Year and later (Filed in 2011 and later): • Gross receipts normally ≤$50,000:990-N. • Gross receipts > $50,000 and < $200,000, and total assets < $500,000: 990-EZ or 990. • Gross receipts ≥ $200,000, or total assets ≥ $500,000: 990. • 990T (Exempt Organization Business Income Tax Return): • $1,000 or more gross income from an unrelated business. • In addition to the obligation to file the annual information return. • Make quarterly payments of estimated tax on unrelated business income.
Regulatory Requirements • Federal (continued): • Failure to file: • $20 a day for each day the failure continues. • Same applies if you fail to give correct and complete information or required information on its return. • Maximum penalty for any one return is the lesser of $10,000 or 5 percent of the organization's gross receipts for the year. • If the organization has gross receipts in excess of $1,000,000, the penalties are increased to $100 per day with a maximum penalty of $50,000. • http://www.irs.gov/charities/article/0,,id=96103,00.html
Regulatory Requirements • Federal (continued): • Grant reporting: Office of Management and Budget sets the primary rules. • Other agencies will require their own reports. • All require financial information. • Wages: • Federal income tax. • Social security taxes (FICA). • Federal unemployment tax (FUTA). • What other federal regulatory requirements do you have?
Regulatory Requirements • Commonwealth of Virginia: • Department of Agriculture and Consumer Services, Division of Consumer Protection reporting requirements: • Charitable or Civic Organization Registration Package. • Request for Exemption from Annual Registration - Form 100. • Registration Statement for a Charitable Organization - Form 102. • Forms for Fundraisers. • Virginia Solicitation of Contributions Law: Section 57-55.3. Disclosure regarding financial statement required. • Rules Governing the Solicitation of Contributions. • http://www.vdacs.virginia.gov/allforms.shtml • Localities: Varies by county and/or city.
Regulatory Requirements • Board and staff MUST be aware of all regulatory requirements, guidelines and provisions. • Financial information generally required for federal, state and local governments: • Annual report with embedded financials; • Audit with management letter; • Balance sheet (point in time).
Written Policies and Procedures • Specific to financial management and transactions. • Litmus tests: • Does the organization operate within a written set of policies and procedures? • Are all Staff familiar with policies and procedures? • Are organizational policies and procedures up-to-date (at least within the last year)? • Do the policies and procedures incorporate grant provisions?
Written Policies and Procedures • Examples: • General Policies and Procedures — Accounting department structure, ethics, conflicts of interest, fraud, security, technology, general ledger, chart of accounts, etc. • Revenues and Cash Receipts Processing — Revenue recognition, contributions, gift acceptance, billing, in-kind, accounts receivable, processing of cash receipts, lockboxes, credit card payments, etc. • Purchasing and Cash Disbursements — Purchasing, solicitation of quotations from vendors, accounts payable, employee expense reports, travel and business entertainment, check preparation, payroll, etc.
Written Policies and Procedures • Examples: • Asset and Liability Accounts — Cash, bank reconciliations, investments, inventory, prepaid expenses, property and equipment, depreciation, leases, fair value accounting, accrued expenses, note payable, income taxes payable, etc. • Financial and Tax Reporting — Interim financial statements, annual financial statements, filing of information and tax returns, public access to returns, unrelated business activities, etc. • Financial Management — Budgeting, external audit, selecting auditors, finance committees, audit committees, insurance, record retention and destruction, functional expense reporting, expense allocations, etc.
Written Policies and Procedures • Examples: • Federal Grants and Contracts — • Administration of federal awards. • Cash draw downs. • Selection and monitoring of sub-recipients. • Special procurement requirements including equipment purchased with federal funds. • Grant close out procedures. • Charging of direct and indirect costs, cost sharing and matching.
Track Costs/Expenses • All staff are familiar with expense policies and procedures. Organization has proper record retention policies. • All expenses have supporting documentation. General documentation requirements to support expenditures: • Reasonable. • Necessary. • Can be allocated. • Allowable. • Adheres to organizational policies and procedures. • In many cases must follow grant guidelines.
Track Costs/Expenses • Cost types: • Direct: Costs that can closely be associated with a program and its objectives. What are some examples? • Indirect: Also known as administrative costs, are costs to operate the organization and are not directly attributable to a program. What are some examples? • Are there instances when a cost category can be considered both direct and indirect? Or does it depend on the situation?
Manage Cash • Managing cash is likely to be your largest challenge!!! • The overall purpose of managing your cash flow is to make sure that you have enough cash to pay current bills. • Organizations can manage cash flow by examining a cash flow statement and cash flow projection. • The cash flow statement includes total cash received minus total cash spent over a predefined period. • The cash flow project is similar but is an estimate. • Cash management looks primarily at actual cash transactions.
Manage Cash • The most commonly used format for the cash flow statement is broken down into three sections: • Cash flows from operating activities. • Cash flows from investing activities. • Cash flows from financing activities. • Cash flows from operating activities are related to your principal line of business and include the following: • Cash receipts from sales or for the performance of services. • Payroll and other payments to employees. • Payments to suppliers and contractors. • Rent payments. • Payments for utilities. • Tax payments.
Manage Cash • Investing activities: • Include capital expenditures – disbursements that are not charged to expense but rather are capitalized as assets on the balance sheet. • Include long term investments. • Investing cash flows could include: • Purchases of property, plant and equipment. • Proceeds from the sale of property, plant and equipment. • Purchases of stock or other securities (other than cash equivalents). • Proceeds from the sale or redemption of investments.
Manage Cash • Financing activities include cash flows relating to the business’s debt or equity financing: • Proceeds from loans, notes, and other debt instruments. • Installment payments on loans or other repayment of debts. • Cash received from the issuance of stock or equity in the business. • Dividend payments, purchases of treasury stock, or returns of capital.
Manage Cash • Cash for purposes of the cash flow statement includes: • Cash. • Cash equivalents: Short-term, temporary investments that can be readily converted into cash, such as marketable securities, short-term certificates of deposit, treasury bills, and commercial paper. • The cash flow statement shows: • The opening balance in cash and cash equivalents for the reporting period. • The net cash provided by or used in each one of the categories (operating, investing, and financing activities). • The net increase (positive) or decrease (negative) in cash and cash equivalents for the period. • The ending balance. Positive is good… • There are two methods for preparing the cash flow statement – the direct method and the indirect method. Both methods yield the same result, but different procedures are used to arrive at the cash flows.
Manage Cash • Direct method: • Analyze your cash and bank accounts to identify cash flows during the period via your general ledger. • Under the direct method, sections of the cash flow statement include: • Cash receipts from customers, grants, investments, donations, and other. • Cash payments for inventory. • Cash paid to employees. • Cash paid for operating expenses. • Taxes paid. • Interest paid. • Equals net cash provided by (used in) operating activities.
Manage Cash • Indirect method: • Net income per the income statement. • Minus entries to income accounts that do not represent cash flows. • Plus entries to expense accounts that do not represent cash flows. • Equals cash flows before movements in working capital. • Plus or minus the change in working capital. • The net effect of the above would then be reported as cash provided by (used in) operating activities.
Manage Cash • Litmus Test: • Organization has adequate cash on hand to meet obligations. • Organization is raising funds on a regular basis. • Grants: Advance requests (if used) are timed so funds are sufficient to run programs. • Organization performs monthly bank reconciliations with financial records. • Monthly cash flow statement is produced. • Appropriate financial vehicles are in place to manage cash flows (e.g. Line of credit and/or loan).
Manage Cash • Questions to consider: • How much cash should we hold in reserve? • How should we invest our short term cash balances? • What is petty cash and how should we handle it? • What is the Board's Responsibility in cash management and investments?
Efficient Accounting System • System must be capable of: • Distinguishing grant verses non-grant related expenditures. • Identifying costs by program. • Identifying costs by budget category. • Differentiating between direct and indirect costs (administrative costs).
Efficient Accounting System • System must be capable of (continued): • Accounting for each award/grant separately (fund accounting). • Maintaining matching funds separately from grant funds. • Recording in-kind contribution as both revenues and expenses. • Allowing management to easily obtain financial reports at both the summary or detailed levels. • Correlating accounting information and documents to financial reports.
Efficient Accounting System • Questions to ask before choosing: • Does your organization have someone on staff doing your accounting? If so, is your accounting system computerized? • If the accounting system is not computerized, do you think it should be? Why? • What kind(s) of accounting software does your organization use? • Is your computerized accounting system currently working well?
Efficient Accounting System • Questions to ask before choosing: • Would your accounting system be adequate with a 25 percent increase in volume? • Is the accounting staff able to keep your organization's accounts accurately and easily? • Do your computers run the accounting software adequately? • Does your organization need to upgrade to a newer version of your current program or even a different program? If so, what program do you need? • How many computers will not be able to run the new software?
Efficient Accounting System • Questions to ask before choosing: • Do you need fundraising software, accounting software, or both? If you need both, do they need to be connected? Why? • How many funds do you have? How independent are they? How many accounting transactions do you have each month? • Do you have specific reporting requirements from your funders?
Efficient Accounting System • Questions to ask before choosing: • Can you support the software internally, or are you going to need long-term help from the consultant who installs it? • What is your budget for this project? • Is your connection fast enough that using an ASP (Application Service Provider) is feasible?
Efficient Accounting System • Vendors include: • For small nonprofits (Less than 5 users and under $1M in budget): • QuickBooks by Intuit. • Peachtree by Sage. • FundEZ by E-Z Development Corporation. • Cost $100 - $1,000. • For Mid-Sized Nonprofits (More than 5 users and greater than $1M): • MIP Fund Accounting by Sage. • Fundware by Kintera. • The Financial Edge by Blackbaud. • Dynamics by Microsoft (formally Great Plains, Solomon, and Navision). • MAS90/MAS200 by Sage. • Cost: $5,000 - $250,000.
Efficient Accounting System • Vendors include: • For Large National and International Nonprofits: • Oracle (including Oracle Financials, PeopleSoft, and JDEdwards). • Microsoft's Dynamics AX. • Lawson Software. • Each must be tailored to your specific needs. • Cost: Upper six figures to well into the millions. • Great resource for choosing and buying accounting software is ww.techsoup.com.
Efficient Accounting System • GIGO – Garbage in Garbage Out. • Your accounting system will only be as good as your financial manager. • Make sure you have $ allocated annually so that your in-house person can have training on both the system as well as professional development.
Budget Controls • A properly approved budget is: • A financial blueprint to help an organization meet its goals and objectives. • A tool to help ensure an organization is meeting matching requirements. • An Organization should: • Periodically review budget to actual. • Assure budget changes are properly approved. • Review movements between line items and verify if they are within provisions, guidelines, and/or policy.
Budget Controls • Budgets can be general operating or project based. • Budget changes requiring approval: • Changes in scope, objectives or goals of organization or program. • Substantial changes in level of revenues received. • Grants: Additional sub-grants or contracts. • Line item changes greater than 10% of original budget.
Budget Controls • Forming your budget (create three budgets): • Blue sky (best case). • Devastation (worse case). • Probable (average of best and worst cases) • Be conservative: estimate revenues low and expenses high. • Budgets are dynamic and flexible.
Budget Controls • Budgets should include: • Expenses • Basics: Lights, heat, telephones, internet, rent, water, office supplies, printing, website, etc. • People: Salaries, benefits, and taxes. • Project specific items. • Use actual costs. Do not guess.
Budget Controls • Budgets should include: • Income (aka revenue, funding): • Six major “pots”: • Operations (aka earned income). • Investments. • Foundations. • Corporations. • Government. • Individuals. • Grants: Only include those that are awarded. • Use actuals. Do not guess.
Budget Controls • Document, document, document. • Multiple iterations will be required. • Review by board, staff, and major partners. • Use prior year as starting point (at minimum to determine the line items necessary). • If you are brand new, beg, borrow and steal samples. If you cannot find an example online, use a library!!!
Budget Controls • Consider using Zero Based Budgeting (ZBB): A method of budgeting in which all expenses must be justified for each new period. • Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. • Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. • ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization.
Budget Controls • ZBB Pros: • Efficient allocation of resources, as it is based on needs and benefits. • Drives managers to find cost effective ways to improve operations. • Detects inflated budgets. • Municipal planning departments are exempt from this budgeting practice. • Useful for service departments where the output is difficult to identify.
Budget Controls • ZBB Pros (continued): • Increases staff motivation by providing greater initiative and responsibility in decision-making. • Increases communication and coordination within the organization. • Identifies and eliminates wasteful and obsolete operations. • Identifies opportunities for outsourcing. • Forces cost centers to identify their mission and their relationship to overall goals.
Budget Controls • ZBB Cons: • Time-consuming and exhaustive. • Forced to justify every detail related to expenditure. • Favors production department. • Necessary to train managers. • In a large organization, the volume of forms/data may be so large that no one person could read it all. • Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.
Time and Activity Documentation • This primarily relates to grants or other reimbursable activities. • Time and Activity Documentation: • All salaries and wages charged to grants must be supported by signed time and attendance records. • Must reflect an after-the-fact distribution of each employee’s actual activity. • Must account for the total activity of each employee. • Must be prepared at least monthly and should coincide with one or more pay periods. • Must be signed by the employee.
Matching Requirements and In-Kind Contributions • Must be verifiable from recipient records. • Must not be included as contribution for other federally-assisted programs. • Must be necessary for accomplishing program objectives. • Must be allowable according to cost principles and grant provisions.
Matching Requirements and In-Kind Contributions • Are to be recorded in the general ledger. • Need to be properly documented. • Need to have the value supported by appropriate documentation. • Fair market value = What you would pay for it if it was not donated.
Matching Requirements and In-Kind Contributions • In-kind contributions documentation have same standards as other expenditures. • In-kind contributions should be recorded as both a revenue and an expense. • Document the basis for determining the value of personal services, material equipment, building, and land. Obtain acknowledgement of the contribution which should include: • Name of donor. • Date and Location of donation. • Description of item/service. • Estimated value.
Matching Requirements and In-Kind Contributions • In-kind may not include the value of direct community services performed by volunteers. • Services that contribute to organizational functions such as accounting, training of staff or members may be counted as in-kind. • In general, in-kind services are recognized in the financial statements if the services received: • Create or enhance non-financial assets. • Requires specialized skills. • Provided by individuals possessing those skills. • Would need to be purchased if not provided by donation. • In the end, please check with your accountant.