Peeling Back the Covers on Nonprofit Financials (Finance 201) was presented at the Third Annual Essex County Institute for Trustees.

1. Peeling Back the Covers
of Your Finance Department
Leigh J. Tucker, CPA
Managing Director, Nonprofit Client Practice

2. Agenda
• Overview/Introduction
• What You Should Know
about Finance
• Internal Controls
• How to Address Gaps

3. Leigh Tucker, CPA
• Managing Director,
Nonprofit Solutions Practice
• CPA
• PWC & KPMG Alum
• A-133 Federal Funds Audit Expert
• Senior executive in private industry
• Founder of Nonprofit Executives, a
successful nonprofit networking group
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4. About Us
• For more than a decade,
Accounting Management
Solutions, (AMS) has provided
accounting support and financial
management leadership at the
consulting CFO, controller and
accounting manager level to
dynamic companies throughout
the Northeast.
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5. Financial Oversight Responsibilities
• Review Financial Reports and Budget to ensure the
financial health of the organization
• Make Budget and Policy recommendations
• Safeguard the assets of the organization through
internal controls
• Provide oversight of short and long-range strategic
planning
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6. Why Should You Care About Finance?
• Finance impacts every aspect
an organization
• Finance is the foundation for
success
• You need financial information
in order to make key decisions
• Money and mission are directly
linked
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7. Determine the Financial Viability/
Effectiveness of Programs

8. What Should You Know About Finance?
• Does the organization have enough resources to
effectively deliver the programs we have committed to?
• Do we have the right team in place?
• What are our outstanding liabilities and restricted
obligations?
• What will our future resources look like?
• Are we effectively managing our financial processes?
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9. Characteristics of Effective Financial
Reporting
• No surprises for management –
paralyzed by indecision
• Link to strategic plan
• Plan linked to budget
• Measures: Key Performance
Indicators (KPI) based on strategy
• Easy to understand
• Meaningful information

10. Financial Reporting
Question Reports
Where do we want to go? Strategic plan
How are we going to get there? Budget
Do we have enough resources Balance Sheet and Cash Flow
to get there?
Are we on track? Income Statement vs. Budget
If not, what are we going to do Board Discussion
about it?
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11. Financial Ratios Overview
• Ratios use financial data to summarize
organizational performance
• Financial ratio analysis is one tool used to
improve financial decision making and alert
leadership & the Board of “issues”
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12. Ratios
Ratios can give a quick, clear picture of the organization
2009 2010 Goal
Do We Have Enough Resources?
Days Cash on Hand 35 30 35 days
Liquid Funds Ratio 158 144 160 days
Endowment Ratio 56 49 55 days
How are we going to get there?
Contributions & Grants Ratio 86% 92% 85%
Expendable Financial Resources $ 3,314,000 $ 3,069,000 $ 3,350,000
Fundraising Expense Ratio 5% 5% 5%
Fundraising Efficiency Ratio 5.05 6.20 5.00 times
Program Expense Ratio 85% 86% 85%
Total Return on Investments 6.12% 2.40% 8.00%
Are we on track?
Operating Margin -3% -23% 0%
Debt Service to Operations 1% 0% 2%
Debt Service Coverage Ratio 6.02 4.30 6.00 times
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13. Ratios
Days Cash on Hand - How many days an
organization can rely on its cash and liquid assets
to fund operations
Total Cash on Hand $650,000
Avg. Daily Expenses $21,707
Days Cash on Hand 30 days
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14. Ratios
Contributions and Grants Ratio - Measures the
portion of total revenue that is received from
third party support
Total Revenue
Total Misc Revenue $1,178,000
Total Contributions & Grants $6,957,000
Revenue
Total Revenue $8,135,000
Contributions and Grants Ratio 86%
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15. Ratios
Fundraising Expense Ratio - Measures the
relationship between fundraising expenses and
total expenses
Total
Total Misc Expenses $7,547,000 Expenses
Total Fundraising Expenses $376,000
Total Expenses $7,923,000
Fundraising Expense Ratio 5%
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16. Ratios
Program Expense Ratio - The relationship
between resources spent on the mission of the
organization and total expenses
Total
Total Misc Expenses $1,199,000 Expenses
Total Program Expenses $6,724,000
Total Expenses $7,923,000
Program Expense Ratio 85% $6,724,000
$1,199,000
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17. Ratios
Operating Margin Ratio - Indicates the excess
margin by which annual unrestricted revenues
cover operating expenses
Operations
Operating Income $(1,472,000)
Total Operating Expenses $6,451,000
Operating Margin -23%
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18. Ratios
Total Return on Investments - Total investment
income (interest, dividend, realized, unrealized
gains) as a percent of funds invested
Investment Return $81,000
Average Investments $1,323,000
Total Return on Investments 6.12%
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19. Ratios
Expendable Financial Resources - Measure of financial
resources that are ultimately expendable
Expendable Financial Resources
Temp Restricted Net $2,424,000
Assets
Unrestricted Net Assets $1,840,000
Less Fixed Assets ($950,000)
Expendable Financial $3,314,000
Resources
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20. Metrics – Link Money to Mission
• Ability to predict the future
• Convey value of organization to funders
• Help the Board (which often includes non-
financial people) understand financial
information
• Shows the relationship between program
outcomes and money
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21. Fraud Prevention &
Internal Controls

22. Financial Pitfalls to Avoid
• Large degree of control by anyone (Founder, CEO/ED,
substantial donor, etc..)
• Important to always have checks & balances
• Failure to include individuals with financial oversight expertise
on the Board
• Not reading or sharing financial information
• Failing to monitor key indicators, allowing the organization to
drift into financial trouble
• Not monitoring financial data and budget overspending
• Being too trusting of staff who handle money
• Not monitoring, updating or verifying internal controls
• Lacking strong external checks on financial reporting
• Not having a CPA firm conduct an audit on time or at all
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23. Policies, Procedures, Checklists
• Policies -- set the standard for what is expected
• Create procedure for exceptions
• Cash flow/forecasting/payment processes
• Procedures, especially where there are flowcharts and
brief descriptions are useful, especially at turnover
• Checklists – monthly closing tasks and HR – ensure all
necessary tasks are completed
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24. Objectives: Internal Controls
• Provide Reliable Financial Data
• Safeguard Assets
• Promote Operational Efficiency
• Encourage Adherence to Policy
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25. Elements of Effective Internal Controls
• Budget/Actual Comparisons
• Definitions of Responsibility
• Segregation of Duties
• Reconciliation of Records
• Documented Policies & Procedures - which are
actually followed
• Periodic Outside Review by Independent Auditors
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26. Sample Internal Controls Questions
• Check Signing:
• Is there a policy against signing blank or incomplete
checks?
• Is a second signature for amounts over a predetermined
amount?
• Are checks returned to preparer after signing?
• Document Controls
• Processing Controls
• Reconciliation Controls

27. Financial Operations Review
• Financial risks can result from insufficient internal controls
or practices that invite fraud, or from fundraising activities
that go awry
• An outside firm can perform a financial operations review
which:
• Assesses financial operations
• Identifies issues and areas for improvement
• Prioritizes best practices and next steps
• Frequently used during organizational changes
• Brief the Board on current financial “best practices”
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28. Create Action Plan
Current State Gap Analysis Best Practices
Day 1 Day 5
Assessment Review Output
Operations Policies/Procedures Recommendations
Systems Financial Health ROI/ Profitability
Process Best Practices Implementation Plan

29. What We Find Most Often
• Inadequate reporting
• Improper staffing
• Inadequate oversight of fiscal area by
management and the Board
• Lack of strategic measures to help detect early
warning signs
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30. How to Address Gaps in Your
Organization

31. Most Common Challenges for Nonprofits
• Budget
• Reduced funding
• Pressure to improve operational efficiencies and
reduce costs
• Technology
• Greater requirements for transparency
• People
• Fewer staff
• Greater need
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32. Nonprofits: Need to Evolve to Survive
• Manage operations more efficiently in order to fulfill
the mission
• Connect money to mission
• Reduce costs
• Raise level of operational effectiveness
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33. Goal: Improve Operations
OPERATIONAL EFFICIENCIES
PROFITABILITY/CASH FLOW
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34. Best Practices: Accounting Outsourcing
• Today, many nonprofits are moving toward
outsourcing some or most of their accounting
services
• Can cost less due to flexibility of outsourcing (part-
time and as-needed)
• Can provide a higher level of expertise and access
to best practices
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35. Best Practices: Shared Services
• Define benchmarks for processes and business
operations against best in class
• Define processes
• Merge standard functions
• Centralize and consolidate
• Specialize and standardize
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36. Best Practices: Systems
• Look at remote services and going virtual
• Implement new technologies
• Capacity building
• Reduce cost
• Address internal staff workload issues
• Example: QuickBooks
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37. Being an Engaged Board Member
• Board input is critical to effective management
• Effective Board reporting should include:
• A summary of key issues (good and bad)
• The likely unknowns critical to financial health
• A summary of critical decisions to be made
• Make sure you understand the information
• Ask the hard questions

38. Questions?

39. Contact Information
Leigh J. Tucker, CPA
Managing Director, Nonprofit Client Practice
Accounting Management Solutions, Inc
Phone: 781-419-9220
E-mail: ltucker@amsolutions.net
@NonprofitCFOs
http://www.nonprofitexecutives.org
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