Financial Management with Cheryl Black

Smart Strategies for Great Financial Management Texas Nonprofit Summit September 9, 2011 Presented by Cheryl Black Chief Financial Officer

Introductions and Class Survey Plan for the session Participation Questions Review the outline Concentrate on the five major sections Wrap up Q&A

Achieving Nonprofit Financial Health Differences between non-profit and for-profit organizations – FASB requirements Setting up systems and getting started Chart of accounts Accounting software Basic financial statements Establishing good internal controls

Annual Operating Cycle Budget preparation Monthly Activities Closing the books Working with the Board and other departments Investment and Cash Management Year end closing Audit, Review or Compilation Management Letter Reporting requirements Form 990 Tax return Single Audit A-133 Payroll reports

Differences Between Non-profit & For-profit Organizations

FASB Requirements FASB 117 - “Financial Statement of Non-Profit Organization” Statement of Financial Position Statement of Activities Statement of Functional Expenses Statement of Cash Flows Financial Statement Disclosures Accrual Basis of Accounting

Functional Expenses Disclose In Statement of Activities or In the footnotes Functional Classifications Program services Management and general Fundraising

Accrual, Cash or Modified Cash Accounting Definitions Accrual Cash Modified Cash Factors to consider when choosing Few payables or receivables Expertise and time constraints on bookkeeping staff Budget size

FASB Requirements (continued) FASB 116 - “Accounting for Contributions Received and Contributions Made” Recognized as revenues in period received Recorded as either restricted or unrestricted revenue (donor imposed conditions)

Accounting for Contributions In-Kind Contributions Donor sets value, not non-profit Shows true cost to operate the organization IRS does not allow in-kind services or facility rental to be deducted from Form 990 tax return

Accounting for Contributions(continued) Special Events and Membership Dues Fund-raiser attendees often receive a tangible benefit in return Membership dues may entitle individuals to benefits The portion of ticket or dues which represents the fair market value of the benefit received is NOT tax deductible Minimal benefits are excluded Non-profit required to send letters to donors re: amount that may be taken as tax deduction

Accounting for Contributions(continued) IRS Publication 1771 - “Charitable Contributions - Substantiation and Disclosure Requirements”

FASB Requirements (continued) FASB 124 - “Accounting for Certain Investments Held by Not-for-Profit Organizations” Investments be reported at fair market value Gains and losses be included in a statement of activities

FASB Requirements (continued) FASB 93 - “Recognition of Depreciation by Not-for-Profit Organizations” Recognize the cost of using up long-lived tangible assets (depreciation) Exceptions Certain works for art Certain historical treasures

Setting up Systems and Getting Started

Chart of Accounts - Design Planning A tool used to code all the transactions that will be recorded in the accounting records. The accounts set up here are then consolidated into the financial statement presentation. If not well thought out, the financial statements will be less effective as a management tool in making decisions about the future of the organization.

Chart of Accounts - Design Planning Decisions to make – Unified Chart of Accounts (UCOA) Numbered accounts Usually follow standard industry practice 100 Assets 200 Liabilities 300 Net Assets (Fund Balance) 400 Revenue 500+ Expenses

Accounting Software Overall Considerations Most important features Cost Off the shelf or customized Number of modules Training of accounting staff Maintenance contract Specialized non-profit packages vs. general accounting packages Compatible with rest of applications

Basic Financial Statements Statement of Activities Commonly known as the “Income Statement” Is the cumulative total of revenue and expense activity for the current annual operating cycle Calendar year Fiscal year Management focuses on this statement more than the Statement of Financial Position (Balance Sheet)

Basic Financial Statements Statement of Functional Expenses Is the breakdown of “natural” expenses into “functional” categories. Admin and general (or overhead) Programming Fundraising Is closely linked to the Statement of Activities (Income Statement) Can be a supplement report or an audit footnote

Basic Financial Statements Statement of Financial Position Commonly known as the “Balance Sheet” Is a snapshot of the financial position of the organization on a certain day Consists of three main categories Assets (what you own) Liabilities (what you owe) Net Assets (what the organization is worth) Independent auditors focus on this statement more than the Statement of Activities (Income Statement)

Basic Financial Statements Statement of Cash Flows Commonly known as the “Change in Financial Position” Breaks down the use of cash into three different activities Operations Investing Financing Lets the reader know exactly where the organization received and spent cash during the period

Internal Controls – Overview Main objectives include - Safeguarding assets Promoting efficiency in operations Enhancing reliability and completeness of financial reporting Minimizing the risk of misuse or abuse of the organization’s resources

Internal Controls – Overview (cont’d.) Nonprofits at greater risk for fraud? An atmosphere of trust Many cash donations (difficult to control) Limited availability of qualified staffing resources (salary constraints) Mixture of volunteers and employees with lack of business/financial experience involved in operations Volunteer Board of Directors (decision makers)

Establishing Good Internal Controls Segregation of Duties No financial transaction is handled by only one person

Establishing Good Internal Controls (continued) Policies and Procedures Established way of doing business that ensures public confidence Maintains integrity of your organization and its assets But does not inhibit your ability to get your daily work done Assists with training new employees Prevents fraud

Budget Preparation Overall significance Used to monitor success of goals Used to show strength of plan Detailed Plan Choose format and tool (how) Choose level of staff/Board participation (who) Commit to a time line for completion (when)

Budget Preparation (continued) Detailed Process Begin with upcoming year goals Translate those into resources needed and expense outlays to carry them out Balanced budget - yes or no Board policy in place to be followed Deficit Surplus Review during the operating year

Monthly Activities Generating monthly financial statements Policy for month-end closing Working with others Board and committees Other departments within organization

Monthly Activities (continued) Investment management Investment policy Investment spending policy Cash management Cash flow shortage policy Cash flow surplus policy

Year End Closing Compilation Information just “compiled” by outside accounting firm Uses standard form of financial statement presentation Provides no opinion or assurance that the information is reliable Cost is minimal

Year End Closing (continued) Review Limited examination of the organization’s financial statements Limited testing Provides limited assurance on the reliability of the information presented Cost is much less than audit

Year End Closing (continued) Audit Process for testing the accuracy and completeness of information presented in the organization’s financial statements Completed by independent CPA’s An “opinion” issued on how fairly the financial position has been presented If financial statements comply with GAAP

Year End Closing (continued) Audit report - consists of Auditors opinion letter (qualified or unqualified) Required Financial Statements Required Notes to the Financial Statements Management letter Informs organization of ways to improve their internal control processes and day to day management

Form 990 Reporting Overview Purpose for filing with IRS Required information for statistics and tracking – not a “tax return” Have information available for public inspection May be primary or only source of information available to the public IRS cleaning up their database When to file 15th day of 5th month after close of fiscal year

Form 990 Reporting OverviewWho Must File 2007 Rules Organizations with gross receipts <$25K per year – Required to file electronic notice “e-Postcard” or Form 990-N Old Rules Organizations with gross receipts <$25K per year – No filing requirements

Changes Since 2007 Form 990-N Filing Log in to www.irs.gov/eo Click on “Annual Electronic Filing Requirement for Small Exempt Organizations – Form 990-N (e-Postcard) Failure to file for three consecutive years will result in revocation of tax exempt status

Form 990 Reporting Overview (continued)Who Must File Old Rules Organizations with Gross receipts between $25K and $100K Total assets <$250K at year end File Form 990-EZ Could elect to file Form 990 2008 Rules Organizations with Gross receipts >$25K but <$l M Total assets <$2.5 M File Form 990-EZ Can elect to file Form 990 and schedules

Changes Since 2007 (cont’d.) Form 990-EZ Has not been redesigned, but changes have been made Review Schedules A, B, C, E, G and L and determine if they apply to your organization

Form 990 Reporting Overview (continued)Who Must File Old Rules Organizations with Gross receipts > $100K Total assets >$250K at year end Required to file Form 990 2008 Rules Organizations with Gross receipts >$l M Total assets >$2.5 M Required to file Form 990

Form 990 Reporting Overview (continued)Who Must File 2009 Rules Organizations with Gross receipts >$500K Total assets >$1.25 M Required to file Form 990 Old Rules Organizations with Gross receipts > $100K Total assets >$250K at year end Required to file Form 990 2010 Rules Organizations with Gross receipts >$200K Total assets >$500K Required to file Form 990

Changes Since 2007 (cont’d.) Form 990 Revised for fiscal years beginning in 2008 Last revision was in 1979 More questions about governance Instructions include “Sequencing List” Format Core form with eleven parts Part IV – Checklist of Required Schedules Sixteen schedules

Form 990 List of Schedules A-Public Charity Status and Public Support B-Schedule of Contributors C-Political Campaign and Lobbying Activities D-Supplemental Financial Statements E-Schools F-Statement of Activities Outside the US G-Supplemental Info Regarding Fundraising or Gaming Activities H-Hospitals I-Grants and Other Assistance to Orgs, Gov’t., and Individuals J-Compensation Info K-Supplemental Information for Tax-Exempt Bonds L-Transactions with Interested Persons M-Non-Cash Contributions N-Liquidation, Termination, Dissolution O-supplemental Information to Form 990 R-Related Organizations and Unrelated Partnerships

Other Reporting Requirements Circular A-133 single audit report $500,000 or more in federal awards expended in any fiscal year Audited annually Available for public inspection Auditee duties Schedule of Expenditures of Federal Awards Maintain internal controls

Other Reporting Requirements Payroll reporting Quarterly (941) reports Annual (940) reports W-2’s 1099’s

Miscellaneous Issues Unrelated Business Income Tax (UBIT) Regularly carries on a trade or business Not substantially related to its exempt purpose IRS Publication 598 - Tax on Unrelated Business Income of Exempt Organizations

Financial Management with Cheryl Black

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Financial Management with Cheryl Black