Nonprofit
Financial Fundamentals
May 21, 2015
Workshop Leader: Kay Sohl
kay@kaysohlconsulting.net
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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
Monitor
Report
Plan
Execute
Record
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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
Program
Administration
Fund 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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Cost Center Budget Format
Total
Management
Fund raising
Lobbying
Personnel
Prof.
Services
Occupancy
XXXXX
Total
Expenses
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Homeless
Services
Energy
Assistance
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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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18
Fund Raising Costs
• Unsolicited requests for
contributions
• All forms of contact with individual
donors
• Most foundation grant-seeking
activity
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19
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 portion
Personnel
Fringe Benefits
Travel
Equipment
Supplies
Contractual
Other
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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 Worksheet
7-01-09 to 12-31-09
July
Aug Sept
7,000 29,350 6,100
Opening Cash
Expected Receipts
Client fees
Gov Contract #1
Gov Contract #2
Donations
Foundation grants
Subtotal Receipts
Loans Received
Oct
200
Nov
Dec
(5,250) (23,350)
8,000
10,000
22,500
500
20,000
8,200
10,000
0
200
0
6,000
10,000
0
200
20,000
4,000
10,000
22,500
500
0
4,000
10,000
800
0
3,500
10,000
0
15,000
30,000
61,000
18,400
36,200
37,000
14,800
58,500
68,000
47,750
42,300
37,200
9,550
35,150
28,000
2,800
3,000
500
2,000
400
200
1,000
0
200
50
400
100
0
38,650
28,000
2,800
3,000
4,000
2,000
400
100
800
0
100
50
400
0
28,000
2,800
3,000
4,500
2,000
400
200
500
0
200
50
350
100
23,000
2,300
2,400
500
1,500
300
100
100
12,000
100
50
100
0
23,000
2,300
2,400
2,000
1,500
400
200
100
0
600
300
100
0
23,000
2,300
2,400
200
1,500
600
100
100
0
100
50
100
100
41,650
42,100
42,450
32,900
30,550
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29,350
6,100
200 (5,250)
(23,350)
Total Cash Available
Expected Disbursements
Payroll
Employer taxes
Fringe benefits
Professional services
Rent
Utilities
Office supplies
Program supplies
Insurance
Printing
Postage
Transportation
Other
Loan repayments
Subtotal Disbursements
Ending Cash
4,600
Financial Management Cycle
Monitor
Report
Plan
Execute
Record
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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?
Cash
Accrual
Modified 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 Sheet
Assets
Liabilities
Net Asset
• Statement of Activities
Income
Expenses
Net Income
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Small Nonprofit
Balance Sheet - Statement of Financial Position
(accrual basis)
September 30, 2005
with comparative totals as of June 30, 2005
9-30-05
6-30-05
Assets
Cash
Fees Receivable
Total assets
6180
500
6680
3000
2000
5000
Accrued salaries & taxes
Accounts payable
Total liabilities
980
2000
2980
300
400
700
Net Assets -unrestricted
3700
4300
Total liabilities and net assets
6680
5000
Liabilities and Net Assets
Liabilities
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Growing Net Assets
Revenues
Opening
Net
Assets
Expenses
Net
Income
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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
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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-date
Annual
Budget
Actual as % Projected
of budget year end
Income
Expense
Net 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:
Unrestricted
Temporarily Restricted
Permanently 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
Opening
Net
Assets
Expenses
Net
Income
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Net
Income
Ending
Net
Assets
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 Assets
Unrestricted
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 ActivitiesOrganization-wide
Yr-to-date
Annual
Budget
Actual as % Projected
of budget year end
Income
Expense
Net 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
Manage
Energy
&
Assist Housing Nutrition General
Income
Expense
Net Income
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Total
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Expense by Program
Actual
Yr-todate
Yr-todate
Budget
Income
Expense
Prog A
Prog B
Prog C
Admin
Total Expenses
Net Income
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Fav/
(Unfav)
Variance
Expense by Line Item
Actual Yr-toYr-to- date
date Budget
Income
Expense
Personnel
Prof Services
Occupancy
Other
Total Expenses
Net Income
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Fav/
(Unfav)
Variance
Program Net Income
Admin
Prog A
Prog B
Income
Direct Expense
Gross Margin
Allocated Expense
Net Income
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Prog C
Contribution to Overhead
Admin
A
Income
Direct Expense
Contribution to Overhead
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B
C
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
Opening
Net
Assets
Expenses
Net
Income
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Net
Income
Ending
Net
Assets
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 Trouble
before 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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Balance Sheet
Income Statement
Financial Indicators
Target
This
month
$270,000
$390,842
$340,908 ($570,240)
Surplus/(deficit) year-end forecast $270,000
$30,937
$250,987 ($570,240)
Surplus/(deficit) YTD
Last
month
Income by Type
Last
year end
Earned income ratio
11.5%
10.3%
11.8%
13.0%
New grants success ratio
50.0%
35.0%
33.0%
50.0%
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%
United Way
14%
Government
Grants &
Contracts
56%
Program
Fees
10%
Individual
Contributions
4%
Corporate/
Foundation
Grants
16%
Cash Flow
Program Indicators
Target
This
month
Last
month
Last
year end
Weatherization Contracts
(monthly goal)
20
21
22
15
Head Start enrollment
100
60
58
109
Monthly job placements
30
11
14
32
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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Actual
Projected
Target = $615,000 minimum
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?
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