Expectations for this lecture
PA5920, Skills Workshop, Spring 2008
Zhirong (Jerry) Zhao, assistant professor
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The big picture of nonprofit financial management
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Financial Management in
Nonprofit Organizations
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What is the topic about?
What are the key concepts?
What are the major issues?
Where to look for more information?
The key theme of discussion:
Nonprofit & Governments
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How are they related?
What are the common issues for they?
How are they different in financial management?
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Lecture outline
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Morning:
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Basics of nonprofits
Nonprofit finance:
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Are these terms the same?
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revenues, spending, and borrowing
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Requirements of nonprofit financial disclosure
Quiz A
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Afternoon:
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Not-for-profit
Nonprofit
Tax-exempt organizations
Charitable organizations
Public charities
Nongovernmental organizations
Introduction to nonprofit financial statements
Quiz B
How to read Form 990?
Assignment (due in two weeks)
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What is in a name?
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What is in a name?
Not-for-profit or nonprofit
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Not-for-profit: activities
" Nonprofit: organizations
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Nonprofit, charitable, or public charities
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Not all nonprofits are charities
Charitable organizations: 501(c)(3)
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Nonprofit or tax-exempt status
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Nonprofit: registered at the states
" Tax-exempt status: determined by IRS
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Public charities
Private foundations
Nonprofits and NGO
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In US, NGO often refer to international NGOs
In some counties, maybe interchangeable
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A diverse world of nonprofits
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Fiscal issues for nonprofits
National Taxonomy of Exempt Entities
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I. Arts, Culture, and Humanities - A
II. Education - B
III. Environment and Animals - C, D
IV. Health - E, F, G, H
V. Human Services - I, J, K, L, M, N, O, P
VI. International, Foreign Affairs - Q
VII. Public, Societal Benefit - R, S, T, U, V, W
VIII. Religion Related - X
IX. Mutual/Membership Benefit - Y
X. Unknown, Unclassified - Z
Nonprofit accountability
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Nonprofit-government relationship
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Supplementary
Complementary
Adversary
Nonprofits in fiscal distress
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In comparison to governmental accountability
Capacity building
Sustainability
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Nonprofit finance: revenue sources
Basics of nonprofits
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Revenue sources for governments
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Federal: income tax, other payroll tax
States: sales tax, income tax, etc.
Local governments: property tax, fees/charges
Intergovernmental transfers
Revenue sources for nonprofits
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Service fees: individual or organizations
Grants: governments or foundations
Fund-raising: private or institutional
Others (investment, membership due, etc)
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Michigan nonprofits (nominal dollar)
Category II: Education
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Category V: Human Services
Category IV: Health
Category VII: Public Societal Benefit
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Nonprofit finance: expenses
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Major expenditures for governments
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Nonprofit finance: borrowing
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Federal: welfare, health, social programs, etc
States: education, highway, pension, etc
Local governments: K-12, public safety, ED
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Types of nonprofit expenses
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Administrative expenses
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A key indicator of financial condition
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Is the proportion too large?
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Fund-raising expenses
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Federal: treasury bonds, notes, and bills
State and local: municipal bonds
Borrowing for nonprofits
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Program expenses
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Borrowing for governments
To even out cash flow (e.g., bridge loans)
For capital purchase (a mortgage loan)
For a special opportunity (a balloon loan)
To consolidate debts (be careful!)
To fill the gap of operation
Fundraising earning ratio
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Nonprofit financial disclosure
Nonprofit finance
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Internal Revenue Service (IRS)
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Purposes of Form 990
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To enforce the laws that govern nonprofits
To gather information about nonprofit financial conditions
Where to get access to Form 990?
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Form 990: > $25,000 annual revenue
990EZ: < $100,000 revenue; < $250,000 net assets
990T: > $1,000 unrelated revenue
990-PF: private foundations
For individual one: http:\\ww.guidestar.com
For the whole sector: http:\\nccs.urban.org
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More about IRS Form 990
Nonprofit financial disclosure
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National Association of State Charities Officials
National Association of Attorneys Genera
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Untimely
Unverified
Not conform to audited financial statements
IRS penalties?
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To revoke the tax exemption
Intermediate level: excise tax
Implications for the quality of reporting
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Other requirements
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Problems with IRS 990
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Audited financial reports and Form 990;
Audited financial reports or Form 990;
No requirement at all
Unified Registration Statement (URS)
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State-level requirements
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Research: the “Minnesota NPO Family Project”
Practice: more accountability, more support
E.g, by grant-makers
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Overview of morning section
Nonprofit financial disclosure
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Nonprofit and tax exempt status
Nonprofit finance
Major revenue sources
" Types of nonprofit expenses
" Why do nonprofits borrow?
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Nonprofit financial disclosure
Federal level
" State level
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Financial Statements
Nonprofit Financial Statements
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Accounting:
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Personal
Managerial accounting: technical analysis
Financial accounting:
external reporting, statements
Generally Accepted Accounting Principles (GAAP)
Comparison
Activities
Orientation
Timing
Requirements
Managerial
accounting
Planning
Implementing
Controlling
Internal: to improve
decision-making
and management
Prospective
Not required
(but widely
used)
Financial
accounting
Recording
Summarizing
Reporting
External: for
stakeholders to
review
Retrospective
Mandated
Organizational
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How much does he have?
2.
How much does he make in
a year?
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How much cash does he
have?
4.
How much does he have in
different accounts?
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The statement of net assets
Financial Statements
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Personal
Terms that refer to the same thing
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Organizational
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How much does he
have?
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How much does he
make in a year?
3.
How much cash
does he have?
4.
How much does he
have in different
accounts?
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Statement of Net Assets (GOV)
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Statement of Financial Position (NPO)
! Balance Sheet (Business)
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Income statement (Business)
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Statement of Functional Expenses (NPO)
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Statement of Cash Flows
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Assets: what you have
Liabilities: what you owe
Net assets: what you actually own (equity)?
and NPO)
The fundamental accounting equation:
Fund-level statements (GOV)
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The basic concepts
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Statement of Activities
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For individual: ______________________
For governments: ___________________
For business: ______________________
For non-profits: _____________________
required for NPO after 1993
• Assets
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= Liabilities + Net Assets
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The statement of activities
The Statement of Net Assets
The statement of net assets:
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Assets:
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Current assets
Non-current assets
Liabilities:
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Net assets:
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Assets = Liabilities + Net Assets
Permanently restricted assets
Temporarily restricted assets
Unrestricted assets
The statement of activities:
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Revenues - Expenses = Changes in Net Assets
Current liabilities
Non-current liabilities
The fundamental accounting equation:
• Assets
Timing
Personal finance equivalent
Statement of net assets
(the balance sheet)
At a point of time
How much do you have as of today?
Statement of activities
(the income statement)
During a period of
time
How much did you make and spend in a
year?
= Liabilities + Net Assets
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Accounting bases
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Accounting bases
Your NPO ordered some snacks from a local company on
06/25/2007; then you used them on 06/28/2007 for a little event,
before paying the bill on 07/05/2007.
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Accounting Bases
Expenses are recorded:
The snacks:
Cash basis
When cash is paid
Recorded on
07/05/2007
When the resource is used
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Cash basis: widely used for personal life
Accrual basis: widely used for private business
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Modified-accrual basis
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When would you record this expense in your “statement of
activities”?
Accrual basis
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Recorded on
06/28/2007
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May be completed with a record of cash flow
Widely used by governments
Accounting
Bases
Expenses are
recorded:
Revenues are
recorded:
Focus:
Cash basis
When cash is paid
When cash is received
Cash flow
Modified-accrual
Basis
When they are obligated to
pay (e.g. when orders
arrive)
When revenue is
“measurable and available”
(within 60 days after the
end of the fiscal year)
Financial resources
Financial
responsibilities
Accrual basis
When the resource is
used
When the revenue is
earned
Actual earnings of
operations
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Statement of
cash flow
The statement of cash flows
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Why statement of cash flow?
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Statement of activities: profitability
Statement of cash flow: (financial) viability
Key components in the statement of cash flows
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Cash flows from operating activities:
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Cash flows from investing activities:
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Adjusted from the statement of activities
Investing money -- less cash
Selling investments -- more cash
Cash flows from financing activities:
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Issue debt -- more cash
Debt service -- less cash
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The statement of functional expenses
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Example: Functional Expenses for Animal Protection Institute (API)
The statement of functional expenses
Fundraising Expenses
Total Expenses
Program Expenses
Administrative Expenses
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Why?
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A reflection of the nonprofit’s mission, values, and success
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How to read Form 990?
Review: Nonprofit Financial Statements
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Accounting:
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Identify and tax status
Managerial accounting
Financial accounting (financial statements)
Financial statements
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Statement of Net Assets
Statement of Activities
Statement of Cash Flow
Statement of Functional Expenses
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How to read Form 990?
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How to read Form 990?
Donative nonprofit
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How to read Form 990?
How to read Form 990?
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Functional Expenses
Net Assets
Part I:
Part IV:
Program Expenses/Total Expenses = 1,200,000/2,000,000=60%
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How to read Form 990?
How to read Form 990?
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Additional references:
Assignment:
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Identify a nonprofit of your interest;
Collect its Form 990s for three most recent years through
www.guidestar.org;
In a two page (double-space) report:
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---- A collections of weblinks in my Blog, Fiscal Issues and Geeky Stuffs
summarize the information in the most recent year about key
revenue sources, distribution of functional expenses, and net
assets
Compare how these observations changed over the past three
year period
Summit it to zrzhao@umn.edu by Feb.1.
http://fiscalissues.blogspot.com/2008/01/lecture-outline-for-nonprofit-financial.html
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