Fundamentals of Nonprofit
Financial Management
Presented by
Paula Smith Arrigoni, Smith & Daley
For New Sector Alliance
September 8, 2011
0
Smith & Daley ©2011
Smith & Daley ©2011
Background
Smith & Daley is a boutique nonprofit
consulting partnership focused on financial
management and strategy issues for small to
mid-sized nonprofits, foundations, and the
broader sector through research and
analysis.
Daley ©2011
What ‘Accidental’ Finance Geek?Smith & Smith
& Daley ©
2011
Background
What ‘Accidental’ Finance Geek?
Why are you here?
Which nonprofit are you working for?
What are you doing there?
Any experience with accounting or finance?
What is your dream job in 10 years?
W
hat What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Why So Much Emphasis on Finance?
Increase Your Professional “Value”
Expertise & Passion for Programs is Not Enough
Nonprofit Finance is Tricky
Earning Potential and Versatility
W
hat What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Why So Much Emphasis on Finance?
Nonprofits are businesses!
Organizational Sustainability
Accountability to Funders, Board &
Stakeholdersek?
W
hat What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Nonprofit Sector Outlook
The “New Normal”
Government funding uncertainty at all levels
Limited private fundraising capacity in many
sub-sectors
High fundraising competition
W
hat What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
The Basics
Cash v. Accrual Accounting
Internal v. External Financial Statements
Audits, Reviews and Compilations
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
What ‘Accidental’ nance Geek?
Smith & Daley ©2011
The Basics
What ‘Accidental’ Finance Geek?
3 Key Statements in an Audit:
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Budgets
Projections
Smith & Daley ©2011
What ‘Accidental’ nance Geek?
Smith & Daley ©2011
What ‘Accidental’ Finance Geek?
Statement of Financial Position
aka the “Balance Sheet”
Gives overall report of financial health
Reflects a “snapshot” in time
Assets = what you own
Liabilities = what you owe
Assets-Liabilities = Net Assets (Net Worth)
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Statement of Financial Position
Typical Assets
Cash, Investments, Receivables & Deposits
Property, Plant & Equipment
Typical Liabilities
Payables (money owed) to vendors or
employees, lines of credit, deferred revenue,
or mortgage loans‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
of Financial Position
’Statement
Finance Geek?
It’s important to understand what Net Assets are
made of, and what’s been happening over time. Are
they mostly liquid? Physical Assets? Have they been
increasing or decreasing?
Net Assets grow or contract depending what is
happening with an organization’s operations.
Deficits
shrinking Net Assets (more vulnerable).
Smith & Daley ©2011
Smith & Daley ©2011
Statement
of Activities
What ‘Accidental’
Finance Geek?
What ‘Accidental’ Finance Geek?
aka Statement of Profit and Loss (P&L) or
Statement of Income
Reflects the activities for a period (month,
quarter or year)
Tracks revenue, expense and surplus/deficit
Smith & Daley ©2011
Smith & Daley ©2011
Statement of Activities
Nonprofit Accounting (FASB) requires
organizations to classify revenue by level of
restriction: unrestricted, temporarily
restricted and permanently restricted.
Only unrestricted revenue pays for operating
expenses. What ‘Accidental’ Finance Geek?
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Statement of Activities
Temporary restrictions are imposed by a
funder and are satisfied by completing a
prescribed activity, or the lapse of time.
For example, a foundation gives an
organization a grant to support a counseling
program, 50% in 2011 and 50% in 2012.What
‘Accidental’ Finance Geek?
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Statement of Activities
Permanently restricted revenue is also imposed
by a donor, and is usually an endowment.
Endowments are common for arts and
education-related organizations.
Only the interest from an endowment is
considered unrestricted revenue. The “corpus”
investment is never spent.Accidental’ Finance
Geek?
What ‘Accidental’ Finance Geek? Smith & Daley ©2011
Smith & Daley ©2011
Statement of Activities
Healthy organizations maintain cash reserves to
protect against uncertainty, losses, and risk.
Reserves can have specific uses: operating,
capital, program development, etc.
Board-designated reserves are a flexible
alternative to endowments.
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Statement of Cash Flows
What ‘Accidental’ Finance Geek?
Reconciles the use of cash (in and out flows)
during a period, around the following key
categories: operating, financing and investing.
Is inextricably connected to the Balance sheet
(through cash position) and the Statement of
Activities (esp. through the net surplus/deficit)
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Operating Budget
What ‘Accidental’ Finance Geek?
The financial representation of how an
organization plans to generate and spend
its money over a given period.
Should reflect only unrestricted revenue
and regular, day-to-day activities.
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Smith & Daley ©2011
Non-Operating Items
Generally, non-recurring and unrelated to core
business model
-Purchase/Sale of capital items (equipment,
property and land usually in excess of $5k)
-Investment gains and losses
-Bequestsat ‘Accidental’ Finance Geek?
Smith & Daley ©2011
What ‘Accidental’ Finance Geek?
Smith & Daley ©2011
Sorting Out the Terms
Why is it important to know the difference
between operating v. non-operating,
unrestricted v. restricted?
‘Accidental’ Finance Geek?
-regular operating expenses are paid with
unrestricted revenue
-non-recurring activities, like big purchases,
skew regular operations
Smith & Daley ©2011
Smith & Daley ©2011
Final Thoughts
What
Finance
If you ‘Accidental’
aren’t already,
start Geek?
finding ways
What
‘Accidental’
Financecapacity!
Geek?
to
improve
your financial
-Participate in budgeting (project or
program)
-Read your organization’s annual report,
audit, Form 990s or strategic plan
-Hone your Excel guru skills
-Join a committee or a Board
Smith & Daley ©2011
Smith & Daley ©2011
Good Luck!
What
‘Accidental’
Drop me
a line: Finance Geek?
What ‘Accidental’ Finance Geek?
paulasarrigoni@gmail.com
@smitharrigoni
Smith & Daley ©2011
Smith & Daley ©2011