FINANCIAL MANAGEMENT
of NON-PROFIT ORGANIZATIONS
Presented by:
Nerou (Neil) Cheng, CPA
Tel. no. 212-785-0100 ext. 929
Jake Lee, CPA
Tel. no. 646-896-2918
Jose Fiocca
Tel. no. 646-896-2953
40 Exchange Place, Suite 1206
New York, New York 10005
Financial Management of Non-Profit Organizations
Time
line
Page
Introduction
Fiduciary responsibility of leaders and managers ..................................................15......................1
Understanding the jargon
The terminology/the formula .................................................................................30.................. 2-4
Interpreting financial statements
Understanding the accounting jargon and the accounting
equation through simplified definitions, illustrations and
simplified set of financial statements for ABC-NFPO ....................................15.................. 5-7
Group exercise
Based on the examples provided and from concepts covered
earlier, fill in the blanks for the exercise material...............................................20......................8
Using the numbers from the exercise, construct a set of
financial statements. This further illustrates the important
concepts and the relationships between the various statements
which make up a set of financial statements .....................................................40................ 9-10
A full set of financial statements –XYZ - NFPO
Opinion letters - audit, review and compilation - what are they?
Another review of the various statements and their components
and the relationship between the statements.
Importance of having good footnotes ....................................................................20.............. 11-24
Budgeting
Given a set of situations, developing a budget
Important considerations for good budgeting and how to utilize
your budget as a management tool......................................................................40.............. 25-27
Cash flow projection
Given the situation illustrated so far, prepare a cash flow projection
Importance of a good cash flow projection and the difference between
this document and a set of financial statements..................................................30....................28
Services and technology available
Staffing considerations to achieve responsible financial reporting
Technology and outsourcing alternatives available - what to look for ....................5....................29
Conclusion ..............................................................................................................5....................29
Questions and answers ........................................................................................20
Financial Management of Non-Profit Organizations
Page 1 of 29
Introduction
Fiduciary responsibility of leaders and managers
Leaders and managers of NPOs are very comfortable and knowledgeable about the needs of their
constituents and about how to deliver the services. If these leaders have a strong infrastructure
and can concentrate solely on delivering the services, their organizations will thrive. NPOs have
to be aware of all the financial reporting requirements: internal (to management and the board of
directors) and external (to the funding agencies, to the contributors, to the IRS and the
government). In these organizations, often enough, the Executive Director, by default has to
learn to function as a CFO. For anyone to assume both of these duties (as CEO and CFO) is
very difficult. The purpose of this course is to provide the tools and guidance on getting
comfortable with the fiscal side of the operation and how to relate the various activities and
programs of the organization to the financial reports.
Financial Management of Non-Profit Organizations
Page 2 of 29
Understanding the accounting jargon
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
accounting period/fiscal period
statement of financial position/balance sheet
statement of activities/income statement
statement of functional expenses
statement of cash flows
assets
liabilities
net assets (unrestricted, temporarily restricted & permanently restricted)
capitalization vs. expensing
depreciation
cash vs. accrual basis of accounting
accounts receivable
prepaid expense
accounts and accrued expenses payable
cost reimbursement contract
Unit based budgeting/contract
contributions (unrestricted, temporarily restricted and permanently restricted)
budget modification
Basic accounting equation
assets = liabilities + net assets
Cash
Accounts receivable
Prepaid expense
Office equipment net
Total assets
$ 10,000
25,000
5,000
10,000
$ 50,000
Accounts payable
Net assets
Total liability and net assets
$ 27,000
23,000
$ 50,000
Financial Management of Non-Profit Organizations
Page 3 of 29
1. Accounting period/ fiscal period: when reporting on the financial activities of an
organization, it is always reported for a defined fiscal period - as of and for the three
months ended September 30, 2008.
2. Statement of financial position/balance sheet: shows the financial position of an
organization as of a certain date.
3. Statement of activities/income statement: for a defined accounting period, this statement
will summarize the amounts of income earned and expenses incurred.
4. Statement of functional expenses: presents expenditures of an organization by function
(youth program, senior program, fund raising, administration, etc....) and natural categories of
expenses such as salaries, rent, etc.
5. Statement of cash flows: shows the cash produced by operating an organization as well as
the investing and financing transactions that take place during a fiscal period. It also shows
the reconciliation between change in net assets (net income/net loss) on the accrual basis to
change in the cash position for a reporting period.
6. Assets: resources of an organization that are expected to benefit future operations - cash,
accounts receivable, prepaid expenses.
7. Liabilities: commitment to pay for activities which occurred within a fiscal period - accrued
expenses for telephone, payroll .....a mortgage related to the purchase of a building.
8. Net assets: the remaining interest in the assets of an organization after all its liabilities are
paid off - net assets is where the cumulative results of the activities (income and expenses) of
an organization over its existence is reflected: assets - liabilities = net assets.
9. Capitalization vs. expensing: purchases of assets such as furniture or office equipment
which are significant are capitalized (not expensed) and are depreciated over their estimated
useful lives - computer, desks .....
10. Depreciation: when a capitalized asset such as computer, desks ....... is acquired, it is
depreciated over the estimated useful life of the asset - if a computer (costs of say $1,500) is
expected to have a useful life of 3 years, the annual depreciation will be 1/3 per year or $500
- every year for the three years, depreciation expenses is $500 - at the end of the 3 year
period, the computer is fully depreciated.
Financial Management of Non-Profit Organizations
Page 4 of 29
11. Cash vs. accrual basis of accounting: If you are reporting on the cash basis for a particular
fiscal period, you only report what the organization received in cash and what you paid out.
For the accrual basis, you report and reflect what your are entitled to collect and obligated to
pay (receivable and payables pertaining to the fiscal period).
12. Accounts receivable: what you are entitled to collect/have earned, but have not yet
collected.
13. Prepaid expenses: portion of a payment made in one accounting period that will benefit
future accounting period(s) - prepaid insurance.....
14. Accounts and accrued expenses payable: expenses which belongs to a fiscal period but
has not yet been paid. ex.. telephone and salaries for the month of June (for fiscal year
ending June 30), but paid in July.
15. Cost reimbursement contracts: In most situations the NFPO receives a cash advance at the
beginning of the contract period. As funds are spent, claims are submitted to the funding
source to reclaim what was spent. For example: If the NFPO received a contract for the fiscal
year ending June 30, 2009, it would receive a cash advance in July 2008. The NFPO would
spend the funds in July and would prepare the claim for reimbursements in August. The total
claims represents all the expenditures incurred in July for the contract. In general, the cash
advance is recovered via deductions of the reimbursement from the last 3 claims for the
contract year.
16. Unit based budgeting: For these contracts, the NFPO is reimbursed based on the units of
services rendered as opposed to costs incurred.
17. Contributions: Only donors can impose restrictions. The board of directors and
management can only designate the purpose for which funds will be used but cannot restrict
the use of such funds. Board designated funds are UNRESTRICTED funds.
There are two types of restriction: (1) Time restrictions - The contributions are earned with
the passage of time, (2) Purpose restrictions - the contributions is earned as the obligation set
by the donor is met.
Temporarily restricted net assets: Represents the accumulated contributions received but not
yet earned. They can be time restricted or purpose restricted. These net assets must be
factored in when a NFPO prepares its annual budget.
Permanently restricted net assets: In general, this is the endowment fund and investment
income derived from this fund is used to support the operations and/or the programs of the
NFPO.
18. Budget modification: Request submitted to the funding source to change the budget to be
more in line with the needs of the program being funded.
Financial Management of Non-Profit Organizations
Page 5 of 29
ABC - NFPO
Statement of Financial Position
As of June 30, 2009
Assets
Cash
Accounts receivable
Prepaid expenses
Office equipment - net of accumulated
depreciation of $5,000
Total assets
Liabilities and net assets
Liabilities
Accounts and accrued expenses payable
$
10,000
$
50,000
$
27,000
Net assets
Unrestricted
Total liabilities and net assets
See notes to financial statements.
10,000
25,000
5,000
23,000
$
50,000
Financial Management of Non-Profit Organizations
Page 6 of 29
ABC - NFPO
Statement of Activities
For the fiscal year ended June 30, 2009
Support and revenue
Government grants
Contributions
$ 150,000
87,000
Total support and revenue
237,000
Expenses
Program services
Youth program
Senior program
108,500
93,500
Total program services
202,000
Supporting services
Management and general
23,000
Total expenses
225,000
Change in net assets
Net assets as of June 30, 2008
12,000
11,000
Net assets as of June 30, 2009
See notes to financial statements.
$
23,000
Financial Management of Non-Profit Organizations
Page 7 of 29
ABC - NFPO
Statement of Functional Expenses
For the year ended June 30, 2009
Salaries
Fringe benefits
Youth
program
Supporting
Program services
Services
Total Management
Senior
program
and
program
services
general
Total
program
and
supporting
services
$ 80,000
16,000
$ 70,000 $ 150,000 $ 10,000
14,000
30,000
2,000
$ 160,000
32,000
Rent
Insurance
Telephone
Other office expenses
Depreciation
96,000
84,000
180,000
12,000
192,000
4,000
500
500
5,000
2,500
4,000
500
500
2,000
2,500
8,000
1,000
1,000
7,000
5,000
2,000
2,000
1,000
1,000
5,000
10,000
3,000
2,000
8,000
10,000
$ 93,500 $ 202,000 $ 23,000
$ 225,000
$ 108,500
Percentages
See notes to financial statements.
48.22%
41.56%
89.78%
10.22%
100.00%
Financial Management of Non-Profit Organizations
Page 8 of 29
ABC - NFPO
For the fiscal year ended June 30, 2009 (assuming that it is the first year of operation)
Please provide the summary of these transactions for the 12 months ended June 30, 2009 (fiscal year) affecting cash, SA & SFP.
Cash
SA
SFP
(+/-) (Income)
Asset
Expense (Liability)
Total
1.
On April 1st, 2008, signed a contract with the state of NY for $400,000 for the
twelve months ended June 30, 2009. For the year ended June 30, 2009 received
a total of $380,000 (Assuming earned the entire $400,000 for the year, but
no cash expense for simplicity in this question).
2.
On July 1, 2008, received a $200,000 commitment from a Foundation
for period of two years / the contribution is unrestricted with $100,000
to be paid in August 2008 and the other $100,000 in August of 2009.
3.
Salaries and fringe benefits for the fiscal year (FY) June 30, 2009 is
$300,000 / salaries are paid on the 15th & the end of each month /
payroll taxes and fringe benefits are paid by the end of each month.
4.
Rent which is paid at the beginning of each month amounts to $50,000 for the year.
5.
Property and board liability insurance for twenty-four months costs
$24,000 and is payable in advance on July 1, 2008.
6.
Audit fee for the fy June 30, 2009 is $8,000, however this work cannot
start until the books for the year are closed / the auditors are expected
to start in mid August and be finished and paid sometime in September of 2009.
7.
Total office expenses for the year amounts to $70,000. Of that total,
$1,000 of telephone expenses for the month of June 2009 is not paid
until July 2009 when the actual telephone bill is received
8a.
Paid $10,000 for equipment in July 2008.
8b.
It is estimated that the equipment which costs $10,000 has a useful life of
five years. How do we record depreciation expense?
Totals for the year ended June 30, 2009
Financial Management of Non-Profit Organizations
Page 9 of 29
ABC - NFPO
Statement of Financial Position
As of June 30, 2009
Assets
Cash
Government contracts receivable
Contributions receivable
Prepaid insurance
Equipment - note x
Accumulated depreciation on equipment
$
(1) 27,000
(3) 20,000
(5) 100,000
(9) 12,000
(13) 10,000
(15)
2,000 )
Total assets
$
(11) 167,000
Liabilities and net assets
Liabilities
Accounts and accrued expenses payable - note x
$
9,000
(
Net assets
Unrestricted
Temporarily restricted - note x
58,000
100,000
Total net assets
158,000
Total liabilities and net assets
$
167,000
Statement of Activities
For the year ended June 30, 2009
(commencement of operations)
Temporarily
restricted
Unrestricted
Revenues
Government contracts
Contributions
Assets released from restrictions
$ (2)
$
$
100,000
Total revenues
(4)
(
500,000
Expenses
Salaries and fringe benefits
Rent
Insurance
Audit fee
Office expenses
Depreciation expenses
(6)
(7)
(8)
(10)
(12)
(14)
Total expenses
Change in net assets
Net assets as of July 1, 2008
Net assets as of June 30, 2009
400,000
200,000
100,000 )
400,000
200,000
-
100,000
600,000
300,000
50,000
12,000
8,000
70,000
2,000
300,000
50,000
12,000
8,000
70,000
2,000
442,000
442,000
58,000
$
Total
58,000
100,000
158,000
-
$
100,000
$
158,000
Financial Management of Non-Profit Organizations
Page 10 of 29
ABC - NFPO
Statement of Cash Flows
For the fiscal year ended June 30, 2009
(commencement of operations)
Cash flows from operating activities
Change in net assets
$
158,000
Adjustment to reconcile changes in net assets
to net cash provided by operating activities
Depreciation
Change in government contracts receivable
Change in contributions receivable
Change in prepaid insurance
Change in accounts and accrued expenses payable
2,000
20,000 )
100,000 )
12,000 )
9,000
(
(
(
37,000
Cash flows from investing activities
Acquisition of fixed assets
Net increase in cash representing
cash balance as of June 30, 2009
10,000 )
(
$
27,000
SAMPLE FINANCIAL STATEMENTS
XYZ - NFPO
Financial Statements
For the year ended June 30, 2009
(with comparative totals for 2008)
11
XYZ - NFPO
Contents
Page
Independent Auditors' Report.......................................................................................................... 1
Statement of Financial Position....................................................................................................... 2
Statement of Activities .................................................................................................................... 3
Statement of Functional Expenses ................................................................................................. 4
Statement of Cash Flows ................................................................................................................. 5
Notes to Financial Statements ....................................................................................................6-12
12
#
"
! "
! "$
" %
!
Independent Auditors' Report
To the Board of Trustees
XYZ - NFPO
New York, New York
We have audited the accompanying statement of financial position of XYZ - NFPO as of June
30, 2009 and the related statements of activities and change in net assets, statement of functional
expense, and cash flows for the year then ended. These financial statements are the responsibility
of XYZ - NFPO's management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of XYZ - NFPO as of June 30, 2009, and the changes in its net assets and
its cash flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
New York, New York
August 24, 2009
13
XYZ - NFPO
Statement of Financial Position
June 30, 2009
(with comparative totals for 2008)
Temporarily
restricted
fund
Unrestricted
fund
Assets
Cash and cash equivalents
Investments - Note 7
Contributions receivable
Prepaid expenses and other assets
Fixed assets, at cost, net of accumulated
depreciation of $3,204,733 (2009) and
$3,086,094 (2008) - Note 5
Mortgage costs, net of accumulated
amortization of $40,014 (2009) and
$33,858 (2008)
Total assets
Liabilities and net assets
Liabilities
Accrued expenses payable
Mortgage payable - Note 4
Total liabilities
Net assets
Unrestricted:
Operating
Fixed assets
Endowment - Note 2
$
2008
2,430,304
21,903,496
1,733,443
192,755
$ 5,213,748
23,175,548
2,144,356
422,731
3,039,170
3,039,170
2,971,960
21,545
21,545
27,701
$ 29,320,713
$ 33,956,044
$
$
1,826,454
21,395,896
1,385,943
192,755
$
468,204
$
347,500
$
815,704
$
135,646
507,600
-
643,246
655,946
1,325,174
$
655,946
1,325,174
550,535
1,325,174
1,981,120
1,981,120
1,875,709
2,283,577
3,039,170
20,557,896
2,283,577
3,039,170
20,557,896
2,333,232
2,971,960
24,479,948
643,246
25,880,643
815,704
643,246
29,785,140
1,651,949
643,246
643,246
27,339,593
32,080,335
643,246
$ 29,320,713
$ 33,956,044
Total unrestricted
Temporarily restricted - Note 3
Permanently restricted - Note 2
25,880,643
Total net assets
25,880,643
Total liabilities and net assets
Total all funds
2009
$ 27,861,763
$
Permanently
restricted
fund
$
815,704
$
815,704
$ 27,861,763
$
The accompanying notes are an integral part of this statement.
14
815,704
$
XYZ - NFPO
Statement of Activities and Changes in Net Asset
For the year ended June 30, 2009
(with comparative totals for 2008)
Temporarily
restricted
fund
Unrestricted
fund
Support and revenue
Contributions:
Foundations
Corporations
Individuals
Dividend and interest income
Gala, net of direct
expenses of $217,043 (2009)
and $202,332 (2008)
Annual member giving campaign
$
751,502
315,415
3,529,323
579,336
$
2,270,278
236,025
Permanently
restricted
fund
Total all funds
2009
629,898
170,000
352,559
$
45,878
2008
1,381,400
485,415
3,881,882
579,336
$
829,657
757,512
5,875,671
451,784
2,316,156
236,025
3,623,838
296,093
Net assets released from restrictions
7,681,879
2,034,580
(
1,198,335
2,034,580 )
-
8,880,214
-
11,834,555
-
Total support and revenue
9,716,459
(
836,245 )
-
8,880,214
11,834,555
Expenses
Program services
Program 1
Program 2
Program 3
Program 4
Program 5
956,981
2,859,592
1,924,216
1,966,400
586,193
956,981
2,859,592
1,924,216
1,966,400
586,193
1,039,254
2,673,014
2,086,423
1,930,995
599,233
Total program services
8,293,382
8,293,382
8,328,919
784,737
944,345
784,737
944,345
548,182
964,769
1,729,082
1,729,082
1,512,951
10,022,464
9,841,870
Supporting services
Administration
Fund raising
Total supporting services
Total expenses
Change in net assets before change
in value of investments
Net realized/unrealized (loss)
on investments - Note 7
Change in net assets
Net assets at beginning of year
Net assets at end of year
10,022,464
(
306,005 )
(
3,598,492 )
(
3,904,497 )
29,785,140
$ 25,880,643
836,245 )
(
(
$
-
836,245 )
1,651,949
$
643,246
815,704
$
643,246
The accompanying notes are an integral part of this statement.
15
(
1,142,250 )
(
3,598,492 )
(
4,740,742 )
32,080,335
$ 27,339,593
1,992,685
(
631,934 )
1,360,751
30,719,584
$ 32,080,335
XYZ - NFPO
Statement of Functional Expenses
June 30, 2009
Program
services
Program
1
Salaries and fringe benefits
Insurance
Consultants
ACTIVITIES
Office occupancy
Facility rental
Office supplies, postage and telephone
Program supplies
Meetings
Printing and photocopying
Other costs
$
Total expenses
604,737 $ 1,551,537 $
22,707
118,838
26,730
110,636
49,484
Total before depreciation,
amortization and bad debt
Depreciation and amortization
Total before provision for uncollected
pledges
Provision for uncollected pledges
$
Program
2
Program
3
1,351,295 $
Program
4
1,107,458 $
82,226
243,790
50,665
3,315
65,701
41,876
645,906
31,477
3,300
69,727
2,402
6,432
3,172
38,754
490,972
38,248
265,288
29,711
101,467
40,345
6,236
253,056
2,888
955
104,119
945,138
11,843
2,815,614
43,978
956,981
2,859,592
956,981 $ 2,859,592 $
Program
5
446,717 $
Total
5,061,744 $
Total
program and
supporting
services
Supporting
services
Administration
Fund
raising
Total
2009
90,094
6,260
12,697
1,054,636 $
53,662
137,012
9,349
42,303
9,104
70,200
79,304
4,308
19,527
41,811
816
44,585
31,401
5,124
64,112
73,212
6,116,380 $
53,662
332,997
1,574,660
196,906
393,481
307,599
112,177
57,287
107,412
450,885
5,832,040
51,713
377,098
1,689.770
274,402
410,810
315,552
114,885
69,412
99,930
348,884
375,252
53,662
46,918
3,089
29,606
$ 679,384 $
2008
3,986
19,539
14,253
10,422
65,805
7,483
10,942
13,672
10,710
2,542
10,138
3,073
195,985
1,565,311
154,603
393,481
228,295
112,177
52,163
43,300
377,673
1,904,954
19,262
1,937,522
28,878
581,504
4,689
8,184,732
108,650
583,277
7,237
935,437
8,908
1,518,714
16,145
9,703,446
124,795
9,584,496
257,374
1,924,216
1,966,400
586,193
8,293,382
590,514
194,223
944,345
1,534,859
194,223
9,828,241
194,223
9,841,870
1,924,216 $
1,966,400 $
586,193 $
8,293,382 $
784,737
$ 944,345 $
The accompanying notes are an integral part of this statement.
16
1,729,082 $
10,022,464 $
9,841,870
XYZ - NFPO
Statement of Cash Flows
For the year ended June 30, 2009
(with comparative totals for 2008)
Total all funds
2009
Cash flows from operating activities
Change in net assets
($
2008
4,740,742 )
$
1,360,751
Adjustments to reconcile change in net assets to net
cash (used in)/provided by operating activities:
Depreciation
Amortization
Unrealized loss/(gain) on investments
Change in contributions receivable
Change in XYZ – NFPO expenses and other assets
Change in accrued expenses payable
Net adjustments
118,639
6,156
1,858,849
410,913
229,976
105,410
251,217
6,156
520,295
695,727
64,076
153,453
2,729,943
1,690,924
3,051,675
Net cash (used in)/provided by operating activities
(
2,010,799 )
Cash flows from investing activities
Sale of investments
Purchase of investments
Acquisition of fixed assets
(
(
9,804,468
10,367,903 )
209,210 )
(
(
11,631,077
13,338,688 )
113,121 )
Net cash used in investing activities
(
772,645 )
(
1,820,732 )
Net (decrease)/increase in cash
Cash and cash equivalents at beginning of year
(
2,783,444 )
5,213,748
1,230,943
3,982,805
Cash and cash equivalents at end of year
$
2,430,304
$
5,213,748
Interest paid
$
56,901
$
87,266
The accompanying notes are an integral part of this statement.
17
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 1 Organization
Description of the organization and its programs
Note 2 Summary of significant accounting policies
Financial statements. XYZ - NFPO’s financial statements have been prepared in accordance
with FASB Statements 116 and 117 which established accounting standards for not-for-profit
organizations. These standards require that resources be classified for accounting and
reporting purposes into three classes of net assets - permanently restricted, temporarily
restricted, and unrestricted.
Accrual basis. The financial statements of XYZ - NFPO have been prepared on the accrual
basis of accounting.
Endowment fund. The Endowment includes both Donor-restricted funds (Permanently
restricted) and Board-designated funds (Unrestricted).
Endowment – Permanently restricted is comprised of Donor-restricted funds stated at the
original value of the contributions made to XYZ - NFPO for Endowment. Donor-restricted
funds are subject to restrictions such that the principal value thereof cannot be used but the
income derived there from can be used for either restricted or unrestricted purposes. Interest
income derived from Donor-restricted funds is recorded as unrestricted investment income in
the periods earned if all restrictions have been met during the period. Accumulated dividends
and net capital gains and losses on Donor-restricted funds (which comprise the Reserve fund
are fully invested) are included in Endowment – Unrestricted. The Reserve fund value was
$278,140 at June 30, 2008 and ($15,737) at June 30, 2009.
Endowment – Unrestricted is comprised of (a) the Reserve fund (accumulated dividends and
net capital gains and losses on Donor-restricted funds) and (b) unrestricted net assets
designated by the Board of Directors to function as an endowment. XYZ - NFPO’s Boarddesignated funds were first established in 1985 to serve as a buffer in times of general
economic downturn “EDITED”. In FY 2009 the Board-Designated Endowment contributed
$850,000 to XYZ - NFPO’s operations in the form of interest, dividends and draw on
endowment. Board-designated funds are reported at market value.
18
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 2 Summary of significant accounting policies – (continued)
“EDITED
Temporarily
restricted
Unrestricted
Endowment
Permanently
restricted
Total
EDITED
)
)
Net assets, end of year
$
Assets earmarked for board designated endowment:
Unrestricted
total
Board
designated
Balance
EDITED
Total
$
Fixed assets. Acquired fixed assets are capitalized and depreciated over their estimated useful
lives using the straight-line method as follows:
Buildings and improvements
Furniture and equipment
Software
40 years
5 years
3 years
Support. Contributions received and unconditional promises to give are measured at their
fair values and are reported as an increase in net assets. Gifts of cash and other assets are
reported as restricted support if they are received with donor stipulations that limit their use.
When a donor restriction expires, that is, when a stipulated time restriction ends or the
purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to
unrestricted net assets and reported in the statement of activities as net assets released from
restrictions.
19
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 2 Summary of significant accounting policies – (continued)
Gifts of goods and equipment are reported as unrestricted support unless explicit donor
stipulations specify how the donated assets must be used. Gifts of long-lived assets with
explicit restrictions that specify how the assets are to be used and gifts of cash or other assets
that must be used to acquire long-lived assets are reported as restricted support. In the absence
of explicit donor stipulations about how long those long-lived assets must be maintained,
XYZ - NFPO reports expirations of donor restrictions when the donated or acquired longlived assets are placed in service.
Contributions receivable. Unconditional promises to give that are expected to be collected
within one year are recorded at net realizable value. Unconditional promises to give that are
expected to be collected in future years are recorded at the present value of their estimated
future cash flows. The discounts on those amounts are computed using risk-free interest rates
applicable to the years in which the promises are received. Amortization of the discounts is
included in contribution revenue. As of June 30, 2009 there were only unconditional promises
to give within one year, not in future years. Conditional promises to give are not included as
support until the conditions are substantially met.
Use of estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Provision for uncollected pledges. Management has written off pledges from prior periods
that were not collected and has made a provision for uncollectible contributions receivable
based on management’s assessments of the aged basis of its receivables, current economic
conditions and historical information.
Cash and cash equivalents. Cash and cash equivalents consist of cash held in checking and
money market accounts.
Functional allocation of expenses. The costs of providing the various programs, fundraising and other activities have been summarized on a functional basis. Accordingly, certain
costs have been allocated among the programs and fund-raising activities benefited.
Comparative information. The financial statements include certain prior year summarized
comparative information in total but not by net asset class and certain prior year expense
information has been reclassified for comparative purposes.
20
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 2 Summary of significant accounting policies – (continued)
Concentrations of credit and market risk. Financial instruments that potentially expose
XYZ - NFPO to concentrations of credit and market risk consist primarily of cash, cash
equivalents and investments. Cash is maintained at one of the nation’s largest banks; cash
equivalents consist of money market funds. Investments consist of U.S. Treasury, Federal
Agencies and high grade corporate obligations; a mutual fund; interests in a fund of
diversified hedge funds, a long/short domestic equity fund, an emerging markets long-only
fund, a credit and event driven long/short global fund, and an Indian equity fund; and a
diversified portfolio of common stocks - all of which are managed by professional investment
advisors. Accordingly, management believes that XYZ - NFPO’s investments do not
represent significant concentrations of market risk.
FASB interpretation No. 48 – Accounting for uncertainty in income taxes – an
interpretation of FASB statement No. 109 (FIN 48). In July 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of
FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006. On
November 7, 2007, the FASB voted to defer FIN 48 for one year until fiscal years beginning
after December 15, 2007. On October 15, 2008, the FASB voted to continue the deferral of
FIN 48 for non-public companies and not-for-profits for an additional year until fiscal years
beginning after December 15, 2008, which-for XYZ - NFPO- will be the year ending June
30,2010.
Investments. Investments are stated at fair value. The fair value of all debt and equity
securities with a readily determinable fair value is based on quotations obtained from national
securities exchanges. The alternative investments, which are not readily marketable, are
carried at estimated fair values as provided by the investment managers. XYZ - NFPO reviews
and evaluates the values provided by the investment managers and agrees with the valuation
methods and assumptions used in determining the fair value of the alternative investments.
Those estimated fair values may not necessarily represent amounts that will be ultimately
realized through distribution, sale or liquidation of the investments. Alternative investments
are less liquid than XYZ - NFPO’s other investments.
Alternative investments include XYZ - NFPO’s interests in limited partnerships and offshore
investment funds. Included in these investments are certain types of financial instruments
intended to hedge against changes in the market value of investments, including, among
others, futures and forward contracts, options and securities sold not yet purchased. These
instruments have various features such as lockups that limit liquidity and they may contain
elements of both credit and market risk.
21
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 3 Temporarily restricted net assets
Temporarily restricted net assets as of June 30, 2009 consist of restricted contributions as
follows:
Balances
Balances
7/1/2008
Additions
Releases
6/30/2009
Time restricted
Purpose restricted
$ 1,576,949
75,000
$
428,854
769,481
( $ 1,526,116 )
(
508,464 )
$
479,687
336,017
$ 1,651,949
$ 1,198,335
( $ 2,034,580 )
$
815,704
Note 4 Mortgage payable
In November 2002, the mortgages on the two properties below were refinanced and converted
to one note with a principal balance of $1,280,675 plus a line of credit of $719,325 for a total
amount of $2,000,000. The balances outstanding are as follows:
xxxxxxx Avenue, Brooklyn, New York
yyyyyyyy Avenue, Queens, New York
$
Edited
Edited
Edited
Line of credit outstanding
Total
$
1,325,174
At June 30, 2009, $674,826 was available to be borrowed on the line of credit. The note and
line of credit are secured by the two properties noted above and bear interest at a rate of 225
basis points above the one-month LIBOR (London Inter Bank Offering Rate), adjustable
monthly on the first day of each month (the interest rate in June 2009 was 2.625%). No
repayment of principal is due until November 1, 2012, when payment in full is required.
22
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 5 Fixed assets
Fixed assets consisted of the following:
Cost
Land
Building
Furniture and equipment
Computer equipment
Total
$
492,750
3,601,011 $
1,337,460
812,682
$ 6,243,903 $
Accumulated
depreciation
1,337,686
1,261,471
605,576
3,204,733
Net
$
492,750
2,263,325
75,989
207,106
$ 3,039,170
Note 6 Related party transactions
In fiscal year 2009, XYZ - NFPO received $”Edited” in contributions from related parties$”Edited” from members of XYZ - NFPO’s Board of Trustees and $”Edited” from
Foundations and Corporations with which members of the Board are affiliated.
Note 7 Investments
The investment portfolio consists of investments in equity, debt securities, a mutual fund, a
long/short domestic equity fund, an emerging markets long-only fund, a credit and event
driven long/short global fund, an India equity fund and a fund of hedge funds, which invests in
hedge funds and managed accounts that employ various strategies. The fair value of
investments as of June 30, 2009 is as follows:
Cash equivalents and money market
Fixed income- Corporate bonds
Mutual fund-Intermediate-term investment grade bond fund
Equity
Hedge funds - Note 2
Total
23
$ 1,651,996
231,347
5,492,447
3,972,025
10,555,681
$ 21,903,496
XYZ - NFPO
Notes to Financial Statements
June 30, 2009
Note 7 Investments – (continued)
Net investment income/(loss) consists of the following:
Realized loss
Unrealized loss
Investment advisory fees
( $ 1,632,874 )
(
1,858,849 )
(
106,769 )
Net realized/unrealized loss
Dividend and interest income, excluding $52,896 of interest income
from cash and cash equivalents
(
Total
( $ 3,072,052 )
24
3,598,492 )
526,440
Financial Management of Non-Profit Organizations
Page 25 of 29
ABC - NFPO
Budgeting for the fiscal year ending June 30, 2010
A good time to start the process is two to three months before the beginning of the fiscal year. In
this case, it would be around April or May of 2009.
Let us assume that in addition to what we have in the earlier case we also have the following:
1. The ABC also received government contract in the amount $650,000 and this contract runs
from January 1, 2009 to December 31, 2009. By the end of June 30, 2009 (six months
period) it is anticipated that the ABC will have spent $350,000 on the 2009 contract. Let us
also assume that this particular government agency made a commitment to fund the ABC at
the same level for at least three years. For the period from January 1, 2010 to June 30, 2010,
the ABC is planning on using $320,000 of the $650,000.
2. The government contract of $400,000 for the fiscal year ending in June 30, 2009 is also
renewed for the same amount for fiscal year ending June 30, 2010.
3. The $100,000 represents an unrestricted contribution committed in the prior year that is
earmarked for this year.
In summary: For the fiscal year ending June 30, 2010 the ABC has: $400,000 renewed,
$300,000 carried over from the December 31, 2009 contract, $320,000 which ABC plans to
spend from the December 31, 2010 contract of $650,000 and $100,000 from a previous
commitment from a foundation. In other words, the ABC has a total of $1,120,000 on which
it can count on.
4. Assuming that based on solicitations submitted to foundations and corporations, ABC feels
that it should receive another $280,000 and therefore, requests that a proposed budget of
$1,400,000 to be prepared. How should we present this budget so it can be used as: 1) a
monitoring tool for the fund raising efforts during the course of the year, 2) get budget
numbers which can entered in the accounting system and allow proper monitoring of
expenditures vs budget and therefore, be able to submit budget modifications on a timely
basis, 3) a useful reporting format for monthly internal financial reports easily understood by
all parties involved.
Financial Management of Non-Profit Organizations
Page 26 of 29
ABC - NFPO
Budgeting for the fiscal year ending June 30, 2010
July 1, 2009
Jan 09
1)
$ 650,000
$ 350,000
June 30, 2010
Dec 09
$ 300,000
$ 650,000
Dec 10
$ 320,000
July 1, 09
June 30, 10
2)
$ 400,000
$ 400,000
3)
$ 100,000*
$ 100,000
Sub-total for the year
4)
$ 280,000 projected
(all unrestricted)
Grand total available
$ 330,000
$300,000+$320,000+$400,000+$100,000
=$1,120,000
$ 280,000
$1,120,000+$280,000=$1,400,000
* Budgeting using funds received in PY for “this” current year. The concept of releases for
restricted contributions. Restricted contributions received in one year are not all income unless it
is earned in the year received. If not earned in the year received, it will be carried forward to
subsequent years. These carryovers must be taken into account when one formulates the annual
budget.
Financial Management of Non-Profit Organizations
Page 27 of 29
ABC - NFPO
Budgeting for the fiscal year ending June 30, 2010
Total
budget
December 09
$650,000
December 10
$650,000
June 10
$400,000
To be covered
by fund
raising
Salaries & fringes
Rent
Insurance
Professional fees
Other office expenses
$
850000 $
150,000
20,000
80,000
300,000
200,000 $
20,000
5,000
15,000
60,000
200,000
40,000
5,000
15,000
60,000
$
300,000 $
40,000
5,000
25,000
30,000
150,000
50,000
5,000
25,000
150,000
Total projected budget
$ 1,400,000 $
300,000 $
320,000
$
400,000 $
380,000
Contract year end
Spent in prior period
Allocated to current FY
# of months in this FY
Carried to next year
Total contract amount
12/2009
$350,000
$300,000
6
n/a
$650,000
12/2010
n/a
$320,000
6
$330,000
$650,000
06/2010
n/a
$400,000
12
n/a
$400,000
Financial Management of Non-Profit Organizations
Page 28 of 29
ABC - NFPO
Cash flow projection for the three months ended September 30, 2009
Expected
for first
3 months
$650,000 contract 12/09
$650,000 contract 12/10
$400,000 contract 06/10
The advance
The claims
$100,000 prior year contribution
$280,000 that was projected
(1)
50,000
(2)
(3)
(4)
(5)
120,000
111,110
100,000
50,000
Expected fot the 1st quarter
Salaries and fringes (evenly)
Rent (evenly)
Insurance (beginning of year)
Other OTPS
Equipment
213,000
38,000
20,000
89,000
10,000
(6)
Projected disbursements
Net cash flow
Cash at beginning of period
Payments of payables
Cash at end of period
July 2009
31
15
August 2009
31
September 2009
15
31
50,000
120,000
37,036
37,037
37,037
100,000
15,000
35,000
431,110
Total receipts
Expected expenses 1st quarter
15
(7)
120,000
52,036
100,000
37,037
50,000
72,037
35,500
12,666
20,000
29,667
10,000
35,500
35,500
12,667
35,500
35,500
12,667
35,500
107,833
35,500
77,834
35,500
77,833
35,500
12,167
27,000
(9,000)
16,536
30,167
22,166
46,703
(9,000)
1,537
59,869
(27,833)
61,406
(9,000)
36,537
24,573
30,167
46,703
59,869
61,406
24,573
61,110
29,667
29,666
370,000
(1) Assuming the vouchering/claim for reimbursement is even throughout the year at $50,000/month ($650,000/12 = $50,000). There
is a 30 day time lag for collection.
(2) Advance on the State contract in the amount of $120,000 to be collected on July 15, 2009.
(3) For this purpose, let’s assume that the expenses on the $400,000 contract can be claimed evenly over a 12 months period:
$400,000/12=$33,333 and the prior year advance of $120,000 was fully recovered in the prior year: $33,333 x3+$111,110.
(4) Represents the 2nd part of the prior year “2 year” commitment of $100,000 per year.
(5) Out the total of $280,000 projected: $50,000 is expected to be collected in the first quarter.
(6) More than ¼ of the $1,400,000 ($1,400,000/4 = $350,000) because of insurance and equipment, because these are paid in total mount
at beginning of the month.
(7) $9,000 is the payment of PY audit fee and telephone bill (page 10) and we are assuming that unpaid bills at the same level at the end of
each month.
Financial Management of Non-Profit Organizations
Page 29 of 29
Services and technology available
Powerful computers and a good selection of software available at reasonable prices have made
automation feasible for even the smallest Organization. These tools allow an Organization to
produce meaningful and timely financial reports for managerial purposes.
Often enough, unfortunately, it is difficult to find qualified manpower for the fiscal department.
Looking for the right consultant is also a difficult process. A trend that is being considered
more and more is outsourcing of the fiscal operation . Turning over the full responsibility to a
professional which is accountable for results can be attractive. With the fast development of
technology, most of the work can be done on a remote basis without having to send documents
back and forth. From a remote location, checks can be printed at a separate location and
supporting documents can be scanned, transmitted and filed electronically on the computer for
easy access. This makes it more cost effective for both the Organization and the professional
firm.
Conclusion
Running an NFPO is running a business. In the end, everyone will be looking to the
management for solutions. Problems can be pushed aside for sometime but, they cannot be
ignored. The longer these problems are put off, the more it will take (time and resources) to
solve them. Understanding and overseeing the fiscal side of the business may be new and
uncomfortable territory but, it is an absolute necessity if an organization is concerned about its
long-term ability to provide quality services to the community. Board members also have a very
significant role to play in this process.
Financial Management of Non-Profit Organizations
Attachment A
ABC - NFPO
For the fiscal year ended June 30, 2009 (assuming that it is the first year of operation)
Cash
(+/-)
SA
(Income)
Expense
SFP
Asset
(Liability)
Total
1.
380,000
(2) (400,000)
(3) 20,000
0 On April 1st, 2008, signed a contract with the state of NY for $400,000 for the
twelve months ended June 30, 2009. For the year ended June 30, 2009 received
a total of $380,000 (Assuming earned the entire $400,000 for the year, but
no cash expense for simplicity in this question).
2.
100,000
(4) (200,000)
(5) 100,000
0 On July 1, 2008, received a $200,000 commitment from a Foundation
for period of two years / the contribution is unrestricted with $100,000
to be paid in August 2008 and the other $100,000 in August of 2009.
3.
(300,000)
(6) 300,000
0 Salaries and fringe benefits for the fiscal year (FY) June 30, 2009 is
$300,000 / salaries are paid on the 15th & the end of each month /
payroll taxes and fringe benefits are paid by the end of each month.
4.
(50,000)
(7)
50,000
0 Rent which is paid at the beginning of each month amounts to $50,000 for the year.
5.
(24,000)
(8)
12,000
(10)
8,000
(11) (8,000)
0 Audit fee for the fy June 30, 2009 is $8,000, however this work cannot
start until the books for the year are closed / the auditors are expected
to start in mid August and be finished and paid sometime in September of 2009.
(12)
70,000
(11) (1,000)
0 Total office expenses for the year amounts to $70,000 / of that total,
$1,000 of telephone expenses for the month of June 2009 is not paid
until July 2009 when the actual telephone bill is received.
(13) 10,000
0 Paid $10,000 for equipment in July 2008.
2,000
(15) (2,000)
0 It is estimated that the equipment which costs $10,000 has a useful life of five years.
How do we record depreciation expense?
(158,000)
131,000
6.
7.
(69,000)
8a.
(10,000)
8b.
(14)
(1) 27,000
(9)
12,000
0 Property and board liability insurance for twenty-four months costs
$24,000 and is payable in advance on July 1, 2008.
0 Totals for the year ended June 30, 2009