Financial Management
57.508-201
The Budget as a Policy, Planning and Information Tool
Week 6 - Spring 2011
Accounting and Controls
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Recording all financial transactions
Accrual or modified accrual basis accounting
GAAP & GASB (Governmental Accounting Standards Board)
Budget oversight and expenditure monitoring
Revenue monitoring
Program or outcome monitoring
Purchasing controls
Staffing changes
Supplemental appropriations
GAAP
The Governmental Accounting Standards Board
(GASB) is the source of the generally accepted
accounting principles (GAAP) used by state and local
governments, publicly-traded and privately-held
companies and not-for-profit organizations
GAAP Principles
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Regularity: Conformity to enforced rules and laws
Consistency: All entries in exactly the same way
Sincerity: Done in good faith
Permanence of methods: Allow for comparison
Non-compensation: Not seek to compensate a debt with an
asset or a revenue with an expense
Prudence: Not make things look better than they are.
Continuity: Assume that the business will not be interrupted
Periodicity: Each entry should be allocated to a given period
Full Disclosure/Materiality: All information must be disclosed
Fund Accounting
Governments & NGOs practice fund accounting
Rule: All revenues are designated to be deposited in
a particular fund and every item of expenditure comes
from some particular fund
Principle: An obligation for reporting to financial
statements users to show how money is spent
Fund Structure
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General Fund
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Special Revenue Fund
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Capital Projects Fund
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Debt Service Fund
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Enterprise Fund
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Internal Service Fund
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Special Assessment
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Trust and Agency (3rd party)
Budgeting Interrelationship
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Both budgeting and accounting are fiscal systems or processes
that involve the allocating, and disbursing of resources
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This results in an interrelationship and a need for coordination
between these two fiscal disciplines
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Budgeting is regarded more in terms of planning, preparing
and executing a fiscal plan for a period of time
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Budgeting processes are dependent upon the accounting of
past-year and current-year expenditures/revenues
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Accounting focuses on the recording, classifying, and
interpreting of financial transactions
Financial Statements
GAAP requires the following 4 financial statements
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Balance Sheet - statement of financial position at a
given point in time
Income Statement - revenues minus expenses for a
given time period ending at a specified date
Statement of Owner’s Equity - also known as
Statement of Retained Earnings or Equity Statement
Statement of Cash Flows - summarizes sources and
uses of cash; indicates whether enough cash is available
to carry on routine operations
Balance Sheet
Based on the fundamental accounting model:
Assets = Liabilities + Fund Balance
(Note for-profit: Assets = Liabilities + Equity)
Balance Sheet
Assets
Assets can be classed as current or fixed
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Current assets are assets that easily can be converted
into cash including cash on hand, accounts receivable,
marketable securities, notes receivable, inventory, and
prepaid assets like insurance
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Fixed assets include land, buildings, and equipment
and are recorded at historical cost (which can be
higher or lower than the current market value)
Liabilities
That portion of the assets that are owed
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Current liabilities include accounts payable, notes payable,
debt service, wages owed, etc.
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Long-term liabilities include outstanding mortgages and bonds
Fund Balance
A fund balance is created from excess revenues over
expenditures (some combination of revenues being
higher than budgeted and expenditures being lower
than budgeted)
Fund balance two different categories
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Reserved Fund Balance
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Capital reserve or special projects
Unreserved Fund Balance
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Emergency or contingency or “rainy day”
Income Statement
The income statement presents the results of the
organization’s operations over a period of time
Net Income = Revenue - Expenses
Income from operations can be separated from other forms of
income like grants, gifts, interest earned, sales, etc.
And if there are investments or property:
Net Income = Revenue - Expenses + Gains - Losses
Income Statement
Statement of Cash Flows
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Shows how changes in balance sheet affect cash on hand
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Useful in the organization’s ability to pay its bills on time
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Represents an analysis of all of the transactions of the period
showing where the organization obtained its cash and what it
did with it and breaks the sources and uses of cash into :
– Operating activities
– Investing activities
– Financing activities
– Grant receipts
Statement of Cash Flows
Financial Statements
McNamara’s Basic Guide to Non-Profit Financial Management
“NONPROFIT FINANCIAL STATEMENTS”
“Financial Statements of Not-for-Profit Organizations”
http://www.1800net.com/nprc/fasb117.html
Alliance for Nonprofit Management
http://www.allianceonline.org/
Auditing
Government Auditing Standards
Generally Accepted Government Auditing Standards
(GAGAS)
Standards for audits of “government organizations,
programs, activities, and functions, and of
government assistance received by contractors,
nonprofit organizations, and other nongovernment
organizations.”
http://gaqc.aicpa.org/
Internal Controls
A process, effected by an entity’s board of directors,
management and other personnel, designed to provide
reasonable assurance regarding the achievement of
objectives in the following three categories:
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Effectiveness and efficiency of operations
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Reliability of financial reporting
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Compliance with applicable laws and regulations
Internal Controls
Five Components
Control Environment
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Tone set at the top
Risk Assessment
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Risks to achieving the objectives
Control Activities
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Written policies and procedures
Information and Communication
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Communicate, communicate , communicate…
Monitoring
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Performance measurement
Internal Controls
“As important as an internal control structure is to an
organization, an effective system is not a guarantee
that the organization will be successful. An effective
internal control structure will keep the right people
informed about the organization’s progress (or lack of
progress) in achieving its objectives, but it cannot
turn a poor manager into a good one.”
Guiding Principles
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Planning
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Fundraising
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Governance
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Human Resources
Public Policy &
Advocacy
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Information and
Technology
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Strategic Alliances
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Evaluation
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Financial Management
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Transparency and
Accountability
Planning
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Clearly defined written mission statement
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Periodic review of mission statement
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Formal risk management plan
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Solicit input from staff, board & clients
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Consults with counterpart agencies
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Written strategic plan with objectives & tasks
Governance
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Determine the organization’s mission and purpose
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Select & evaluate the chief executive
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Provide proper financial oversight
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Ensure legal and ethical integrity
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Recruit and orient new board members
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Enhance the organization’s public standing
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Monitor the organization’s programs and services
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Review & adopt the organization’s annual budgets
Human Resources
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Comply with all state and federal employment laws
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Adopt written personnel policies and procedures
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Employ personnel who reflect the community (EEO)
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Support the education and development of staff
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Provide opportunities for growth and advancement
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Provide clear and current job descriptions
Financial Management
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Generate accurate and relevant financial reports
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Should understand how to read financial statements
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Have specific financial checks and balances process
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Have annual audits prepared by outside auditor
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Auditor should meet with the board separately
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Establish and maintain a financial reserve
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System that allows reports of financial misconduct
Transparency & Accountability
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Comply with all required reporting procedures
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Regularly measure levels of performance
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Clients provided with opportunities for input
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Hold public meetings regularly to gather input
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Produce an annual report on activities and performance
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Full information on services and fee structure
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Ensure confidentiality and non-discriminatory service
Fundraising
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Board owns responsibility for fundraising
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Seek only the funds needed to achieve mission
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Comply with code of ethics and standards
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Professional fundraiser must be licensed
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Expend funds according to funders’ wishes
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Regularly communicate with donors
Public Policy & Advocacy
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Advocate on behalf of its clients and mission
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Participate in public policy formation
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Maintain understanding of current policies
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Assist its client groups in public and civic
engagement
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File accurate reports on all lobbying activities
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Ensure that the activities are nonpartisan
Information and Technology
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Have information systems in place with back-up
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Have technology use and security policies
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Train board, employees and volunteers on system
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Should maintain a catastrophic data recovery plan
Strategic Alliances
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Foster relationships with similar organizations &
state, regional and national associations
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Alliances should be in line with the strategic goals
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Be aware of services provided by other organizations
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Promote other organizations’ services for choice
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Collaborate to ensure effective use of resources
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Larger nonprofits should assist smaller nonprofits
Evaluation
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Procedures for evaluating programs and procedures
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Regularly monitor the satisfaction of clients
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Results should be used to effect operational plan
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Performance measures should be specific
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Evaluation should be ongoing with broad input
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Results should be communicated broadly
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Share lessons learned with other agencies & funders
Upcoming Schedule
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Spring Break – No class 3/9
Midterm Presentations 3/16
– No more than 15 minutes
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3/23 – Comparative Public Budgeting (US & others)
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Tom Moses - Lowell
3/30 – Strategic Management
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Send me presentations in advance (by 4:00 pm)
Donnalee Lozeau - Nashua
4/6 – The Strategic Agenda
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Paul Cohen - Chelmsford