NMI 103 Financial Management Principles - ASU Guides for NMI/NMI_103... · NMI 103 – Financial...

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NMI 103 Financial Management Principles

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TABLE OF CONTENTS

COURSE OVERVIEW __________________________________________________ 2

Description ___________________________________________________________ 2 Course Schedule ______________________________________________________ 2 Course Methods _______________________________________________________ 2 Course Map __________________________________________________________ 3 Learning Objectives ____________________________________________________ 4

DAY ONE ____________________________________________________________ 4

Intro of Course Participants and Major Financial Governance Players _____________ 5 Accounting Basics – Key Financial Terms ___________________________________ 8 Cash Versus Accural Accounting _________________________________________ 16 Standard Set of External Financial Statements ______________________________ 19 Financial Reports 1: Statement of Financial Position __________________________ 21 Financial Reports 2: Statement of Activities _________________________________ 27 Financial Reports 3: Statement of Functional Expenses _______________________ 33 Financial Reports 4: Statement of Cash Flow _______________________________ 35 Financial Reports: Accountants Report and Footnotes ________________________ 37 Contribution versus Exchange Transactions ________________________________ 46

DAY TWO __________________________________________________________ 49

Internal Controls ______________________________________________________ 50 Five Internal Controls for the Very Small Nonprofit _________________________ 52

Financial Planning and Budgeting ________________________________________ 55 Meaningful Budget Work by the Board ___________________________________ 56 Youth Education Skills (YES) Organization _______________________________ 62

Presentation of Budget _________________________________________________ 67 Tax Form 990 – A Public Relations Tool ___________________________________ 67

APPENDIX __________________________________________________________ 71

Key Financial Terms_________________________________________________ 71 Pet Rescue Budget Answers __________________________________________ 75 By Groups to Analyze 990s ___________________________________________ 76

© NMI 103 – Financial Management Principles | Participant Guide 1

Course Overview Description In this course, you will learn how to read, interpret, and manage a nonprofit organization from a standard set of financial statements. You will also learn basic accounting principles and the importance of internal controls to protect the assets of your organization. Finally, you will learn how to analyze and use tax form 990, along with your organization’s annual report, as a public relations tool.

Course Schedule Friday: 9:00 a.m. – 5:00 p.m. Saturday: 9:00 a.m. – 5:00 p.m.

Course Methods Learning in this course will occur through your active participation in large and small group discussions. You’ll also complete brief, un-graded exercises based on instructor-generated presentations, articles, case studies, and other Internet or media resources. As adult learners, you bring a rich array of prior knowledge, skills, and experience to build on and share with each other. Facilitating the exchange of new and existing information is a key method NMI instructors use to expand your learning and enable you to immediately apply that learning to your nonprofit organization and your career.

2 NMI 103 – Financial Management Principles | Participant Guide ©

Course Map

Module Learning Objective/Outcome Friday

Welcome and Introductions Participant Guide, Course Road Map, and Learning Objectives

NMI announcements Introduce instructor Review Participant Guide, Course Road Map, and

learning objectives. Intro of Course Participants and Financial Governance Players Nonprofit Financial Model

Introduce participants. Describe the relationships between and among the

major players in the structure of financial governance.

Accounting Basics: Key Financial Terms Analyze a set of basic nonprofit financial statements and describe different types of business transactions.

Break

Cash versus Accrual Accounting Distinguish between accrual versus cash-based accounting.

Lunch Break

Financial Reports: 1-Statement of Financial Position

Analyze a set of basic nonprofit financial statements and describe different types of business transactions (continued).

Financial Reports: 2-Statement of Activities Differentiate between different classes of net assets:

unrestricted, board designated, temporarily restricted, permanently restricted.

Financial Reports: 3-Statement of Functional Expenses Manage from the financial reports and evaluate trends.

Financial Reports: 4-Statement of Cash Flow Assess the financial strength of a nonprofit.

Break

Financial Reports: Accountants Report and Footnotes

Distinguish among three types of accountant’s reports and audit opinions.

Explain the value and importance of footnotes.

Contribution versus Exchange Transactions Differentiate between contribution versus exchange transactions.

Wrap Up Day 1 Answer any lingering “Parking Lot” questions.

SATURDAY

Welcome Back Review Day 1 Learning objectives Day 2

Internal Controls Explain 3 common internal controls and how they can protect the assets of a nonprofit organization.

Break

Financial Planning and Budgeting Build an abbreviated, thoughtful budget with reasonable, justifiable assumptions.

Lunch Break Financial Planning and Budgeting (continued) See above

Presentation of a Budget Present an abbreviated, thoughtful budget with reasonable, justifiable assumptions


Module Learning Objective/Outcome Break

Tax Form 990 – A Public Relations Tool Analyze the main components of a Tax Form 990,

explain where the public can find them, and how they can be used as a public relations tool

Course Wrap-Up Answer any lingering “Parking Lot” questions

Learning Objectives After taking this course, you will be able to do the following:

Describe the relationships between and among the major players in the structure of financial

governance.

Analyze a set of basic nonprofit financial statements and describe different types of business transactions.

Distinguish between accrual versus cash based accounting.

Differentiate between different classes of net assets.

Analyze financial reports and evaluate trends.

Determine the financial strength of a nonprofit.

Distinguish among three types of accountant’s reports and audit opinions.

Differentiate between contribution versus exchange transactions.

Explain common internal controls and how they can protect the assets of an organization.

Develop a budget with reasonable, justifiable assumptions.

Analyze the main components of a 990; explain where the public can find them, and how they can be used as a public relations tool.


Day One

Intro of Course Participants and Major Financial Governance Players

Introducing Course Participants

Pair Share with a Partner…

Your name

Your title

Your organization

What challenges, concerns, or specific needs do you have about financial management in your organization?

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What is your role with regard to financial management?

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Sketch and share a simple organization chart of all the major financial players in your organization


Compare Your Organization’s Structure

Describe the relationship between and among these major players:

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What about the role of funders?

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Organizational chart from

www.hurwitassociates.com


Nonprofit Financial Model

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Accounting Basics – Key Financial Terms Matching Exercise

Instructions: Even if you are unsure about your answers, make your best guess about the definitions and descriptions for the following key financial terms.

Match the financial term with its definition.

a. Calendar Year b. Fiscal Year c. Asset

d. Liability e. Net Assets f. Revenues

g. Expenses h. Depreciation

1. _____ Contributions and earnings that increase the overall net assets of the organization and/or decrease liabilities.

2. _____ Costs and payments that represent the use of assets to operate an organization for fundraising, programs, or management and general.

3. _____ Annual reporting cycle that ends on a date, usually the last day of a month, other than December 31.

4. _____ The amount of assets in excess of liabilities. Also, the accumulation of revenues in excess of expenses since the inception of the organization.

5. _____ Items of economic obligations of the organization to outsiders (and in some cases for future periods)

6. _____ Cash and economic resources that are expected to benefit future cash inflows or help reduce future cash outflows.

7. _____ A process of allocating the cost of a long-lived asset or how much of an asset’s value has been used up.

8. _____ Annual reporting cycle that ends on December 31.


Mark an “A” next to the item, if it is an ASSET. Mark an “L,” if it is a LIABILITY.

9. _____ Cash and cash equivalents 10. _____ Fixed assets

11. _____ Deferred revenues 12. _____ Accounts receivable

13. _____ Accounts payable 14. _____ Cash received in advance of performing service

15. _____ Inventory 16. _____ Prepaid expenses

17. _____ Accrued expenses 18. _____ Notes payable

Match the type of financial report with its description.

a. Statement of Financial Position b. Statement of Activities

c. Statement of Cashflows d. Statement of Functional Expenses

19. _____ Only required by Voluntary Health & Welfare organizations, this provides additional detail about the expenses of the organization and reports how much of the expenses were in direct support of the organization’s programs, how much was for management and general activities and how much was for fundraising.

20. _____ Reports revenues and expenses. Revenues over expenses (net income) or expenses over revenue (net loss). When added to net assets at the end of last year must equal the end of this year’s net assets.

21. _____ Reports financial assets, liabilities and net assets of the organization. Total assets must equal liabilities plus net assets.

22. _____ Reports operations, investing and financing activities that affected the amount of cash on hand throughout the year.

Match the type of accountants’ reports with its description. a. Compilation b. Audit c. Agreed-Upon-Procedures

d. Review e. Single Audit

22. _____ A report issued by an outside independent CPA when that CPA has done some limited testing of the financial information. The report does not express an opinion on the accuracy of the financial information, but rather states whether or not any misstatements came to their attention during the limited testing.

23. _____ A report issued by an outside independent CPA on findings based on specific procedures performed related to a financial statement component or other written assertion as requested by the client. The report does not express an opinion on the accuracy of the financial statements or internal


controls taken as a whole, but rather reports on the results of certain agree-upon tests of the financial management system.

24. _____ A report issued by an outside CPA when that CPA has taken information, provided by management, and put it into the form of a financial statement. The CPA does not do any testing of the information provided and, accordingly, does not express an opinion or provide any assurance of the accuracy of the financial information provided.

25. _____ A specialized report issued by an outside Independent CPA when that CPA has done sufficient testing to render an opinion about whether or not the organization complied with the terms of a federal grant or contract.

26. _____ A report issued by an outside independent CPA when that CPA has done sufficient testing of the financial information to be able to render an opinion about whether or not the financial information fairly represents the financial position of the organization in all material respects when the financial statements are taken as a whole.

Match the type of audit opinion with its description.

a. Unqualified b. Qualified c. Disclaimer d. Adverse

26. _____ The financial statements are materially misstated and do not conform with the method of accounting chosen by management.

27. _____ The auditor states that s/he could not form an opinion on the financial statements.

28. _____ The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management.

29. _____ The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management with the exception of certain enumerated departures.


Organization’s Accounting Period

Calendar Year – Annual reporting cycle that ends on December 31.

Fiscal Year – Annual reporting cycle that ends on a date, usually the last day of a month, other than December 31.

Assets and Liabilities

Asset – Cash and economic resources that are expected to benefit future cash inflows or help reduce future cash outflows.

Examples of Assets

Cash and cash equivalents Accounts receivable Inventory Prepaid expenses Fixed assets

Liability (What you Owe) – Items of economic obligations of the organization to outsiders (and in some cases for future periods)

Examples of Liabilities Accounts payable Accrued expenses Notes payable Deferred revenues Cash received in advance of performing

service o Example - Government grant o Example - Membership fees

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Asset What you own

Liability What you owe


Calendar YearJan-Dec Fiscal year

Annual reporting cycle not ending Dec 31

Depreciation

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Depreciation is a process of allocating the cost of a long-lived asset or how much of an asset’s value has been used up

If an asset is used for more than one accounting period, the cost of an asset is allocated to each period

Depreciation method should be systematic and rational

Depreciation methods:

• straight line depreciation• double declining balance method• sum-of-the-years'-digits method• production based method


Key Financial Terms on Statement of Activities

Types of Financial Reports

Statement of Financial Position - Reports financial assets, liabilities and net assets of the organization. Total assets must equal liabilities plus net assets.

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Statement of Activities - Reports revenues and expenses. Revenues over expenses (net income) or expenses over revenue (net loss). When added to net assets at the end of last year, must equal the end of this year’s net assets.

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Statement of Cashflows - Reports operations, investing, and financing activities that affected the amount of cash on hand throughout the year.

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Net AssetsThe amount of assets in excess of liabilities. Also,the accumulation of revenues in excess of expenses since the inception of the organization.

RevenuesContributions and earnings that increase the overall net assets of the organization. Revenues enhance and increase assets, and/or decrease liabilities.

ExpensesCosts and payments that represent the use of assets to operate an organization. Expenses can be for fundraising, programs, or management and general.


Statement of Functional Expenses - Only required by Voluntary Health & Welfare organizations, this provides additional detail about the expenses of the organization and reports how much of the expenses were in direct support of the organization’s programs, how much was for management and general activities and how much was for fundraising.

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Types of External Accountant’s Reports

A report issued by an outside CPA when that CPA has taken information, provided by management, and put it into the form of a financial statement. The CPA does not do any testing of the information provided and, accordingly, does not express an opinion or provide any assurance of the accuracy of the financial information provided.

A report issued by an outside independent CPA when that CPA has done some limited testing of the financial information. The report does not express an opinion on the accuracy of the financial information, but rather states whether or not any misstatements came to their attention during the limited testing.

A report issued by an outside independent CPA when that CPA has done sufficient testing of the financial information to be able to render an opinion about whether or not the financial information fairly represents the financial position of the organization in all material respects when the financial statements are taken as a whole.

A specialized report issued by an outside Independent CPA when that CPA has done sufficient testing to render an opinion about whether or not the organization complied with the terms of a federal grant or contract.

A report issued by an outside independent CPA on findings based on specific procedures performed related to a financial statement component or other written assertion as requested by the client. The report does not express an opinion on the accuracy of the financial statements or internal controls taken as a whole, but rather reports on the results of certain agree-upon tests of the financial management system.

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Compilation

Review

Audit

Single Audit

Agreed-Upon Procedures


Types of Audit Opinions

Unqualified - The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management.

Qualified - The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management with the exception of certain enumerated departures.

Disclaimer - The auditor states that s/he could not form an opinion on the financial statements.

Adverse – The financial statements are materially misstated and do not conform with the method of accounting chosen by management.

Accounting Standards Federal and state laws governing financial reporting refer to accounting standards as follows…

GAAP – Generally Accepted Accounting Principles. A hierarchy of rules that define the standards of external financial reporting.

FASB – Financial Accounting Standards Board. A private body designated by the American Institute of Certified Public Accountants. It sets the majority of U.S. GAAP standards.

AICPA – American Institute of Public Accountants. Produces Audit & Accounting Guide for Not-for-Profit Entities, as well as other Industry A&A Guides.

Industry Practices – Widely recognized and prevalent either general or industry-specific standards that do not contradict formally issued guidance.

IFRS – International Financial Reporting Standards. Standards adopted by the International Accounting Standards Committee. Not yet applicable to U.S. GAAP.

SOX – The Sarbanes Oxley Act of 2002. Non-profits are excluded from all provisions accept the provisions about whistleblowers and record retention.

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Unqualified Qualified

Disclaimer Adverse


Accrual Basis: Transactions are recorded as revenue is earned and expenses are incurred. Not tied to the receipt or payment of cash

Cash versus Accrual Accounting Cash versus Accrual Accounting Video

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Open WOW Statements of Financial Position Accrual and WOW Statements of Financial Position Cash

Compare Cash versus Accrual Assets

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Compare Cash versus Accrual Liabilities

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Cash Basis: Transactions are recorded as cash is received and disbursed


What Did You Discover About Cash versus Accrual Assets?

What Did You Discover About Cash versus Accrual Liabilities?


Effect on Financial Statements of Cash versus Accrual Accounting

Cash Accounting Versus Accrual Accounting

Instructions: Answer the following questions to determine the effect on financial statements that use cash accounting versus accrual accounting methods.

1. On December 31, 2011, a donor promises to send in $1,000 during 2012.

a. Does this create a change to the Cash financial statements or Accrual statements?

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2. The donor makes the promised payment of $1,000 early on March 15, 2012.

a. Does this create income to the Accrual Statement of Activities?

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b. Does this create income to the Cash Statement of Activities?

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3. Would the account called “Prepaid Insurance Expense” appear on the Cash Statement of Financial Position?

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4. Would the account called “Prepaid Insurance Expense” appear on the Accrual Statement of Financial Position?

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5. The organization that reports on a Cash basis receives a bill for Office Supplies for $300 and puts in the file to be paid in 15 days. Is there an impact on the Statement of Financial Position?

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6. In that instance for the Cash basis, is there an impact on the Cash basis Statement of Activities?

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7. The organization that reports on an Accrual basis receives a bill for Office Supplies for $300 and puts it in the file to be paid in 15 days. Is there an impact on the Statement of Financial Position?


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8. In that instance for the Accrual basis, is there an impact on the Accrual basis Statement of Activities?

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Standard Set of External Financial Statements

Statement of Financial Position - Reports financial assets, liabilities and net assets of the organization. Total assets must equal liabilities plus net assets.

Statement of Activities - Reports revenues and expenses. Revenues over expenses (net income) or expenses over revenue (net loss). When added to net assets at the end of last year must equal the end of this year’s net assets.

Statement of Functional Expenses - only required by Voluntary Health & Welfare organizations, this provides additional detail about the expenses of the organization and reports how much of the expenses were in direct support of the organization’s programs, how much was for management and general activities and how much was for fundraising.

Statement of Cashflows - Reports operations, investing, and financing activities that affected the amount of cash on hand throughout the year.

All 4 financial statements correlate to each other. Totaled numbers must align across all four statements

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Internal Reports

Example Internal Statements

Type

Frequency• Daily or Weekly Reports: Deposit summary, Cash / check

report, Check register, Income summary, Expense summary• Interim Reports: Balance Sheet, Statement of Activities,

Functional Expense, Cash flow, Budget, Investment• Annual Reports: Audit report, Management letter, Annual

report

Users• Treasurer, Finance Committee, Board Members

Budget to Actual

Projections for the Year

Special Event Analysis

Operations Budget by Location

Statement of Revenues and Expenditures

Statement of Activities

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Why So Many Different Statements?

People within an organization need different statements (or levels of reporting) depending on their needs/role. For example…

Accountants or bookkeepers know details, how each statement relates to the other, and which statement is needed by members of an organization

An Executive Director needs all 4 statements and to know how the numbers across statements tie together and should be in agreement

Board members mainly need reports with high level numbers and not as much detail, unless a question arises

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Financial Reports 1: Statement of Financial Position

Statement of Financial Position

A “snap shot” of what an organization ownsand owes at a moment in time (net worth)


Statement of Financial Position Reports the Following Information

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Example Statement of Financial Position

Open The Rivera Organization Accountant Statements and reference the Financial Position tab

Analyze the Rivera Organization’s Statement of Financial Position

You are a board member who must analyze the organization’s Statement of Financial Position

Is your organization doing well or not?

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Financial Assets (what you own)

• Cash and cash equivalents • Accounts receivable • Inventory • Prepaid expenses • Fixed assets

Liabilities (what you owe)

• Accounts payable • Accrued expenses • Notes payable • Deferred revenues – cash received

in advance of performing service • Example: Government grant • Example: Membership fees

Net Assets (what you’re worth)

• The amount of assets in excess of liabilities

• Also, the accumulation of revenues in excess of expenses since the inception of the organization


How do you know?

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With a partner, analyze the statement. Write a brief explanation supporting your conclusions about the current financial status of this nonprofit organization at this moment in time.

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Items to Look for and Analyze

Notice: Total Assets must = Total Liabilities + Net Assets

Notice: Total Assets – Total Net Assets = Total Liabilities

Assets are listed in order of declining liquidity, so the most liquid assets (cash) are at the top, followed by “receivables” (money owed to the nonprofit) and investments

What do you notice about “Receivables”?

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What changes do you notice from last year to this year?

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What did your analysis reveal?

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Assets – Statement of Financial Position

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Liabilities and Net Assets – Statement of Financial Position

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Observations and Questions

Net Assets have increased by approximately $700,000 or 1/6th

Are there any bad debts (receivables) that would reduce Rivera Organization’s net worth? Are they having problems getting paid?

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Investments have either increased in value or Rivera Organization has bought more investments

Accounts Payables have gone up, so this could mean they’ve become slow payers or bought something more substantial that they haven’t paid for yet, which might cause a liquidity problem. Liquidity is down to $744 from 1 million the previous year

Now need to look at other 3 statements to better understand Rivera Organization’s Statement of Financial Position at this moment in time.


Classified Statement of Financial Position – Typical but Optional Presentation

Financial Scenario

In General, Organizations with positive net assets are financially more stable than organizations with negative net assets

Positive Net Assets = More Assets than Liabilities

Has the resources to pay off its obligations although timing can be a problem

Only one asset – building that costs $500,000

Only one liability – payroll taxes payable $10,000

Net assets are positive $490,000…Sounds good!

Payroll taxes are due next week. IRS won’t accept 2% of building as payment. Whoops! Not so good!

Current Assets

• What you own that are liquid Accounts receivable Cash Prepaid expenses

Non-Current Assets

• Things that you own that you can liquidate but take longer Investments Property and Equipment

Current Liabilities

• Liabilities whose obligation must be met within 12 months Accounts payable Note payments payable

within 12 months

Non-Current Liabilities

• Obligations to be met after 12 months Note payments payable more

than 12 months from now Grant payable where the grant

will be paid more than 12 months

Current Ratio = Current Assets ÷ Current Liabilities

• A current ratio of 1 or higher indicates the organization has enough assets that will convert into cash in the next 12 months to cover obligations due in the next 12 months. There can still be timing problems.


Statement of Financial Position – Summary and Brief Discussion

Can a nonprofit organization have too much in net assets?

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Financial Reports 2: Statement of Activities Statements of Activities - Reports the Following Information

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Reference the Activities tab

Revenues may be broken out and with detail about• Unrestricted Funds•Temporarily Restricted

Funds• Permanently Restricted Funds

Expenses may be divided by functional areas• Programs• Fundraising• Management and General Administration

Net Assets at year end will match those net assets also reported on the Statement of Financial Position


Rivera Statement of Activites

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Classes of Net Assets – What Does the Donor Want?

Unrestricted

Undesignated

Board Designated

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Restricted

Temporarily

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Managing Restricted Funds Video

Quiz – Circle the correct classification

1. An individual sends a check for $3,000 to support the nonprofits work

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2. A foundation rewards a grant for $15,000 for a computer system

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3. A foundation awards $60,000 over three years for general operating support. The second and third year payments will be made after the financial audit and narrative report is submitted

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4. An individual gives $100,000 to provide scholarships for campers in perpetuity from the interest and investment earnings

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Financial Reports 3: Statement of Functional Expenses Statement of Functional Expenses

Reference the Functional Expenses tab

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Only required for voluntary health and welfare organizations; Optional statement for all other organizations

Detailed view of expenses already captured on the Statement of Activities

Functional Expenses may be broken out into• Programs• Fundraising• Management and General

Administration

This statement less likely to appear at the Board level


Example Statement of Functional Expenses

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Financial Reports 4: Statement of Cash Flow Statement of Cash Flow

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Reference Cash Flows tab

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A standard requirement of stakeholders because it's a financial summary of how and where cash was derived and used during a certain period

Quick snapshot view of

Donations Received Expenses Paid

Broken down into three categories (or sources) of cash flows

Operating Investing Financing

Shows the flow of cash into and out of an organization, as well as the financial strength of a non profit organization at a glance


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Financial Reports: Accountants Report and Footnotes

Footnotes

Example Footnotes

Open Rivera Organization Accountant Footnotes document

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The final section of a standard set of external financial statements

Provide added valuable info about an organization’s financial status that can influence the overall judgment about its future

“Footnotes” or “notes of disclosure” explain things the numbers can’t


Types of Accountant’s Reports

A report issued by an outside CPA when that CPA has taken information, provided by management, and put it into the form of a financial statement. The CPA does not do any testing of the information provided and, accordingly, does not express an opinion or provide any assurance of the accuracy of the financial information provided.

A report issued by an outside independent CPA when that CPA has done some limited testing of the financial information. The report does not express an opinion on the accuracy of the financial information, but rather states whether or not any misstatements came to their attention during the limited testing.

A report issued by an outside independent CPA when that CPA has done sufficient testing of the financial information to be able to render an opinion about whether or not the financial information fairly represents the financial position of the organization in all material respects when the financial statements are taken as a whole.

A specialized report issued by an outside Independent CPA when that CPA has done sufficient testing to render an opinion about whether or not the organization complied with the terms of a federal grant or contract.

Audit Report Normally Covers

Statement of Financial Position

Statement of Activities

Statement of Functional Expense

Statement of Cash Flows

Related Footnotes

Supplemental Schedules



Standard Auditors Report

How an Actual Auditors Report Might Read Explanation of Sections of the Auditors Report

Independent Auditor's Report 1. Title

Independent

To the Board of Directors of XYZ Organization 2. Addressee

Group that hires auditor, generally not management

We have audited the accompanying statement of financial position of XYZ Organization (a non-profit organization) and the related statements of activities, functional expenses, and cash flows for the years then ended.

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and

3. Introductory paragraph

We have audited

List financial statements

Indicated management's responsibility

U

nqua

lifi

ed

Qua

lifi

ed

Unqualified - The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management.

Qualified - The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management with the exception of certain enumerated departures.

Dis

clai

mer

Disclaimer - The auditor states that s/he could not form an opinion on the financial statements.

Adverse – The financial statements are materially misstated and do not conform with the method of accounting chosen by management.

Adv

erse


maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express and opinion on these financial statements based on or audits. We conducted our audits 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 consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4. Scope paragraph

Generally Accepted Audit Standards (U.S.)

Reasonable assurance statements are free of material misstatement

Not an examination of the internal control system/environment

Examining on a test basis evidence supporting amounts and disclosures

Assessing accounting principles used and significant estimates made, as well as evaluating overall presentation

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 Organization as of June 30, 2013, 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

5. Opinion paragraph

In our opinion

Present fairly, in all material respects (or not – read this paragraph carefully!)

In conformity with U.S. generally accepted


United States of America.

accounting principles (or not, material departures will be noted – read carefully!)

Name and signature of auditors 6. Signature

Firm

November 20, 2013 7. Date

- Date financials are available to be published

Source: from Scottsdale Training and Rehabilitation Services, I

Source: from Scottsdale Training and Rehabilitation Services, Inc.

Audit Opinion, June 30, 2013

www.starsaz.org


Make Good Use of the Treasurer & Finance Committee

Author: Kate Barr, Nonprofits Assistance Fund Originally appeared in Nonprofit World, 2009 Accessed 10/28/11 www.snpo.org

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Understand the Treasurer’s Job Description

• Must be knowledgeable about the organization’s financial affairs • Assures the board receives accurate and timely financial information and uses it in

making decisions • Signer for deposit accounts • Initiates and manages mortgages and loans

Find the Right Treasurer

• Board receives accurate financial information in a timely manner • Board chair gives ample time and attention to priority financial issues • Important observations and trends are highlighted for the board

Understand the Finance Committee’s Role

• Participates in budget planning • Recommends fiscal policies • Discusses financial statements in detail • Helps staff and board think through financial questions and develop opinions

A finance committee isn’t needed if the board as a whole can understand the financial information, provide guidance, and make financial decisions efficiently.

While finance committee members need to understand financial reports, don’t assume that only accountants, bankers, and businesspeople are qualified. Financial language can be learned.


Quick Self-Test

Reviewing Financial Terms and Statements

Instructions: Take this brief quiz to see what you recall from learning about financial terms and statements so far.

1. What do you call the annual reporting cycle that ends on a date, usually the last day of a month, other than December 31?

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2. Are notes payable an asset or a liability?

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Match the type of financial report with its description.

e. Statement of Financial Position f. Statement of Activities

g. Statement of Cashflows h. Statement of Functional Expenses

3. ____ Only required by Voluntary Health & Welfare organizations, this provides additional detail about the expenses of the organization and reports how much of the expenses were in direct support of the organization’s programs, how much was for management and general activities and how much was for fundraising.

4. _____ Reports revenues and expenses. Revenues over expenses (net income) or expenses over revenue (net loss). When added to net assets at the end of last year must equal the end of this year’s net assets.

5. _____ Reports operations, investing and financing activities that affected the amount of cash on hand throughout the year.

6. _____ Reports financial assets, liabilities and net assets of the organization. Total assets must equal liabilities plus net assets.

7. Which type of audit opinion is most desirable?

a. Unqualified

b. Qualified

c. Disclaimer

d. Adverse


Contribution versus Exchange Transactions Contribution versus Exchange Transactions

Classifying something as an “exchange” or a “contribution” (i.e. a donation) can be tricky

Accountants must sometimes sift through the facts to get a description and classify the transaction properly as “exchange” or “contribution”

Contribution Transactions Defined

Exchange Transactions Defined

A unique attribute of nonprofit accounting that could include contributions (i.e. donations) of

• Money • Stock • Valuables: car, horse,

jewelry, artwork

People will have no expectation for getting anything in return for their contribution, except a good feeling for helping the cause and forwarding your organization’s mission

When an organization provides goods or services in exchange for money

Recorded differently from contributions (i.e. donations)

• Revenue is only recorded when the goods or serviced are delivered


Exchange Transaction – Classic Example: Mental Health Treatment

Performance of a behavioral health service to a segment of the population

By law or by agreement, the unit of government (e.g. county or state) is obligated to serve this population

However…

Government asks a nonprofit with expertise to perform the services

Government pays the nonprofit an agreed upon amount

Nonprofit submits proof that they have performed the service

Nonprofit is paid

No element of contribution to the nonprofit for the payment

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Your Turn: Contribution or Exchange?

Scenario 1:

The US Parks Service agrees to fund a Museum’s study of the rare plants in a section of the Grand Canyon National Park.

The research staff spends 18 months in the field and lab follow-up work to identify 10 new types of rare plants in that section of the park.

At the study’s end, the Museum staff writes a report on their findings which is made available to the Park Service as well as to the general public. The Park Service is pleased.

The Museum did valuable research and had a “grant” of $10,000.

The Museum staff’s expenses are included in the operating budget of the Museum.

Is this a contribution or exchange transaction?

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Scenario 2:

The US Park Service needs people to build trails, so they hire clients of “Green Tree,” a nonprofit organization, to work for $10 per hour.

The money is paid to “Green Tree” for trail building services.

Payments are made on this arrangement every two weeks. When the project is completed, the Park Service will pay “Green Tree” a larger lump sum.

Is this a contribution or exchange transaction?

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In-Kind Contributions

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Valuing In-Kind Contributions

“By law, non-profit organizations cannot provide a donor with the dollar value of an In-kind gift. Such valuations when applicable, relative to “fair market value” of In-Kind gifts, need to be professionally assessed and certified elsewhere—if they can be—and that is the responsibility of the donor. This certification subsequently needs to be resolved with the professionals and others who prepare the donor’s tax forms—whose work in turn will need to be reconciled with IRS regulations. In instances where time and service are donated, no tax break whatsoever is allowed, as the IRS Publication 526 clearly states, ‘You cannot deduct the value of your time or services. . . .’”

(“In-Kind Gifts: How to Acknowledge and Recognize Them,” by Tony Poderis, http://www.raise-funds.com/2008/in-kind-gifts-how-to-acknowledge-and-recognize-them/, accessed 5/14/2012)

Summary of Contribution and Exchange Defined by FASB

“An unconditional transfer of cash or other assets to an entity or a settlement of cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting as an owner.”

“Transfers of assets that are in substance purchases of goods or services – exchange transactions, in which each party receives and sacrifices commensurate value.”

The Financial Accounting Standards Board (FASB) provides financial accounting and reporting oversight for nonprofits http://www.fasb.org

Day Two Day 1 Review

Write down two important things you learned yesterday.

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What is one thing that is still unclear for you, or that you have questions about?

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http://www.raise-funds.com/2008/in-kind-gifts-how-to-acknowledge-and-recognize-them/


http://www.fasb.org/

Internal Controls

Internal Controls Defined

Author: Patricia A. O’Malley, CPA. http://www.rubino.com. Copyright 2011 Greater Washington Society of CPAs Educational Foundation.

Accessed 10/21/11.

Why Internal Controls

Protect the strong from temptation

Protect the weak from opportunity

Protect the innocent from false accusation

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What Are Internal

Controls?

Internal controls are the financial processes and procedures that enable the organization to safeguard its assets.

How Is This Done?

The most effective procedures are those that have the greatest segregation of duties. The more people involved in the process, the less likely it is that an error or defalcation will occur.

Who Establishes The

Procedures?

Generally management establishes the system of controls. It is helpful to have an accounting manual detailing the procedures to be followed.


Once Upon Internal Control – Southside Community Church Cartoon Part 1Video

Instructions: While watching this video, list all of the internal controls you hear described

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Which Internal Controls Did you Detect?

Quickly compare your list with a partner’s. Compile one list of shared internal controls and be prepared to share your list with the group.

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Five Internal Controls for the Very Small Nonprofit

Finance & Strategy • By Carl Ho, CPA • January 6, 2010 •

Segregation of duties, checks & balances . . . difficult to implement in the organization that has perhaps three or fewer staff, or only a few active board members in an all-volunteer organization. We asked CPA Carl Ho, who works with dozens of small nonprofits, what would be the five most important, most do-able controls for small groups:

1. The first and most important consideration is to set the control environment, that is, to let everyone know, from the top down, that there are policies in place and everyone has to follow the policies. In so many organizations the top person makes exceptions for himself or herself about policies, which sets a sloppy or even unethical tone. Then other people don't think they have to follow procedures, either, and they start cutting corners. The top person can't ask for reimbursement for anything for which they don't have a receipt. The management team members must all use time sheets themselves, get approval for travel expenses, have their credit cards scrutinized.

Emphasize the importance of ethics and controls at staff meetings, and demonstrate that everyone follows the rules, all the time.

2. Define clearly who is responsible for what. It's very common in small organizations, where not as much needs to be written down, for people to say, "I thought she was going to check the invoice." For example, with invoices: who is responsible for checking the math? Who is responsible for approving the invoice to be paid?

3. Physical controls. Lock it up. Computers should be locked to desks, and they should be protected with passwords. Put checks in a locked drawer. Among other abuses, there are too many cases where someone comes in and takes checks from the middle of the checkbook.

4. If there's cash involved -- such as at a fundraiser or box office at a performance -- have two people count all the cash together.

5. Reconciling the bank statement is a very crucial step. It's very unlikely that someone is going to steal from you and run away forever. Reconciling the bank statement means that embezzlement can't go on for very long.

Ideally someone other than the bookkeeper (or whoever handles the money) reconciles the bank account from an unopened statement. That's a strong check on the person who handles the money. But in a small nonprofit there may not be a bookkeeper, and there may be only one person who does everything. In these instances someone else, such as a board member, should receive the unopened bank statement, and look it over before giving it to the bookkeeper or the sole staff person.

There are several controls that are commonly recommended but that you haven't mentioned. Could you comment on them? For example:


http://www.blueavocado.org/category/topic/finance-strategy

Payroll? Payroll controls at small organizations are actually easy because everybody knows everybody, so it's harder to create fictitious employees and pay them. The one area for attention is approval of timesheets for people working on an hourly basis. In these cases someone -- who knows what work they did -- should review and approve timesheets.

Two signatures on checks, or on large checks? This is okay as a policy, as long as you know that banks don't enforce this policy, nor can you hold them liable for a check that goes through with only one signature. Two signatures is a good policy so that someone sees the big checks, but it's more about setting the right tone than about preventing theft.

The person handling money not allowed to sign checks? Bookkeepers should not sign checks. But in a really small organization this may not be practical. One approach is to allow the bookkeeper (or the person who handles the money) to sign small emergency checks, for no more than $100 or $200. If everybody knows this rule, it helps to set a tone of accountability. And again, it will be caught by the person who does the bank reconciliation.

Any concluding thoughts? In even the smallest organization, there can be another person who looks over things periodically, checking whether an expense was too high, was legitimate, whether the payroll taxes were paid. If you combine this with an atmosphere and environment that emphasizes following procedures and high standards of accountability, you still may not be able to prevent theft completely. But you'll prevent honest people from crossing the line, and you'll catch anything before it gets too serious.


Five Internal Controls for the Very Small Nonprofit

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Set The Control Environment

Define Clearly Who Is Responsible For What

Physical Controls

Count All CashTogether

Reconciling The BankStatement

Carl Ho, CPA,

Carl is a partner at Le, Ho, and Company in Daly City, California and serves as the auditor for many small and large community nonprofits in the San Francisco Bay area.

http://www.blueavocado.org Accessed: 10/21/11

Other Considerations:

Payroll?Two

Signatures On Checks?

The Person Handling

Money Not Allowed To

Sign Checks?


http://www.blueavocado.org/

Financial Planning and Budgeting

Financial Planning and Budgeting

A map to guide the organization in obtaining the resources necessary to carry out its objectives and purpose

Must have a clear and concise definition and understanding of the organization’s mission, goals, and purpose

A numerical expression of the financial plan of the organization operations

May span a month, a year, 3-5 years, or the life of the program or contract

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Why is Budgeting Difficult for the Nonprofit Organization?

What do YOU think?

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Financial Plan Budget


Answer:

Contributions (donations)

Fee for Service

Membership Fees

Other

Meaningful Budget Work by the Board

Board Cafe • Finance & Strategy • By Jan Masaoka • December 6, 2010

For many nonprofits, the annual "approval of the budget" is the cornerstone of board financial oversight. However, this annual approval is frequently an empty ritual: one where board members peruse a budget that they are unsure is realistic or appropriate to the planned activities.

Consider the following scene:

The budget discussion is at the end of the agenda, and things are running late. Given a complex budget that "needs to be approved," board members react first by looking for things that they can understand . . . usually a relatively small expense item: "Why is this travel budget so high?" "Can this phone budget be reduced?"

As each question or suggestion is raised, staff respond by explaining why each suggestion for a change is unrealistic. "The travel budget has been funded for Program X so we have to do it." "Actually the phone budget is not that big." After a few instances of staff "explaining" line items, board members realize that asking such questions isn't really going

anywhere.

In the backs of their minds is the thought, "It's probably okay. It was okay last year and I didn't understand it then either." So they vote to approve the budget.

In short, board members first nitpick, staff react to questions as evidence of the board's ignorance, and then the board rubberstamps the budget.

The truth is that such approval of the budget isn't a meaningful act on the part of the board. This process acts as if board members are intimately familiar with all aspects of the operations and can knowledgeably respond to a budget. In fact, the board doesn't know whether six outreach workers is too few or too many. The staff knows more about operations, and, appropriately, staff should develop the budget. But board members can meaningfully discuss the goals and trade-offs


http://www.blueavocado.org/category/topic/board-cafe

http://www.blueavocado.org/category/topic/finance-strategy

in the budget.

So what would be meaningful work for the board on the budget?

The board has some important perspectives to bring to the discussion of the budget. Here are questions that take advantage of the board's diverse community perspectives and the finance staff's knowledge and skill:

1. Are there specific financial objectives that we want for the next year?

For example, an organization may determine that it needs $75,000 in working capital to even out its cash flows over the year. The board may ask the staff to include $15,000 as "surplus" in the budget for each of the next several years to begin building that reserve.

There is frequently an assumption that every budget should be balanced; that is, that revenues and expenses would be the same for a given year. It's worth thinking through this question: do we want a balanced budget, a deficit of perhaps $50,000 (perhaps to spend/fulfill an unusual grant or to get through a temporary bad time), or a surplus of perhaps $10,000 (to save or to repay debt)?

2. Are there desirable new projects, program expansions, or changes in compensation?

The staff, for instance, can be asked to prepare cost estimates for some of the following:

• The financial impact of across-the-board 4% raises • The financial impact of adding a 401(k) retirement plan with a 1%

employer contribution • The financial impact of increasing the child care program by one

more class of children

3. Are there large expenses for which we should be saving?

Should we be setting aside $3,000 per year to prepare for buying a new phone system? Should we expect to spend $5,000 per year on computer replacements and upgrades?

4. Should we consider revisiting how we use our unrestricted funds?

Which programs are breaking even or making a surplus, and which are being subsidized with unrestricted funds? Does the management team have a suggestion for how these cross-subsidies should be changed?

5. Is our dollar allocation generally in line with our priorities?

For example, if an organization started as a dance troupe with a few dance classes, it might consider whether the organization's attention over time -- as reflected in the budget -- has come to overemphasize the classes over dance performance.

Alternative budget process


An alternative budget process can look like this:

First, the finance committee leads a full board discussion on programmatic goals and financial objectives. The board establishes some broad guidelines for staff to follow as the staff develops the budget. Examples:

• A budget that provides for increased volume in homeless services while keeping other services at the same level or allowing a slight decline

• A budget that plans for a surplus of $30,000 to help build a cash reserve • A budget that includes the establishment of a 3% employer contribution to a 401(k) plan • A budget that includes an increase of $35,000 in board-generated donations

Next, staff prepare a draft budget, with comments about the financial implications of the broad guidelines and projections of anticipated revenue, expense, investment, and cash-flow needs. Their comments might include:

• Increasing homeless services by 5% would cost approximately $85,000 in additional staff, food, and garbage costs. There is some possibility of obtaining a foundation grant for this amount.

• Given the risks of state funding levels this year, a $50,000 addition to cash reserves would be more appropriate and allow for deliberate closedowns of programs if necessary.

• If the 401(k) contribution is made for all employees (whether or not an employee also contributes), the cost would be $35,000. Establishing and administering a 401(k) plan will take significant staff time over the year as well.

• This last year, board-generated donations increased by $18,000 over the previous year. A goal of $35,000 would be a stretch goal, and board members should think through whether this is realistic.

• The attached draft budget allows for a 2% salary increase. • Combining staff projections with the board guidelines, a deficit of $20,000 is projected for the

coming year. One possibility is to decrease the addition to cash reserves from $30,000 to $10,000. Another is to direct staff to make another effort to readjust the budget and bring back a revised budget and projection.

At this point, the finance committee and the staff jointly review the draft budget through a couple of iterations and end up with a revised budget that meets some, but not all, of the board's guidelines. In this example, the revised budget may contribute only 2% to the 401(k) plan and increase profitability in some other areas.

Finally, the finance committee presents the budget to the full board. The board can see the extent to which the guidelines are met and what implications there are for other parts of the budget.

The board can then "adopt" the budget, or authorize the staff to proceed with operations as the budget outlines.

For many organizations, the budget process is, in fact, the process through which board and staff decide on the organization's priorities, interpret its vision in operational terms, negotiate compromises, and agree to go forward together. In different organizations, this process is bound to look different. Whatever process you choose, ask yourself: How does the board add value to the budget process? How can we bring the board's knowledge and leadership into the budget process?


This article is adapted from a section in The Best of the Board Cafe, Second Edition , by Jan Masaoka. Jan is Editor of Blue Avocado, former executive director of CompassPoint Nonprofit Services , and has sat in on dozens of budget discussions as a board member of several nonprofits. With Jeanne Bell and Steve Zimmerman, she co-authored Nonprofit Sustainability: Making Strategic Decisions for Financial Viability , which looks at nonprofit business models.

Meaningful Budget Work by the Board

Consider the following scenario:

Complex budget “needs to be approved”

Board members nitpick what they understand

Staff reacts to questions as evidence of board’s ignorance

Board rubberstamps the budget

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Meaningful Questions to Ask

Are there specific financial objectives that we want for the next year?

Are there desirable new projects, program expansions, or changes in compensation?

Are there large expenses for which we should be saving?

Should we consider revisiting how we use our unrestricted funds?

Is there a dollar allocation generally in line with our priorities?

Author: Jan Masaoka. http://www.blueavocado.org. Adapted from a section in The Best of the Board Café, Second Edition. Accessed: 10/27/11.

Budgets Assist in the Following

Guide Operations

Establish Spending Limits

Plan Resource Needs

Manage Community Expectations

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Board Members Think:

"It's probably okay. It was okay last year, and I didn't understand it then either."


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http://www.compasspoint.org/

http://www.compasspoint.org/

http://www.amazon.com/Nonprofit-Sustainability-Strategic-Decisions-Financial/dp/0470598298/ref=sr_1_1?ie=UTF8&qid=1288913667&sr=

http://www.amazon.com/Nonprofit-Sustainability-Strategic-Decisions-Financial/dp/0470598298/ref=sr_1_1?ie=UTF8&qid=1288913667&sr=

Warn of Situations Out of Control

Obtain Financial Aid

Compare Results of Organization Operations

Compare Alternative Use of Resources

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Begin Budgeting Process By

Ideally, A Budget Process Should

Have one overall responsible person or committee

Include Input from

o All members of management or program directors

o Treasurer or other board members (financial committee)

o Constituents

o Legislators and government agencies

o Outside professional advisors

May be influenced by special interest groups

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Identifying future goals, needs, and objectives

Evaluating the organization's performance in the prior period

Understanding all variables affecting the future of the organization and its operations


The Budget Itself Should Be…

Broken down into systematic or natural time breaks: months, quarters, years, etc.

Compared to actual results on consistent basis

Updated if a large or unusual event occurs

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Abbreviated Budget Exercise

Open Pet Rescue Budget Excel Spreadsheet

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YES Organization Case Study

Open YES Organization Budget Excel Spreadsheet.


Youth Education Skills (YES) Organization

Instructions: You will prepare a budget for the YES Organization using a pre-designed Excel Budget Spreadsheet for year ended 12/31/xz. In the Excel spreadsheet provided, you will see Column B displays figures for the Actual Year ended 12/31/xx. Column C displays figures for the Projected Year ended 12/31/xy. Column D is blank. In Column D, you will input the figures you project for year ended 12/31/xz using the information about the YES Organization provided in this document.

1. Take 5 minutes to read through the written case given in the following pages. Note the history and trends for the YES Organization, both good and bad. Study the “Questions for your consideration.” These questions will give you some idea about the YES Organization’s economic environment. They will also give you an idea about what kinds of questions to ask yourself as you develop a projected budget for any organization.

2. Take 45 minutes to work with a partner or team of 3 people to analyze the case and input your budget information into Column D of the Excel Spreadsheet.

3. Take 20 minutes to write up a bulleted list of your analysis, assumptions, and solutions in a word document. Clarify how you integrated your assumptions into the budget. As part of your analysis, discuss how you might turn this organization’s financial position / budget around.

4. Be prepared to present your budget and write up to the large group.

About the YES Organization…

The YES Organization is an established nonprofit in Phoenix, Arizona that has been providing tutoring, communication, decision-making, and leadership skills training for youth ages 12-18 for the past 15 years. They are a relatively small organization with a paid staff of 7-10 people. Recent financial facts and history about the YES Organization include:

The fiscal year-end is December 31.

Continued economic uncertainty is projected.

New competing organizations have entered the marketplace providing similar services for youth.

Last year YES did not make budget. Their current net revenue projection is under budget by $60,000.

Staff turnover occurred primarily in the Development Department.

After the last year’s actual financial results, they pared down their Operating Reserve [from $73,000?] to $50,000.

The YES Organization’s strategic plan includes the following high level goals…

Increase reserves.

Identify new sources of funding.

Hold an annual board retreat.


Increase the number of effective, professional staff.

BRIEF OVERVIEW

Revenue Expenses

Contribution /Grants: Federal & State governmental sources, individuals and foundations, occasional bequests

Special Events: annual dinner, golf tournament, a fun run / walk, and a benefit concert

Program Service Fees

In-Kind Contributions: supplies, expert labor, tools and equipment

Salaries and Benefits

Buildings Costs

Programs Costs

Fund Raising Costs

Administrative Costs

Capital Costs

REVENUE

Questions for your consideration about revenue…

Should the Organization rely on the continued government support at the same levels? What approach might they take to assure continued funding?

Analyze cost/benefit of the four special events to determine the value of retaining all. How do these events support the marketing of the mission, promotion of the programs, and expansion of the donor base?

Are the program fees reviewed annually? If they do not cover costs but are “what the market can bear” what options have you considered to address the shortfall?

Who has provided in-kind contributions to date? What communication has occurred to assure these contributions will continue? Have they been contacted to consider expanding their support? What other Organization needs might be addressed by In Kind Contributions? How else can we leverage the needs of the Organization with collaborative solutions?

EXPENSES

Salaries and Benefits

The organization hasn’t had a development director for the last month of this fiscal year. The former development director was asked for his resignation, after a decline in contribution revenue for the last year and this year.

Controller has just begun to obtain her college degree in accounting. She has had trouble getting timely information to the CEO and other department heads. This has lead to slow response to crises that develop in times of financial trouble. The Controller has trouble communicating unpleasant information and tends to communicate the small victories to colleagues to keep everyone less stressed.


Benefit costs are 25% of Salary costs, but will go up to 35% this coming year since the YES is instituting a 401(k) plan. Benefit costs include medical and life insurance plus tax related benefits.

Questions for you to consider about Salaries and Benefits:

What should the timing be for replacement of the Development Director and how will that impact this budget?

Should there be an allocation for professional development courses for the controller?

Assuming benefit costs and 401k implementation are in line with the market, what else might you consider to attract and retain staff in future?

Building Costs

The costs include insurance expense, telephone and computer operational costs, utilities, alarm service, maintenance and the cleaning service.

The organization has been informed that the costs for the cleaning service are going to increase by 50% and after doing a market check, that is the norm.

Additionally, the Property and Liability insurance will be going up by 20% the coming year (renewal will be December 31, 20xy or xz).

Questions for you to consider about Building Costs:

Since it appears costs are at the norm, what other options can you consider?

Have you reviewed your deductible on your Insurance policies and considered increasing your board reserve to cover an increased deductible?

Should you schedule an energy audit so you can see if costs could be further contained?

Have you contacted your phone/internet vendor to see if there are some improved bundled costs available?

Program Costs

• About 37% of the total costs, excluding costs for salaries and benefits. Examples of these costs include consultants, printing, training, supplies, client costs and travel costs.

Questions for you to consider about Program Costs:

• If travel costs are increasing and they relate to training have you considered alternate delivery methods (WEBEX, SKYPE, etc.).

• When you consider all of the printing needs of the YES Organization, is there an opportunity to go back to the printer and negotiate a better overall rate?

• Are there items that could be purchased in larger quantity and stored on their site?

• Could more of the materials be delivered electronically versus printed?


Fund Raising Costs

• Fund raising cost categories and special event expenses include promotional items and supplies, brochures, advertising, dues, travel and meals, training, and costs for the grant writer, including grant writer fees.

• Also Included are expenses for planned giving programs.

Questions for you to consider about Fund Raising Costs:

• Have you developed a plan for the fundraising efforts so their success can be measured and guided?

• What can you leverage in the production of special events?

• Have you surveyed your participants to assure a greater attendance and relevancy?

• Have you reviewed your merchant account fee arrangement?

Administrative Costs

• Costs for auditor fees, legal fees, payroll services, printing, Board expenses, Directors’ and Officers’ Insurance, and miscellaneous.

Questions for you to consider about Administrative Costs:

• Have you discussed a retainer with your attorney so as to more evenly share anticipated needs/costs?

• Have you priced a 2 year premium on the Directors’ and Officers’ insurance?

• Can training be brought in house?

Capital Costs. These costs are separate from expenses because the YES Organization may or may not choose to spend funds on these types of items, depending on their current financial situation.

• Three new computers are desperately needed for the clients and two new machines for the staff.

• A network system is needed.

• For client rooms, YES needs better furniture.

• YES also needs a new vehicle for transporting clients and staff.

• YES’s current computers have outdated software. Also, staff members recently discovered the organization has only two licensed versions of the main software systems for 10 computers.

Questions for you to consider about Capital Costs:

• Have you researched organizations that donate refurbished equipment, software and furnishings to nonprofits (AZ Strut, TechSoup, Computers With Causes, Etc.).


• Have you considered used furniture/auctions?

• Have you posted a wish list on your website, in the classrooms, and in your publications?

Additional Questions for Consideration

• Due to financial limitations imposed on public schools, might there be room to position this established organization’s programs as a valued supplement?

• Is it time to develop a new marketing / development plan?

• What is a reasonable amount to retain in the Operating Reserve? How will you build this goal into the budget process?


Presentation of Budget

Present Your Budget for the YES Organization

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Tax Form 990 – A Public Relations Tool What is Tax Form 990?

How tax-exempt organizations report their annual financial information to the IRS

Provides the public with financial information about nonprofit organization

Used by government agencies to prevent organizations from abusing their tax-exempt status


Nonprofits Must File Annually

Choices are generally as follows:

Organizations with receipts of $200,000 or more OR assets of $500,000 or more

Organizations with receipts less than $200,000 AND total assets less than $500,000.

Not available for organizations with Donor Advised Funds.

Organizations with gross receipts less than $50,000.

Not available for Supporting Organizations or Organizations with Donor Advised Funds

Generally required for gross revenues of $25,000 or more.

***Churches are generally exempt from filing. Check with your tax advisor for other exceptions to these rules. Additional annual filing requirements which may apply: payroll, sales, property tax; other state filings. If soliciting charitable contributions, registration with Secretary of State***

Access 990 Forms Using Guidestar

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Key Questions for Analyzing a 990

Compare the revenue and expenses for current and previous year

Analyze the balance sheet and notice any trends, good or bad

Notice anything about expenses: programs, management (general), or fundraising

Compare management salaries and benefits to local and national trends

Examine governance policies of the organization (e.g. conflict of interest, does board review 990, etc.)

990 990 EZ 990-N AZ form 99


Analyze Example 990s

With your group, briefly analyze and compare two form 990s provided from a variety of organizations

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What Did You Learn That You Didn’t Know Before?

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Reporting Matters

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We Appreciate Your Feedback

Any lingering questions…

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Appendix Key Financial Terms

Calendar Year – Annual reporting cycle that ends on December 31.

Fiscal Year – Annual reporting cycle that ends on a date, usually the last day of a month, other than December 31.

Asset (What you Own) – Cash and economic resources that are expected to benefit future cash inflows or help reduce future cash outflows.

Examples of Assets

• Cash and cash equivalents

• Accounts receivable

• Inventory

• Prepaid expenses

• Fixed assets

Liability (What you Owe) – Items of economic obligations of the organization to outsiders (and in some cases for future periods)

Examples of Liabilities

• Accounts payable

• Accrued expenses

• Notes payable

• Deferred revenues

• Cash received in advance of performing service

o Example - Government grant

o Example - Membership fees

Net Assets - The amount of assets in excess of liabilities. Also, the accumulation of revenues in excess of expenses since the inception of the organization.

Revenues - Contributions and earnings that increase the overall net assets of the organization. Revenues enhance and increase assets, and/or decrease liabilities.


Expenses - Costs and payments that represent the use of assets to operate an organization. Expenses can be for fundraising, programs, or management and general.

Depreciation – A process of allocating the cost of a long-lived asset or how much of an asset’s value has been used up. For tax purposes, an organization can deduct the cost of the tangible assets they purchase as business expenses; however, the organization must depreciate these assets in accordance with IRS rules.

Types of Financial Reports

• Statement of Financial Position - Reports financial assets, liabilities and net assets of the organization. Total assets must equal liabilities plus net assets.

• Statement of Activities - Reports revenues and expenses. Revenues over expenses (net income) or expenses over revenue (net loss). When added to net assets at the end of last year must equal the end of this year’s net assets.

• Statement of Cashflows - Reports operations, investing, and financing activities that affected the amount of cash on hand throughout the year.

• Statement of Functional Expenses - Only required by Voluntary Health & Welfare organizations, this provides additional detail about the expenses of the organization and reports how much of the expenses were in direct support of the organization’s programs, how much was for management and general activities and how much was for fundraising.

Types of Functional Expenses

• Program

• Fundraising

• Management and General Administration

Types of Accountants’ Reports

• Compilation - A report issued by an outside CPA when that CPA has taken information, provided by management, and put it into the form of a financial statement. The CPA does not do any testing of the information provided and, accordingly, does not express an opinion or provide any assurance of the accuracy of the financial information provided.

• Review - A report issued by an outside independent CPA when that CPA has done some limited testing of the financial information. The report does not express an opinion on the accuracy of the financial information, but rather states whether or not any misstatements came to their attention during the limited testing.

• Audit - A report issued by an outside independent CPA when that CPA has done sufficient testing of the financial information to be able to render an opinion about whether or not the financial information fairly represents the financial position of the organization in all material respects when the financial statements are taken as a whole.


• Single Audit - A specialized report issued by an outside Independent CPA when that CPA has done sufficient testing to render an opinion about whether or not the organization complied with the terms of a federal grant or contract.

• Agree-Upon-Procedures – A report issued by an outside independent CPA on findings based on specific procedures performed related to a financial statement component or other written assertion as requested by the client. The report does not express an opinion on the accuracy of the financial statements or internal controls taken as a whole, but rather reports on the results of certain agree-upon tests of the financial management system.


• Unqualified - The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management.

• Qualified - The financial statements present fairly, in all material respects, the financial position of the organization in accordance with the method of accounting chosen by management with the exception of certain enumerated departures.

• Disclaimer - The auditor states that s/he could not form an opinion on the financial statements.

• Adverse – The financial statements are materially misstated and do not conform with the method of accounting chosen by management.

Federal and state laws governing financial reporting refer to accounting standards as follows:

GAAP – Generally Accepted Accounting Principles. A hierarchy of rules that define the standards of external financial reporting.

FASB – Financial Accounting Standards Board. A private body designated by the American Institute of Certified Public Accountants. It sets the majority of U.S. GAAP standards.

AICPA – American Institute of Public Accountants. Produces Audit & Accounting Guide for Not-for-Profit Entities, as well as other Industry A&A Guides.

Industry Practices – Widely recognized and prevalent either general or industry-specific standards that do not contradict formally issued guidance.

IFRS – International Financial Reporting Standards. Standards adopted by the International Accounting Standards Committee. Not yet applicable to U.S. GAAP.

SOX – The Sarbanes Oxley Act of 2002. Non-profits are excluded from all provisions accept the provisions about whistleblowers and record retention.


Summary of Internal Controls Mentioned in Video

1. Use Outside Sources: Bank statements mailed to someone outside the finance team who looks for any peculiar items

2. Check Each Other’s Work: Completed reconciliations are randomly spot checked, making sure they are complete and identifying any errors

3. Limit the Number of Keys: Only a few team leaders get keys; these people are different from those collecting the money or accessing the alarm

4. Use Dual Control: Accessing money requires at least two people from different teams; one person can’t access the money without the other

5. Institute Physical Barriers: The new plastic bags will make any tampering very apparent

6. Hold People Responsible: Ushers must seal and sign contribution bags; log the numbered bag used


Pet Rescue Budget Answers


By Groups to Analyze 990s

Group 1 American Ceramic SocietyInc-OH-2010 (Arts) Gross Receipts: $9,301,694 SaltPondAreasBirdSanctuariesInc‐MA‐2010 (Environmental) Gross Receipts: $628,555 Group 2 HawaiianDivisionOfTenshoKotai‐HI‐2010 (Religious) Gross Receipts: $296,951 TriangleAquaticCenter-NC-2010 (Public Health, Safety, Recreation) 501(c)(3) Gross Receipts: $2,363,865 Group 3 Jazzmobile‐NY‐2009 (Arts) Gross Receipts: $770,217 Children’s Hospital & Medical Center Foundation-NE (Pediatric Services) Gross Receipts: $32,825,259 Group 4 MiracleFlightsForKids‐NV‐2010 (Social welfare, health and human services / Children) Gross Receipts: $2,390,248 ZoologicalSocietyOfSanDiego‐CA‐2009 (Conservation, Education, Recreation) Gross Receipts: $231,415,124 Group 5 Fellowship of Christian Airline Personnel Inc – GA-2009 Gross Receipts: $145,564 GraceUSA‐CA‐2010 (Services to HIV/AIDS in Sub-Saharan Africa / Peer Educators) Gross Receipts: $66,689 Group 6 African Methodist Episcopal Church Fifth District Economic Development Fund-MO-2009 (Religious) Gross Receipts: $273,601 American Wheat Mission Inc-MD-2010 (Social Services/handicapped) Gross Receipts: $477,811


References

Barr, K. (2009). Make good use of the treasurer and finance committee. Nonprofit World, 27(2), 24-25. Retrieved from http://www.nonprofitsassistancefund.org/clientuploads/directory/resources/Make_Good_Use_of_the_Treasurer.pdf

Ho, C. (2010). Five internal controls for the very small nonprofit. Blue Avocado.

Masaoka, J. (2010). Meaningful budget work by the board. Blue Avocado.

North Carolina State University. (n.d.). Audit report examples. Retrieved from http://www4.ncsu.edu/unity/users/b/buckless/www/audrpt450.htm

Poderis, T. (2011). In-kind gifts: How to acknowledge and recognize them. Retrieved from http://www.raise-funds.com/2008/in-kind-gifts-how-to-acknowledge-and-recognize-them/

The Riviera Organization. (2012). Statement of activities.

Association of Fundraising Professionals – www.afpnet.org

ASU Lodestar Center for Philanthropy & Nonprofit Innovation – lodestar.asu.edu

BoardSource – www.boardsource.org

Center for Lobbying in the Public Interest – www.clpi.org

Center on Philanthropy at Indiana University - www.philanthropy.iupui.edu

Greenlights for Nonprofit Success – www.greenlights.org

MMP Associates – www.mmp-a.com


http://www.nonprofitsassistancefund.org/clientuploads/directory/resources/Make_Good_Use_of_the_Treasurer.pdf

http://www.nonprofitsassistancefund.org/clientuploads/directory/resources/Make_Good_Use_of_the_Treasurer.pdf

http://www4.ncsu.edu/unity/users/b/buckless/www/audrpt450.htm


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