Assessing Your Grantees Financial Health. Rebecca Coker, MPA, Lead Consultant

Transcription

1 Assessing Your Grantees Financial Health Rebecca Coker, MPA, Lead Consultant March 18, 2016

2 Agenda Welcome & Introductions (9:00am) Strategic Financial Management Audited Financial Statements Lunch (12:15pm) Understanding Overhead Grantee Budgets Internal Financial Reports Adjourn (3:00pm) 2

3 STRATEGIC FINANCIAL MANAGEMENT 3

4 4 #fiscalstrength

5 What does excellence in financial management look like? Organizations engage in effective financial planning to prioritize the use of resources Leaders closely monitor results to understand how the organization is doing in relation to plans and to adjust accordingly Effective financial operations ensure that plans are being executed properly and that decisions are based on reliable information Governance sees that all of these elements are being carried out properly and in furtherance of the organization s mission 5 #fiscalstrength

6 UNDERSTANDING AUDITED FINANCIAL STATEMENTS 6

7 What financial information do you request from grantees? Audited financial statements IRS Form 990 Budget Board approved budget for the full organization Budget for a specific project / program Internal financial statements Anything else? 7 #fiscalstrength

8 Nonprofit Financial Health Assessment Tool 8

9

10 Annual Financial Audit: Definition A series of procedures followed by an independent professional accountant used to test, on a selective basis, transactions and internal controls in effect, all with a view to forming an opinion on the presentation of the organization s financial statements 10

11 Order of statements in the audit Statement of Financial Position (Balance Sheet) Statement of Activities (Income Statement, Profit & Loss) Statement of Functional Expenses Statement of Cash Flows Management Letter 11

12

13

14 Audited Financial Statements: How the Numbers Flow 1 4 Statement of Financial Position Assets Liabilities Unrestricted Net Assets Restricted Net Assets 35 5 Statement of Cash Flows Cash Flows from: Operations Investing (30) 15 Financing (30) (200) Change in Cash Beginning Cash Ending Cash Statement of Activities Unrest Temp Unrest Temp Income Released from Restriction 70 (70) 70 (70) Total Revenue (40) Expenses Change in Net Assets (110) (40) Beginning Net Assets Ending Net Assets Statement of Functional Expenses 2015 Program M&G Fundraising Total Personnel OTPS Total Program M&G Fundraising Total Personnel OTPS Total

15 What We Own: Cash Receivables Investments Property, Plant & Equipment Assets = Liabilities + What We Owe: Bills due Line of Credit Advances Long-term Debt Our Net Worth: Unrestricted Net Assets Temporarily Restricted Permanently Restricted 15

16

17 Liquid Unrestricted Net Assets (LUNA) Represents the portion of an organization s unrestricted net assets that could be converted to cash relatively easily Is a measure of funds available to an organization for purposes such as supplying working capital, guarding against downturns, and pursuing new opportunities LUNA = Unrestricted Net Assets (Fixed Assets Debt Related to Fixed Assets) Benchmark: LUNA sufficient to cover 3-6 months of operating expenses is generally considered healthy, but this depends on an organization s business model, plans and goals. 17

18 Balance Sheet: Liquid Unrestricted Net Assets (LUNA) Indicator Calculation Months of Liquid Net Assets Liquid Unrestricted Net Assets Average Monthly Expense 18

19 Calculating LUNA 19

20 Operating Reserves: How Are They Funded? Annual surplus designation Annual replenishment considered a budgetary expense Re-designation of special purpose funds Targeted investment 20

21 Balance Sheet: Months of Cash on Hand Indicator Calculation Months of Cash on Hand Total Cash + Cash Equivalents Average Monthly Expenses 21

22 Calculating Months Cash on Hand 22

23 Balance Sheet: Composition of Net Assets Indicator Composition of Net Assets Calculation Unrestricted Net Assets Total Net Assets Temporarily Restricted Net Assets Total Net Assets Permanently Restricted Net Assets 23 Total Net Assets

24 EXAMPLE 100% Unrestricted Temporarily Restricted Permanently Restricted 80% $751,538 $1,122,853 $938,416 60% 40% 20% $1,250,727 $1,366,212 $1,747,503 0%

25 Age of Fixed assets Indicator Age of Fixed Assets Calculation Fixed Assets Accumulated Depreciation Total Fixed Assets 25

26 EXAMPLE Percent of Fixed Assets Undepreciated Percent of Fixed Assets Depreciated 100% 80% $36,465 $63,599 $91,370 60% 40% 20% $102,336 $89,203 $69,103 Benchmark 0%

27 Organizational performance for the fiscal year Revenues by type and restriction Expenses broken out functionally Fiscal year s operating results (gains/losses) Revenues released from restriction Amount released from restrictions Balance of Temporarily Restricted Net Assets being carried forward into the next fiscal year 27

28

29 Operating Results Reserve Balance TRNA balance going into the next fiscal year

30 Statement of Activities: Operating Results Indicator Calculation Operating Results Unrestricted Revenue Total Expenses 30

31 Calculating Operating Results 31

32 Statement of Activities: Revenue Composition Indicator Calculation Revenue Composition Contribution & Foundation Support Total Revenue Government Contracts Total Revenue Earned Income Total Revenue 32

33 EXAMPLE $1.8 $1.6 Government Funding Contributions Earned Revenue Investment Income Other Revenue $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $

34

35 Expense Analysis What is the largest program? Is the program with the largest expense a program aligned with the organization s mission? What is the largest expense? Salaries and benefits are often an organization s largest expense Salaries and benefits commonly make up 60% or more of total expenses 35

36 Functional Expense Definitions Classification Description Examples Program, separated by major programs The direct provision of goods or services related to the organization s mission and purpose Program supplies, salaries of program staff Support Services: Management & General Activities such as oversight, business and financial management Audit costs, salaries of Finance and HR staff Support Services: Fundraising Incurred in inducing donors to contribute Costs to produce a donor event, salaries of fundraising staff 36

37 Largest Expense Matches amounts on Statement of Activities Largest Program 79.2% 8.6% 12.2%

38 Investment of Resources Expense ratios: The percentage of funds spent by the organization in each functional area Program Expense Total Expense Mgmt. & General Expense Total Expense Fundraising Expense Total Expense Benchmark: Benchmark: Benchmark: 65%-70% 20%-25% 10%-15% Source BBB Wise Giving Alliance Charity Accreditation Standards: 38

39 The Starvation Cycle Pressure on nonprofits to conform Taking Action to End the Nonprofit Starvation Cycle, The Bridgespan 39 Group, Donors Forum Workshops, February 2011

40 Statement of Functional Expenses: Resource Allocations Indicator Calculation Functional Expense Composition Program Expense Total Expenses General & Administrative Expense Total Expenses Fundraising Expense Total Expenses 40

41 Calculating Resource Allocation 41

42 Understanding the Statement of Cash Flows Looks at where cash was obtained and spent Reports on the following activities: Operations Investing Financing Must disclose any non-cash activity such as acquisitions of equipment on finance Note: Statement not available on Form

43

44 Matches cash amount on Statement of Financial Position

45 What to do Focus on receivables collections Liquidate short-term investments, if available Use Line of Credit Delay non-critical vendor payments Negotiate with foundations on timing of payments What not to do Delay payment of payroll taxes Personal loans from staff and Board members, if possible 45

46 Cash Flow Projection Template + Online Tutorial Toolkit: StrongNonprofits.org 46

47 Significant Disclosures Description of the organization Basis of accounting (cash, accrual and modified accrual) Fixed assets Debt Temporarily and permanently restricted net assets Related party transactions Subsequent events Commitment and contingencies 47

48 Management Letter Issued by the auditor Identifies areas of operations or procedures that the organization may want to improve or redesign Reports any "material weaknesses" and significant deficiencies May include an organization s corrective action plan On a quarterly basis, the Finance and Audit Committee should check in on the progress in implementing this plan 48

49

50 UNDERSTANDING OVERHEAD

51 Analysis of over 220,000 Forms 990 found widespread reporting that defies plausibility Nonprofit Overhead Cost Project, % 13% Percent of nonprofits reporting ZERO fundraising expenses on their 990s Percent of nonprofits reporting ZERO management & general expenses on their 990s Taking Action to End the Nonprofit Starvation Cycle, The Bridgespan Group, Donors Forum Workshops, February

52 52 Nonprofit Finance Fund 2014 State of the Sector

53 53 Nonprofit Finance Fund 2014 State of the Sector

54 Are foundations open to dialogue about key financial issues? 54 J McCray, Is Grantmaking Getting Smarter? GEO,

55 First Letter Encourages Donors to Focus on key factors of nonprofit performance other than just overhead Second Letter Encourages Nonprofits to Demonstrate ethical practice and share data about performance Manage towards results and understand true costs Help educate funders on the real cost of results 55

56 Video: Real Talk About Real Costs

57 Nonprofit Finance Fund 2014 State of the Sector 57

58 New OMB Guidelines for Federal Funding In effect as of December 2014 Requires all government funders to reimburse reasonable indirect costs when federal dollars are part of funding stream: De minimis indirect cost rate is now 10% For government funding purposes, indirect cost rate is calculated as a percentage of specifically defined cost pool New OMB Uniform Guidance clarifies cost allocation rules, allowing more costs to now be reimbursable as direct costs For instance, in some cases program administration (like admin staff dedicated to a specific program) can now be reported as direct 58

59 The Real Cost Project brings together education, advocacy and skill-building with the goal to increase the number of funders that provide real-cost funding and to build the skills and capacity of all those engaged in grantmaking foundations, corporations, individuals, and government. The Nonprofit Overhead Project will leverage millions of flexible dollars for nonprofits in California and elsewhere by changing government reimbursement rates, foundation grants and donor analyses. 59

60 GRANTEE BUDGETS

61 Budget: an Action Plan stated in Dollar Terms 61

62 Type Strategic Budget Operating Budget Program Budget Grant Budget Cash Budget Capital Budget Description 3-5 year plan for revenues and expenses, encompassing an organization s strategic goals. 1-year plan for revenues and expenses that includes the departments and programs of an organization and may incorporate plans for accumulation of reserves. 1-year plan for revenue and expenses related to a specific program, with the goal of covering true cost of delivery. A plan for specific revenue and expenses related to a grant or contract month plan for cash inflows, cash outflows, and the amount and duration of cash shortages or shortfalls. A plan for fixed asset outlays within a 1-5 year period.

63 Operating Budget: Key Framework Presented by programmatic/functional activity Reflective of revenues and support for current year operations including funds raised in prior years: Committed/pending/to be raised Separates direct and shared expenses so that overhead can be calculated separately Contemplates scenarios (Plan A, Plan B) Includes considerations for capital Identifies to be raised by program 63

64 Video: An Appreciation of Depreciation

65 Budgeting for Depreciation Don t forget to account for future capital needs! Even though depreciation is a non-cash expense, it can still (and should!) be included in the operating budget. Questions: What are the capital assets? When will their useful lives end? What are the future capital needs? Are they included in the budget? 65

66 Budget by Functional Activity Surplus/Deficit By Program #fiscalstrength

67

68 Specific and Shared Expenses Specific Expenses Expenses that can be specifically assigned to one or more program(s) or function(s), based on time or money spent directly in each program or function Shared Expenses Expenses that are shared among some or all programs and functions. These expenses must be allocated among functional areas on the basis of an appropriate methodology Salaries for program personnel Salaries for fiscal staff Fundraising expenses Rent & utilities in a common space Office supplies Depreciation 68

69 Costs are often more likely to be designated as Tier 1 expenses rather than Tier 2, and Tier 2 rather than Tier 3 TIER 1 TIER 2 TIER 3 Specific Program Expenses Shared Program Expenses Management & General and Fundraising Expenses ( Overhead ) 69

70 How nonprofits see costs How funders see costs Specific Program Expenses Tier 1 Shared Program Expenses Tier 2 Overhead Tier 3 Program Indirect 70

71 Allocation of costs Expense Personnel Occupancy Rent Utilities Cleaning Maintenance Interest Insurance Deprecation 71 Methodology Staff Level of Effort substantiated by Timesheets Time studies Employee Attestation Statement % of salary dollars Headcount (F.T.E) Facilities use studies (%) Square footage Asset use (for debt to acquire property) Loan use (for working capital loans)

72 Staff Level of Effort: FTE 72

73 Tier 1: Example of Specific Expenses - Personnel Direct Program Expense Direct M&G Expense Direct Fundraising Expense 73

74 Tier 1: Example of Specific Expenses - Fringe 74

75 Tier 1: Example of Specific Expenses - OTPS Direct Program Expense Direct M&G Expense Direct Fundraising Expense

76 Tier 2: Shared Expenses Percentages derived using staff level of effort calculation

77 Tier 1 +2: Specific and Shared Expenses for Program A Direct Program Expense Total: $133,800 Shared Expenses Allocated to Program Total: $20,366

78 Tier 3: Supporting Services (Overhead) Direct M&G and Fundraising Expenses Shared Expenses Allocated to M&G and Fundraising

79 Example: Grantee Operating Budget Tier 3: Overhead Tier 1:Direct Program Expense Tier 2: Shared Costs Allocated to Programs 79 #fiscalstrength

80 Funding for a Program Plan Full Cost Funder Support Gap #fiscalstrength

81 Examples 1. Raise unrestricted dollars 2. Indirect cost recovery 3. Develop an earned revenue stream the covers the full cost of the associated program or more 4. Build an overhead rate into requests for restricted program funding 81

82

83 INTERNAL FINANCIAL REPORTS

84 Best Practice Internal Financial Reports for Nonprofits Management narrative Budget-to-actual revenue & expenses for individual programs organization-wide Year-end forecast Balance sheet Cash flow projection Bold = information you could consider requesting 84

85 My Grantee Doesn t Have an Audit and Uses QuickBooks What Can I Reasonably Expect? For-profit software, but can be adapted for use by nonprofits With the right configuration QuickBooks can be used to: Track financial data for individual programs Track spending against restricted grants Generate a Balance Sheet Provide budget-to-actual reports for revenues and expenses 85

86 QuickBooks: Default Balance Sheet Defaults net assets to Retained Earnings ; cannot tell what is temp. restricted or LUNA Includes a Net Income sum line when within current year

87 What QuickBooks Can Do: Budget-to-Actual by Program

88 RESOURCES

89 Program-Based Budget Template + Online Tutorial

90 StrongNonprofits.org In collaboration with the Wallace Foundation, FMA has created a library of tools and resources to help organizations become fiscally fit Four Topic Areas: Planning Monitoring Operations Governance 90

91 Online Tutorials for StrongNonprofits.org FMA is offering complimentary orientation one-hour webinars that will feature a high-level overview of the website and drill down on several resources housed on the site. Upcoming webinar date: April 20 at 12:00pm PST June 2 at 11:00am PST To register, or check for future webinar dates, see the following webpage: 91

92 The Key to Long Term Financial Health Liquid Unrestricted Net Assets (LUNA), Hilda Polanco, New York Nonprofit Press, May 2012: long-term-financial-health-liquid-unrestricted-net-assets-luna- Operating Reserve Policy Toolkit for Nonprofit Organizations, sponsored by the National Center for Charitable Statistics, Center on Nonprofit and Philanthropy at the Urban Institute, and United Way Worldwide, September 15, The Nonprofit Starvation Cycle, Ann Goggins Gregory and Don Howard, Stanford Social Innovation Review, Fall Nonprofit Cost Allocation Toolkit: Six Steps to Finding the True Cost of Programs, Marta Garcia Abadia and Johnny Lin, The Bridgespan Group, June Investing for Impact: Indirect Costs are Essential for Success, National Council of Nonprofits, October

93 QUESTIONS? 93

94 Established in 1999 to serve not-for-profit organizations around the country Provides customized financial management, accounting, software, organizational development, human resources, and other consulting services Works directly with organizations or through funder-supported management and technical assistance programs FMA's mission is to empower not-for-profit organizations with the knowledge and skills to successfully serve their constituents and fulfill their missions Rebecca Coker, MPA New York Chicago Oakland Los Angeles /FiscalManagementAssociates linkedin.com/company/fiscal-managementassociates-llc