6/15/2015. Review the board s role to provide financial leadership. Identify six key financial questions to ask and acquire tools to answer them

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1 Review the board s role to provide financial leadership Identify six key financial questions to ask and acquire tools to answer them Apply financial information to your organization Duty of Care Act in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care a prudent person in a like position would exercise in similar circumstances. Duty of Obedience Follow the organization s governing documents, carry out the organization s mission, assure that funds are used for lawful purposes, and comply with state and federal laws that relate to the organization and the way in which it conducts its business. Duty of Loyalty Put the good of the organization first and avoid engaging in transactions with the organization from which the director will benefit. 1

2 Financial Management Musts Comply with all federal and state financial regulations: Independent audit if total revenues exceed $750,000 Complete, approve and file Form 990 Complete, approve and file MN Charitable Annual Report Make available three most recent Form 990s to general public Financial Management Shoulds o Prepare and approve budget on annual basis o Receive timely, consistent, and accurate financial reports o Review and understand financials with key staff o Implement separation of duties and create written financial procedures Statement of Financial Position o Snapshot of financial position at a point in time o Assets = Liabilities + Net Assets Statement of Activities o Financial activity during a specified period o Revenue - Expenses = Change in Net Assets Budget vs. Actuals o Comparison of planned activities to actual o YTD Actuals YTD Budget = YTD Variances Cash Flows Projection o Project peaks and valleys from cash transactions o Beginning Cash + Cash Receipts Cash Disbursements = Ending Cash What is our cash position? Can we pay our debts? What restrictions are there on our net assets? What are the reasons for an operating surplus or deficit? How reasonable and effective are our internal controls? What is the key information in our Form 990? 2

3 What is our cash position? Cash is the most important asset, it funds operations and pays debts Too much not always good o FDIC limit of $250,000 o Return on checking/savings accounts little or zero Board Skills Practice: o Days Cash on Hand o Cash Flows Projection Number of days an organization has of cash to cover operating expenses Days Cash on Hand = Cash + Short-Term Investments Operating Expenses 365 x (N/12) Calculate Diversity Wilderness days cash on hand Benchmark varies, generally 90 to 270 days 3

4 Timing of future cash received and paid Plan for cash shortfalls and surpluses Review Diversity Wilderness handout: o What can you tell about Diversity Wilderness cash flows projection? o What actions would you consider to ensure operations remain uninterrupted? Can we pay our debts? Make sure enough resources are available to meet current obligations Timely payment of vendors makes for good working relationships Be familiar with types of current and long-term debt Board Skills Practice: o Current Ratio 4

5 Ability to pay short-term obligations Current Ratio = Current Assets Current Liabilities Calculate Diversity Wilderness current ratio Benchmark ratio varies, generally greater than 1.0 What restrictions are there on our net assets? Not all assets are available to be used however the organization needs them to meet its mission Limits may be placed on what is owned from the existence or absence of donor-imposed restrictions Three Net Asset classes: o Unrestricted o Temporarily Restricted o Permanently Restricted Board Skills Practice: o What does the breakdown of Wilderness Diversity s net assets tell you? 5

6 No restrictions on use except to advance mission May divide into Undesignated & Board Designated Examples: o General contributions o General operating grants o Gains/Losses on investments o Earned income o Membership dues Restricted for specific use or passage of time Amounts released from restrictions moved to unrestricted net assets Examples: o Program grants o Capital campaign contributions Cannot be released by either time or use Donor or courts may release restriction Examples: o Endowment fund contributions o Real asset for specific use 6

7 What are the reasons for an operating surplus or deficit? Results from operating activities are an indication of the financial direction of an organization Focus on major categories, discuss large variances Surplus not always good, deficit not always bad Budget is a guide and not the law Board Skills Practice: o What story can you tell from the operating surplus of Diversity Wilderness? o How does current depreciation expense affect future budgets? How reasonable and effective are our internal controls? 7

8 Gauge whether the risk of loss due to fraud, misuse, and abuse has been minimized Then, assess how written policies and procedures have been implemented into daily operations There exist inherent limitations on internal controls Consider the opportunity for internal audits and external reviews Internal Controls is a process designed to provide reasonable assurance regarding the achievement of organization objectives in three categories: 1) Effectiveness and efficiency of operations 2) Reliability of financial reporting 3) Compliance with applicable laws and regulations Fraud is the intent to deceive for personal or organizational gain, Critical for board and executive staff to set proper tone at the top Opportunity ability to commit fraud Motivation reason to commit fraud Rationalization justification for fraud 8

9 Complete separation of duties means no one employee performs multiple functions Four Functional Areas: 1) Custody of Assets 2) Authorization of Transactions 3) Recording of Transactions 4) Reconciliation Recommended for small and mid-sized organizations to incorporate compensating controls What is the key information in our Form 990? 9

10 Part I Summary o Activities and Governance o Revenue, Expenses and Net Assets Part III Program Service Accomplishments Part VI Governance, Management and Disclosure o Conflict of Interest Policy o Whistleblower Policy o Document Retention and Destruction Policy o Process for Executive Compensation Part VII Compensation of TDOKEs & HCEs Part IX Statement of Functional Expenses Schedule A Public Support Test o 33 1/3% Support Test o 10% Facts and Circumstances Test Schedule O Supplemental Information American Institute of Certified Public Accountants Association of Certified Fraud Examiners BoardSource Internal Revenue Service MAP for Nonprofits MN Council of Nonprofits Nonprofits Assistance Fund Nonprofit Finance Fund 10