Taking Out the Mystery of Your Nonprofit s Financial Statements

Transcription

1 Taking Out the Mystery of Your Nonprofit s Financial Statements Presented by: Nonprofit and Social Services Practice Bridget Hartnett, CPA, PSA, Member in Charge June 16, 2016

2 Discussion: Not a Lecture Participation appreciated Speak up and be heard Share your thoughts and ideas Take from this day what you put in 1

3 Agenda for Today Build familiarity with financial operations Provide overview of accounting services Review the fundamental concepts and structure of nonprofit financial statements Understand how to analyze information Use cash flow projections Review IRS Form 990 Consider watchdog organizations Leverage strategic planning 2

4 Reading Nonprofit Financial Statements Purpose Provide useful information to present and potential funding sources, donors, and other users Guidelines The information provided should be comprehensible to those who have a reasonable understanding of the business and economic activities The primary focus of financial reporting is information about earnings and its components 3 Source: FASB Statement of Financial Accounting Concepts No. 1 Objectives of Financial Reporting by Business Enterprises

5 Reading Nonprofit Financial Statements Concepts Accounting information should be both relevant and reliable The information provided should be comparable and consistent Materiality whether an omission or misstatement would affect the judgment of a reasonable person relying on the information Conservatism adequate consideration of uncertainty and risks Source: FASB Statement of Financial Accounting Concepts No. 2 Qualitative Characteristics of Accounting Information 4

6 Types of Financial Statements Prepared by outside CPA Firm Audit Review Compilation Prepared internally Internal financial statements Internal budgets Dashboard reports Strategic planning documents 5

7 Audit Verification of specific information Communication with third parties Highest Level of Assurance Review of internal controls Tests of selected transactions 6

8 Levels of Audits GAAP Yellow Book Uniform Grant Guidance 7

9 Review Primarily consists of analytical procedures Good middle ground without work and expense of an audit Limited Assurance Inquiries of management team 8

10 Compilation Present management s information SAS No. 21 Accounting and Review Services: Clarification and Reconciliation Effective end of 2015 Lowest Level of Assurance Express no opinion or assurance No inquiries of management or analytical procedures 9

11 Audited Financial Statements of Nonprofit/Social Service Organizations Independent Auditor s Report Short Form (Lenders) Long Form (GAS) Financial Statements of Not-for-Profit Organizations Financial position (a.k.a. Balance Sheet) Activities (a.k.a. Income Statement or Profit & Loss Statement) Functional expenses Cash flows Footnotes 10

12 Statement of Financial Position Assets = Liabilities + Net Assets Snapshot at a point in time Current assets vs. Current liabilities Net assets accounting for contributions received and contributions made Permanently restricted Temporarily restricted Unrestricted 11

13 Statement of Financial Position Assets Cash Receivables Plant & Equipment Investments & Other Liabilities Payables Debt Other 12

14 A Primer on Net Assets: The 3 Buckets Temporarily Restricted Contributions Unrestricted Contributions Earned Revenue Permanently Restricted Contributions Temporarily Restricted Net Assets Net Assets Released Investment Income Permanently Restricted Endowment Unrestricted Net Assets Operating and on-operating Expenses 13

15 Statement of Activities Revenues, Gains, Other Support Expenses Program services Management and general Fund raising Activity for the reporting period 14

16 Statement of Activities Is the change in Net Assets positive or negative? Are there any one time transactions that caused revenues or expenses to increase/decrease? Are expenses comparable to prior years? Compare to prior years and other similar organizations 15

17 Most Common Problems on Statement of Activities Overstatement or misallocation of revenues Understated or misallocated expenditures Aggressive accounting policies Related party transactions 16

18 Financial Reports Accounting for Contributions Received and Made Unconditional transfers or promises to give Contributions must be recorded as revenue Unconditional promises recorded at present value Defines recognition of contributed services or donated goods 17

19 Aggressive Accounting Policies Use of very aggressive accounting principles or practices for income recognition, deferred revenues, capitalization and deferral of costs, amortization Manage earnings/change in net assets Lack of supporting documentation 18

20 Statement of Functional Expenses Report Expenses by Functional Categories Program types Management G & A Fund raising 19

21 Statement of Functional Expenses Allocation between programs Percentage of general and administrative expense Are expenses comparable to prior years? Compare to prior years and other similar organizations 20

22 Statement of Cash Flows Investing Activities Financing Activities Cash and Cash Equivalents Operating Activities Statement of Cash Flows Non cash Financing and Investing Activities 21

23 Statement of Cash Flows Are there significant changes in the organization s cash position? Can the organization meet its current obligations? How is the organization using its cash? 22

24 Notes to Financial Statements Unusual charges Changes in accounting principles Corrections of errors in previously issued financial statements Discontinued operations or combinations Debt(new or mounting) Pension/retirement plans (funding) Commitments and contingencies (lawsuits) Subsequent events 22

25 Why is Managing Cash Flow Critical for Nonprofits? Government payments may be late Foundation grants are usually paid in one or two lump sums Many nonprofits experience a seasonal demand for program services Time gap between providing service and receiving payment for service 23

26 Cash Management The process of forecasting, collecting, disbursing, investing and planning for the cash an organization needs to operate smoothly 24

27 Cash Flow Management Managing the flow of cash into, and out of, an organization 25

28 Cash Flow Cycle Support/Grants/Donations Accounts Receivable CASH Accounts Payable Cash Salaries/Related Benefits Purchases/Disbursements Investments/Cash Reserves 26

29 Cash Flow Projection A tool that is used to facilitate cash flow analysis A forecast of all cash received and expended over some future period, ideally 12 months A roll forward 12 months (e.g. June to May then July to June, etc.) Based on Organization s annual operating and capital budgets Takes into account Organization s cash reserves Funds invested in short-term securities, savings, and money market accounts 27

30 Cash Flow Projection Dynamic constantly changing Essential tool in the financial decision making of the Board of Directors and Finance Committee Timely information for Organization leadership to proactively make decisions and provide guidance 28

31 Budget vs. Projection Budget: A cash map showing the amount and the timing of cash receipts and cash disbursements on a daily, weekly, or monthly basis (estimated) 29

32 Cash Flow Planning Starting point is budget Forecast the anticipation of income Consider timing of receipts Terms for contracts Timing of campaigns 30

33 Cash Flow Planning Forecast the Schedule of Expenditures Payroll Employee benefits Other expenditures Investments Capital expenditures 31

34 Cash Flow Planning Starting cash Add forecasted weekly receipts Deduct weekly expenditures Ending cash Tailor to the needs of the Organization Update for actual 32

35 Managing Cash Deficits Increase or accelerate cash inflows Decrease and/or slow down cash outflows Access additional cash through financing Line of credit Bridge loan Increase fundraising efforts Liquidate investments 33

36 Managing Cash Surpluses Purchasing power Cash balances that are not needed in the immediate future should be put to work earning interest Factors to consider: The degree of liquidity desired The return provided by the interest rate The degree of risk 34

37 Create a Cash Flow Forecast A cash flow forecast will assist you in managing through the period of tight cash A simple Excel-based cash flow forecast is easy to utilize A good (free!) Excel-based cash flow forecast with directions can be downloaded here: or 35

38 36 Cash Flow Worksheet

39 Gotchas to Remember Make sure you know your true costs of expenditures Make sure you know what your true gross margin is by program (lowest revenue component) 37

40 Gotchas to Remember Never use the IRS as an unauthorized lender File 941 tax reports on time Pay 941 taxes on time Monetary penalties are very high for: Failing to file 941 tax returns on time Failing to pay tax on time Lapsing insurance payments 38

41 How Much Cash Do You Need? Rule-of-Thumb Impact of Working Capital Levels on Operations NOTE: Reality can be different, especially if funders are reliable and cash flow is even Mos. of Expenses Covered by Cash Operating Situation 0 Crisis - management is scrambling for cash. Delaying vendors. Checking over-drafts <1 month Cash is tight - Line of credit source of liquidity. Delaying vendors 1-3 months Room to breath Can do some long-term thinking Little room for rainy days 3+ months Handles risk Ability to withstand shocks such as large facility repairs, funding cuts and possibly recessions 39

42 Overview of IRS Form Tax Year (Fiscal year beginning in 2014 and ending in 2015) If your Organization s gross receipts are: Form To File Normally equal to or less than $50, N 40 Equal to or more than $50,000 and less than $200,000 and total assets are less than $500, EZ Equal to or more than $200,000 or more, and Total assets are equal to or more than $500,

43 Report to the Public Why is it needed? Nonprofit sector is large part of GDP Previous disclosure was limited Scandals Abuses in missions, transactions, self-serving Initiatives 41

44 What The IRS Wants To Know 990 States the Case Organized as a tax exempt Operating as a tax exempt Are there taxable transactions that need to be reported? Is there compliance with tax laws? 990 Tells All What Congress wants to know What IRS thinks John Q. Public wants to know 42

45 What The Public Wants To Know Form 990 = Information Return; Not Tax Return Must be complete and accurate Open to the public Includes financial information Discloses insider and related party information Describes the programs, accomplishments and activities Reports on the governance, management and policies Tells potential donors how the Organization is spending its resources 43

46 New/Improved 990 (2008) (Last Major Revision 1979) Stated Goals: Improve Transparency Disclosure Improve Compliance Questions & Answers Minimize Burden 44

47 What Does This Mean? Increased disclosure + transparency = ability to follow the $ Compliance can be monitored better with direct yes and no Q&A which will create a greater awareness Governance highlights should mean policies will be put in place so that responsible persons will know what needs to be done in order to act as a good fiduciary Questions need answers; answers need explanations (Schedule O) 45

48 Today s Form 990 Core Form 11 pages with a summary at the beginning Schedules to provide additional information 46

49 Major Emphasis on Governance, Management & Disclosure Number of voting members O,D,T or KE have family or business relationship Management delegated to others Any change to organizational documents Fraud Minutes Chapters Conflict of interest policy Whistleblower Document destruction policy Books and records Compensation of officers and key employees policy 47

50 48 Nonprofit Watchdog Groups

51 A Few Words on Strategic Thinking/Planning Think Outside of the Box 49

52 Think Outside of the Box Remember Ask Questions! Ask Questions Often! Consider New Approaches! 50

53 51 Questions

54 Contact Information Bridget Hartnett, CPA, PSA, Member in Charge Nonprofit and Social Services Practice Ron Matan, CPA, CGMA, PSA, Member Nonprofit and Social Services Practice Sobel & Co. LLC 293 Eisenhower Parkway Livingston, NJ (973) Visit our website for additional nonprofit resources and information: 52