Nonprofit Financial Statements. What Every Executive Director Must Know

Transcription

1 Nonprofit Financial Statements What Every Executive Director Must Know

2 Today s Lesson Plan 1. Introductions 2. Financial Reporting Overview 3. 4 Financial Reports every Executive Director Must Know 4. Presenting to Your Board & Funders 5. Wrap Up * Please Submit Questions Thru GoToWebinar Question Tool 2

3 Lesson Topic 1 of 5 : Introductions Meet Your Instructors Host Ron Kwak, Director of Strategy & Marketing, Jitasa Ron has over a decade of business process consulting, marketing, and business strategy experience across for-profit and nonprofit sectors. He holds a B.A. in Math & Economics from Northwestern University and an MBA from Kellogg School of Management Ron lives out his spirit of serving others through Zimele USA a nonprofit he founded that empowers women in South Africa via microsavings and microbusiness programs. Instructor Jeff Russell, CEO & Founder of Jitasa Jeff has over a decade of consulting, client management and back office experience running service centers handling $250M worth of transactions each year. Jeff also served as the Executive Director for an international development nonprofit, The Momentum Group. Jeff is a Georgia Tech Industrial Engineer with a Yale MBA. 3

4 Lesson Topic 1 of 5 : Introductions Jitasa is the first and largest national accounting services provider exclusively focused on the nonprofit sector We are currently serving 200+ nonprofits Arts & Humanities Education Environment Health & Medicine Human Services International Affairs Religious / Churches Youth Development Associations / Foundations from federations to start ups in every sector 4

5 Lesson Topic 2 of 5: Financial Reporting Overview Inseparability of Financial & Program Understanding For nonprofits, financial sustainability & program sustainability cannot be separated Jeanne Bell CEO of Compasspoint 5

6 Lesson Topic 2 of 5: Financial Reporting Overview The Path to Financial Understanding Reports Designed to Your Audience internal reporting (monthly basis) Executive Director should understand finances focus on cash flow management review spending across all categories ensure giving trends are on target board reporting (quarterly basis) higher level reporting with supporting detail 6

7 Lesson Topic 2 of 5: Financial Reporting Overview The Path to Financial Understanding Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Provide reporting insights to drive decision making The investment in a solid finance accounting infrastructure will help you achieve your mission! 7

8 Lesson Topic 2 of 5: Financial Reporting Overview The Path to Financial Understanding Prerequisites for Reliable & Insightful Reporting key to useful financial statements is accurate and reliable financial data. reliability is important, so run reports on a regular schedule. accuracy is important. your reports are only as good as your data entry, i.e. bookkeeping. garbage in = garbage out 8

9 Lesson Topic 2 of 5: Financial Reporting Overview The Path to Financial Understanding Prerequisites for Reliable & Insightful Reporting 1. Accurately Capture & Index Transactions 2. Capture Necessary Layers 3. Analyze Financials Different Views by Need 9

10 Lesson Topic 2 of 5: Financial Reporting Overview Step 1. Accurately Capture & Index Transactions Important to capture each transactions and baseline / standard detail Basic Transaction Details Transaction Type: Revenue or Expense Timing Amount Revenue: Donor Expense: Vendor Expense: Account Code Revenue Transaction Expense Transaction 10

11 Lesson Topic 2 of 5: Financial Reporting Overview Step 2. Layering Capture additional information needed for reporting / filings Basic Transaction Details Transaction Type: Revenue or Expense Timing Amount Revenue: Donor Expense: Vendor Expense: Account Code Revenue Transaction Expense Transaction Additional Layers Associated Program(s) Associated Grant Program Grant / Donor 11

12 Lesson Topic 2 of 5: Financial Reporting Overview Step 3. Analyze Financials Different Views by Need Expense Tracking Program 1 Program 2 Program 3 Expenses Program 4 By Year Grant / Donor 1 Grant / Donor 2 FY 2013 Grant / Donor 3 Grant / Funder Reporting Expense 1 Expense 2 Grant(s) Expense 3 Program Cost Grant / Donor 1 Grant / Donor 2 Grant / Donor 3 FY 2012 Grant / Donor 1 FY 2013 Program 12

13 The 4 Financial Reports every Executive Director Must Know Produced on a Monthly Basis 1. Statement of Financial Position (Balance Sheet) 2. Statement of Activities (Profit & Loss) 3. Budget vs. Actuals Statement 4. Statement of Functional Expenses 13

14 Report 1 of 4: Statement of Financial Position Introduction shows the financial state of an entity at a specified point in time equivalent to balance sheet in for-profit sector 3 main portions Assets Liabilities Net Assets (Equity) assets = liabilities + net assets 14

15 Report 1 of 4: Statement of Financial Position Assets main line items cash accounts receivable contributions receivable other assets fixed operating asset 15

16 Report 1 of 4: Statement of Financial Position Liabilities main line items payables accrued liabilities 16

17 Report 1 of 4: Statement of Financial Position Net Assets main line items unrestricted temporarily restricted permanently restricted 17

18 Report 1 of 4: Statement of Financial Position Grant Tracking - The Basics 2 forms: revenues first or expenses first varies by accounting system Jitasa Webinar Grant Tracking 101 requires a 3 rd attribute per transaction ultimate goal is to pull a Statement of Financial Position per grant 18

19 Report 1 of 4: Statement of Financial Position defensive interval i.e. cash on hand Key Metrics for Financial Analysis a measure of cash on hand if nonprofit were to cease receiving donations cash + receivables + marketable securities defensive interval = average monthly operating expenses debt ratio a measure of a nonprofit s solvency (lower is better). total liability debt ratio = total assets 19

20 Report 1 of 4: Statement of Financial Position Key Metrics for Financial Analysis accounts payable aging indicator a measure of a nonprofit s financial health (i.e. ability to pay its bills) AP aging indicator = accounts payable x 12 total expenses lower the indicator, faster the organization pays its bills best practice < 1 % funds unrestricted a measure of a nonprofit s financial flexibility % funds unrestricted = unrestricted funds total net assets higher the number, more cash freed up for overhead, etc 20

21 Case Study Organizational Background Jitasa Justice is a human services nonprofit headquartered in the US with programs and operations in the US and overseas. Financial Goals Context Jitasa Justice has been in operations for 5 years and after successfully developing its program and operating model has plans for rapid expansion and growth. They are looking to understand how to better leverage their financial data and history as they make key strategic growth and day to day organizational decisions. 21

22 Report 1 of 4: Statement of Financial Position Situational Context In preparation for their annual strategic planning process, Jitasa Justice is preparing and examining their year end financials. Statement of Financial Position 1H 2012 Analysis of Key Metrics defensive interval 3.96 months OPEX debt/ asset ratio 0.46 AP aging 1.81 months to pay bills % funds unrestricted 66% Assessment / Conclusion healthy cash position 22

23 Report 2 of 4: Statement of Activities Introduction funds earned (revenues) vs. funds spent (expenses) equivalent to profit & loss or income statement in for-profit sector revenues analyze each stream as a % of total revenue diversification sustainability of future revenue streams expenses analyze each stream as a % of total expenses identify major expenses further analysis from other statements 23

24 Report 2 of 4: Statement of Activities Introduction contributions support earned revenues other revenues personnel related expenses non personnel related expenses non GAAP expenses 24

25 Report 2 of 4: Statement of Activities Key Metrics for Financial Analysis change in net assets a measure of a nonprofit s profitability or sustainability change in net assets = net asset period 2 net asset period 1 savings indicator savings indicator = revenue expenses total expenses if savings indicator > 0, adds to net asset balance if savings indicator < 0, depletes net asset balance impact of savings indicator varies by organization best practice: have 3-6 months of unrestricted cash in bank 25

26 Report 2 of 4: Statement of Activities Analysis of Key Metrics Statement of Activities 1H 2012 revenue diversification sustainability expenses identify major expenses need further analysis change in net assets positive savings indicator =.21 26

27 Report 2 of 4: Statement of Activities Analysis of Key Metrics revenue trend year to year decline Statement of Activities 1H H H 2011 expense trend year to year increase change in net assets year to year decline 27

28 Report 3 of 4: Budget vs Actuals Introduction another layer of Statement of Activities plan vs reality review major discrepancies definition of major varies by organization review any line item with budget but no actuals 28

29 Report 3 of 4: Budget vs Actuals Key Metrics for Financial Analysis (> $10,000) revenue > budget special events less diversification Budget vs Actuals 1H 2012 expenses < budget contract service change in net assets > budget 29

30 Report 3 of 4: Budget vs Actuals Situational Context For 2013, Jitasa Justice received an ABC grant with expense reporting requirements. Below is financial report of their YTD progress against the ABC Grant. Jitasa Justice ABC Grant Donor: Federal Government TOTAL Actual Budget Variance % of Budget Income 4500 Revenue from government grants 50,000 75,000 (25,000) 67% Total Income $ 50,000 $ 75,000 $ (25,000) 67% Expenses 7200 Salaries & related expenses 3,557 17,298 13,741 21% 7500 Contract service expenses 277 2,119 1,842 13% 8100 Nonpersonnel expenses 253 1, % 8300 Travel & meetings expenses 209 1, % 8500 Other expenses 63 2,494 2,431 3% 8700 Program Expenses 50,453 49,141 (1,312) 103% Total Expenses $ 54,812 $ 73,455 $ 18,643 75% Net Income $ (4,812) $ 1,545 $ (6,357) -311% 30

31 Report 4 of 4: Statement of Functional Expenses detailed expense analysis breakout expenses into 3 general categories programs administration fundraising track each program and special event separately 31

32 Report 4 of 4: Statement of Functional Expenses Introduction measurement of a nonprofit s efficiency known as net income in for-profit sector world key ratio % programs vs (% admin+% fundraising) 80/20 rule 32

33 Report 4 of 4: Statement of Functional Expenses Financial Comparison Examples 33

34 Report 4 of 4: Statement of Functional Expenses Allocation of Expenses methodology must be documented, reasonable and consistent most popular method based on employee time approved by Executive Director and auditor examples of possible allocated expenses salaries rent office expenses 34

35 Report 4 of 4: Statement of Functional Expenses Situational Context In preparation for their annual strategic planning process, Jitasa Justice is examining their year end snapshot of their Functional Expenses to examine their allocation of spend. Statement of Functional Expenses 1H

36 Report 4 of 4: Statement of Functional Expenses Statement of Functional Expenses 1H 2012 Analysis of Key Metrics detailed overhead analysis; can problem be corrected in 2H09? allocated expense methodology extenuating, one-time circumstances Assessment / Conclusion below best practice benchmark (80%) assess allocation methodology re-allocate vs accept 36

37 Additional Financial Monthly Reporting program analysis event analysis budget vs forecast donor analysis 37

38 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tips 1. focus before flow 2. keep it simple 3. send a preview 4. prepare & relax 38

39 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tip 1: Focus Before Flow 1. What is the story you want to communicate? First get the heart of the story straight What is the purpose of the discussion? Is there a decision you are trying to reach? 2. Write out the flow for your story Write an outline / story board Context is important. Know your audience, where they are coming from, & WIFM 3. Build Your PowerPoint Slides Write your outline across the slide headers One idea / message per slide 39

40 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tip 2: Keep It Simple 1. Start with an Agenda & Executive Summary 2. Do NOT copy entire Excel spreadsheets onto your slide Instead use summary charts and graphs to tell your financial stories Bring life to numbers: use of key performance metrics / ratios with trends and benchmarks Put the detailed financials in the appendix 40

41 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tip 2: Keep It Simple 1. Start with an Agenda & Executive Summary 2. Do NOT copy entire Excel spreadsheets onto your slide Instead use summary charts and graphs to tell your financial stories Bring life to numbers: use of key performance metrics / ratios with trends and benchmarks Put the detailed financials in the appendix 3. Simplify and Educate Nonprofit accounting is very different from for-profit accounting, you may need to educate / translate concepts i.e. Balance Sheet = Statement of Financial Position 41

42 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tips 3 & 4 Send a Preview Send the board packet at least a week before your board meeting Tee up agenda items and highlight critical decisions / desired outcomes Provide background reading (homework) to make the best use of meeting time Prepare & Relax Less about remembering do s and don ts of public speaking / giving a presentation More about preparing a good story and knowing the story / talking points > Relax! 42

43 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presentation Book Recommendations 43

44 Lesson Topic 5 of 5: Wrap Up Who We Are Our Two Passions 1. Love for Numbers 2. The Spirit of Serving Others 44

45 Lesson Topic 5 of 5: Wrap Up Why We Exist We do what we do best so you can do what you do best 45

46 Lesson Topic 5 of 5: Wrap Up Our Solutions BOOKS & ACCOUNTING FINANCIAL ANALYSIS ONSITE CONSULTING 46

47 Lesson Topic 5 of 5: Wrap Up Educational Resources Additional Webinar Topics Nonprofit Financial Statements for Executive Directors Grant Tracking 101 The Power of Financial Analysis for Decision Making Performance Management to Drive Fundraising Educational Updates Regulatory Updates: IRS, State, and Payroll / Tax Year End: What To Know Best Practice Tips & Deep Dives

48 Lesson Topic 5 of 5: Wrap Up Questions & Contact Information Ron Kwak, Director of Strategy & Marketing, Jitasa (e) ron.kwak@jitasa.is (o) Jeff Russell, CEO & Founder, Jitasa (e) jeff.russell@jitasa.is (o)

49 Lesson Topic 5 of 5: Wrap Up Closing Thoughts strong financial management is essential any nonprofit s success engage your board s finance members at a minimum, develop a basic understanding of key F&A terms build, run, analyze = financial success 49