Consulting Accounting Technology

Transcription

1 Advanced Financial Review May 20, 2009 Consulting Accounting Technology

2 Advanced Financial Review May 20, 2009 AGENDA 8:00 8:30 Registration 8:30 10:00 An Audit Basic Financial Statements Revenue Recognition Financial Statement Analysis 10:00 10:15 Break 10:15 10:30 Forecasted Cash Flows 10:30 11:00 Case Study on Cash Flows 11:00 11:30 Discussion on Cash Flows 11:30 12:00 Capital Structure Recap positive signs and red flags Questions

3 Course Material

4 Advanced Financial Review Key Components Auditor s Opinion CONSULTING ACCOUNTING TECHNOLOGY The Financial Statements Are Named Are Management s Responsibility The Audit In Accordance with GAAS Provides a Basis for the Opinion The Audit Opinion In Accordance with GAAP Consistently Applied ROLE OF THE AUDITOR Two terms you may hear when reviewing financial statements or working with accountants/auditors are:» GAAP Generally Accepted Accounting Principles» GAAS Generally Accepted Auditing Standards GAAP may be defined as the rules and practices necessary at a particular time that represent accepted accounting principles and practices. Accounting principles that encompass both written and unwritten rules are commonly referred to as GAAP. GAAP is dynamic: the rules are constantly changing. GAAS can be defined as the minimum level of performance required to measure the quality of an audit by an independent auditor. The auditor must meet professional auditing standards that require the constant exercise of professional judgment. GAAS are the minimum guidelines that set the tone for the auditing profession Raffa 1

5 Advanced Financial Review FINANCIAL STATEMENTS (And Financial Statement Analysis) Basic Financial Statements: Reporting on Business Activities Statement of Financial Position At a Point in Time Statement of Financial Position At a Point in Time Statement of Activities For a Period of Time Statement of Cash Flows For a Period of Time Beginning of the Year One Year Period End of the Year (January 1) (December 31) Statement of Financial Position (balance sheet) is a snapshot, as it represents the financial position of a business entity as of (or at ) a certain day. It needs to be compared to other snap shots as of a certain date so as to provide meaningful information on changes in the financial position of the business entity. For that reason, the statement of financial position from the previous year is usually provided. This is called a comparative financial statement. Statement of Activities (income statement) is more of a movie picture, as it presents certain activities of the business entity that occur over a period of time, usually one year. It presents the revenue and support less the related expenses (the money spent against that revenue or support) and the resulting changes in net assets (or income or excess of revenue over expenses). Statement of Cash Flows also presents activities of the business that occur over a period of time. It provides information about the sources and uses of the cash of the organization. Other Financial Statements Statement of Functional Expenses This statement is not always required under GAAP (Generally Accepted Accounting Principles). It is meant to show the details of each of the programs of an organization by natural expense category (e.g., salaries, printing, travel, etc.) Raffa 2

6 Advanced Financial Review The Statement of Financial Position (see page 2 of the sample financial statement handout) Notice date - it is "as of" or "at" date: The purpose of this statement is to show the financial position of the organization on a specific date. The date shown or the year-end date is usually a low business cycle. Looking at the statement of financial position (on page 2 of the sample financial statements given to you as a handout), note the three main elements of the statement as of June 30, 2002: Assets (resources of the organization) - Liabilities (amounts owed to = outsiders) Net Assets (amount of the resources owned by the organization) In 1995, the Financial Accounting Standards Board (FASB) issued new accounting standards for the nonprofit industry (SFAS #116 and 117). The effect of these changes is to shift financial reporting away from the former fund accounting practices that grouped assets, liabilities and remaining balances by purpose and use to a net assets classification system based on donor-imposed restrictions. The Net Asset classes are: CONSULTING ACCOUNTING TECHNOLOGY Three Classes of Net Assets Unrestricted general operating support Temporarily Restricted donorimposed restriction as to use or time Permanently Restricted endowment funds; donor stipulates that gift can never be used Unrestricted Amounts that are free of all donor-imposed restrictions and are therefore available for use by the organization, subject only to those broad limits that relate to the nature of the organization, its by-laws or its contractual agreements. Unrestricted net assets represent the portion of expendable funds that are available for support of the nonprofit s operations. The board of the organization can internally designate these amounts, if it so chooses, to be reserved for a particular purpose as defined by the board (e.g., operating reserves, a future program, payment of a debt due in the future, etc.) Temporarily Restricted Amounts that are specifically restricted by donors or grantors for various purposes, programs or to future periods. The restriction is removed through the proper use of the funds for the particular purpose or program as stipulated by the donor, or with the passage of time. Permanently Restricted Endowments are gifts received with a donor-imposed limitation that may never be removed by time or action of the organization. These amounts are typically invested in perpetuity and only the income can be expended. Sometimes the donor may restrict the use of the income from the endowment for a particular purpose, requiring the investment earnings to be treated as temporarily restricted funds Raffa 3

7 Advanced Financial Review However, only those amounts or assets that represent a donor s unconditional promise to give are reflected in the financial reports. (See also page 7, Classification of Net Assets, in the sample financial statement handout) Fee for Service (Exchange) vs. Contribution Exchange vs. Contribution CONSULTING ACCOUNTI NG TECHNOLOGY Exchange reciprocal transfers; each party to the transaction received something of approximately equal value Contribution unconditional voluntary transfer of something of value in which the donor gets no direct benefit MATCHING PRINCIPLE Exchange Exchange transactions are reciprocal transfers in which each party receives and sacrifices something of approximately equal value (examples: purchases of assets or payments of employees salaries clearly are exchange transactions: each party gives up and received equivalent economic value). Contribution (paragraph 5 of FASB #116) An unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. Other assets include securities, land, buildings, use of facilities or utilities, material and supplies, intangible assets, services, and unconditional promises to give those items in the future. For an Exchange Transaction the Matching Principle applies It is a fundamental concept of accrual basis accounting that offsets revenue against expenses on the basis of their cause-andeffect relationship. It states that, in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period: As an example sales cause the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense Raffa 4

8 Advanced Financial Review Indicators for Distinguishing Contributions from Exchange Transactions Indicator Exchange Transaction Contribution Nonprofit organization s intent in soliciting the asset Provider s expressed intent about the purpose of the asset to be provided Methods of delivery of the assets to be provided by the nonprofit organization to third-party recipients Method of determining payment amount Penalties assessed if the nonprofit organization fails to make timely delivery of assets Delivery of assets to be provided by the nonprofit organization Nonprofit organization asserts that it is seeking resources in exchange for specified benefits. Provider asserts that it is transferring resources in exchange for specified benefits. Delivery method is specified by the provider. Provider pays the nonprofit organization an amount equal to the value of the assets provided by the organization of the assets cost plus markup, based on the quantity of assets to be provided. Nonprofit organization is penalized for nonperformance. Provisions for economic penalties exist beyond the amount of payment. Assets are to be delivered to the provider or to individuals or organizations closely connected to the provider. Nonprofit organization asserts that it is soliciting a contribution. Provider asserts that it is making a contribution to support the nonprofit organization s programs. Delivery method is at the discretion of the nonprofit organization. Provider determines the amount of payment. Nonprofit organization is not penalized for nonperformance. Penalties are limited to the delivery of assets already produced and the return of the unspent amount. Assets are to be delivered to individuals or organizations other than the provider Raffa 5

9 Advanced Financial Review Indicators for Determining Contribution And Exchange Portions of Membership Dues Indicator Exchange Transaction Contribution Nonprofit organization s expressed intent concerning purpose of dues Extent of benefits to members Nonprofit organization s service efforts Duration of benefits Expressed agreement concerning refundability of dues payment Request describes the dues as providing economic benefits to members or other organizations or individuals designated by or related to the members. Substantive benefits available to members (such as publications, admissions, educational programs, or special events) also may be available to nonmembers for a fee. Dues request describes the dues as being used to provide benefit to the general public or to the nonprofit organization s service beneficiaries. Benefits to members are negligible. Nonprofit organization s benefits Nonprofit organization provides are provided primarily to members. services to members and nonmembers. Benefits are provided for a defined Duration of benefits is not specified. period, and additional payment is required to extend benefits. Payments is fully or partially refundable if member withdraws from membership. Payment is not refundable to member Raffa 6

10 Advanced Financial Review Contributions Contributions Received CONSULTING ACCOUNTING TECHNOLOGY No Donor-Imposed Restrictions Unrestricted Support Recognize revenue when received or promised Donor-Imposed Restriction Temporary Donor-specified use is satisfied by fulfillment of purpose or passage of time Permanent Donor imposed restriction cannot be removed by the NPO Recognize revenue when received or promised Donor-Imposed Conditions Specifies a future or uncertain event Contribution depends on overcoming a barrier Recognize revenue as condition is met Unconditional Promise to Give A no strings attached written or oral agreement to contribute cash or other assets to the nonprofit organization. Although the donor may specify a use or a time period for the use of the funds given, it is not a condition that the nonprofit organization is unlikely to meet (i.e., an environmental group receives a grant to complete a clean water project). Conditional Promise to Give The written or oral agreement to contribute will depend on the occurrence of a specified future or uncertain event (i.e., an NPO is given a grant for an annual conference only if the conference attracts 30% more participants this year. A three-year grant is awarded conditional each year on the grantor approving the report results of the prior year and the budget for the coming year. A large grant is awarded conditional on the NPO obtaining a matching grant from another donor within the next year) Raffa 7

11 Advanced Financial Review Is it an exchange of a contribution? If a CONTRIBUTION, then - Is it conditional or unconditional? If UNCONDITIONAL, then - Is it unrestricted, temporarily restricted or permanently restricted? 1. A foundation promises to give $10,000 to an NPO in support of its general operations. 2. A private medical practice purchases advertising space in an NPO s trade publication for its market value. 3. A corporation contributes $20,000 to an NPO to purchase computers to upgrade an NPO s current systems. 4. A foundation awards an NPO involved with healthcare issues $100,000 to prepare a Medicare study among the elderly. 5. A board member pledges $10,000 if the rest of the board will contribute $50,000 by the end of the year. 6. A foundation donates $450,000 for a three-year grant at $150,000 each year. 7. A foundation awards a three-year grant of $150,000 ($50,000 per year) to support a homeless shelter s food program. The second and third installments are contingent upon the NPO having operated at a surplus for the preceding year. 8. The Department of Housing and Urban Development enters into a contract with an NPO for it to put on a seminar on its behalf to train Hope 6 housing recipients. 9. A wealthy individual contributes $100,000 to a school to be held in perpetuity. The earnings are to be used as scholarships for financially needy students. 10. A donor gives $10,000 to a NPO with instructions that it must give the money to the ABC Charter School? 2009 Raffa 8

12 Advanced Financial Review Agency Agreements Situation in which a donation is made to an NPO in which the donor explicitly specifies that the donation must go to another NPO. If no variance power is given by the donor to the initial donee (that is the NPO who receives the gift is required to give the funds to another NPO specifically named by the donor), then no income is to be recognized by the NPO who is the initial recipient of the gift. Instead the NPO records an asset and a liability. (SFAS #136) Analysis of the Statement of Financial Position A classified statement of financial position will separate current assets and liabilities from long-term assets and liabilities. Current assets are defined as those assets available to meet current obligations. They are typically the liquid assets, such as cash, and those that will become liquid (or be converted to cash) within one year, such as accounts receivable. Current liabilities are those obligations that are due to be paid within the next year. Ratios that measure liquidity: Net Working Capital Indicates the ability to meet short-term obligations by reporting the difference between the current assets over/under the current liabilities. Current Ratio Indicates the ability to pay current liabilities as they mature by providing the ratio of current assets to current liabilities. A ratio of 1 to 1 or greater corresponds to positive net working capital. CONSULTING ACCOUNTING TECHNOLOGY Basic Analysis for Financial Position Net Working Capital Ratios Current Ratio Quick Ratio Debt to Net Assets Fluctuation Analysis Comparison of Current Year Balances to Prior Year Balances Points to remember when working with ratios Consider the type of NPO Consider the other ratios Current Current Assets Liabilities Difference Net Working Capital $1,715 less $877 equals $838 OR Current Ratio $1,715 over $877 equals 1.96 to 1 This means that this NPO has almost twice as many current assets than are required to pay off its current liabilities. (See page 2 Statement of Financial Position in the sample financial statement handout) Quick (or Acid test) Ratio This ratio may be a better measurement of a nonprofit s liquidity as it measures the current assets that can quickly be turned into cash, removing assets such as inventory. (For the sample financial statement handouts, you would reduce the current assets of $1,715,400 by the inventory of $100,600 to get the more liquid current assets of $1,614,800 and divide that by $877,000 of current liabilities to arrive at the quick ratio of 1.8 to 1.) 2009 Raffa 9

13 Advanced Financial Review Other ratios for the statement of financial position include: Debt (Liabilities) to Net Assets Ratio This ratio indicates how much of the organization s net worth is comprised of debt. The higher the percentage, the more the organization relies on borrowed money for its ongoing operations. Debt can be a sign that the organization could have trouble meeting its obligations; however, each situation (and ratio) needs to be assessed within the specific context of the nonprofit and in light of other key ratios. (For the sample financial statement handouts, it would be $1,861,600 over $12,196,500 or 15%.) The Statement of Activities (see page 3 of the sample financial statement handout) Notice date - it is "for the period ended The purpose of the statement is to show the results of operations and support for a specific period. The period is usually one year. Notice the three columns covering the three net asset classes discussed above. Revenue and support is categorized by these classes: If no restriction, it is shown as unrestricted revenue. If earned income from a program, it is typically shown as unrestricted revenue. Statement of Activities Revenue and Expenses reported in gross Present Four Basic Totals Change in unrestricted Change in temporarily restricted Change in permanently restricted Change in total assets Transfer between funds reported separately Investment gains and losses may be netted Special events reported gross if ongoing and major If donor restricted, it is classified as either temporarily restricted or permanently restricted depending on donor stipulation. CONSULTING ACCOUNTING TECHNOLOGY CONSULTING ACCOUNTING TECHNOLOGY Statement of Activities (continued) Revenue Classified as unrestricted unless donor restricts Differentiate between temporary and permanent based on donor intent Expenses Always reported as decreases in unrestricted net assets Breakout into program and supporting services being mgmt & general and fundraising Functional classification disclosure The basic equation is: As for expenses: Always reported as decreases in unrestricted net assets. The amounts expended against a temporarily restricted grant are then shown as net assets released from restrictions in the Revenue and Support section. Typically expenses are broken out into Program Services, Management and General and Fundraising costs. Functional classifications are required in the footnotes or, if a voluntary health and welfare organization, the statement of functional expenses is required. Revenue and Support Expenses _ Program Services = Mgmt & Gen l Fundraising Increase or Decrease in Net Assets 2009 Raffa 10

14 Advanced Financial Review Basic Analysis for Activities CONSULTING ACCOUNTING TECHNOLOGY Contributions to Total Revenue Program Costs versus costs of Supporting Services Supporting Services as a Percent of Total Revenue Fluctuation Analysis Comparison of Current Year Balances to Prior Year Balances Points to remember when working with ratios Consider the type of NPO Consider in-kind support Consider the other ratios Analysis of the Statement of Activities Contributions to Total Revenue This can tell you the percentage of revenue that comes from grants, donations and other charitable contributions as opposed to earned income from program services. For the sample financial statement handouts, you might add: Contributions of $1,738,500 Grants of 190,100 United Way of 10,300 Total $1,938,900 This is about 45% of total revenue including the investment losses (and 43% without these losses), which means that 45% of this NPO s total revenue comes from grants and contributions while 55% is earned from programs such as membership, the gift shop and advertising.] Program to Total Expense This can tell the percentage of total expenses used to support programs versus overhead of supporting services (management and general and fundraising costs). [For the sample financial statement handouts, this would be $3,888,900 over $4,849,300 or 80% of the NPO s costs support programs while the other 20% is the cost to manage and fundraise.] 2009 Raffa 11

15 Advanced Financial Review Statement of Cash Flows Broken into Three Categories Operating Activities Investing Activities Financing Activities CONSULTING ACCOUNTING TECHNOLOGY This Statement Can Give the Reader Information on Historic Cash Flow (as opposed to the accrual basis which is required for GAAP financial statements) Statement of Cash Flows (see page 5 of the sample financial statement handout) Reports the sources and uses of cash for the period as analyzed in three major categories: Operating Activities include all transactions and other events that are the result of delivering or producing goods for sale or providing services, as well as the donations and contributions received. Investing Activities include lending money and collecting on those loans, acquiring and selling securities and acquiring and selling assets used in the business such as furniture and equipment. Financing Activities include obtaining resources from third parties and creditors and repaying amounts borrowed. Projected or Forecasted Cash Flows While not a required part of a formal set of GAAP financial statements, projected or forecasted cash flows can provide the reader with important information about the current condition of the organization by looking at its projected or forecasted future operations. Cash Management can be defined as certain management technique employed to improve cash flow (e.g., accelerate the collection of receivables, control payments to trade creditors) and efficiently manage cash. It typically involves the following: Accelerating cash receipts (including contributions and grants) Defer spending or payments due to vendor Concentrating Funds which involves moving cash from on place to another in the shortest time at the least cost. Forecasting cash inflows and out flows Investing idle cash Reporting cash balances Monitoring cash flows and the systems for it Capital Structure I assisted the editorial staff of The Nonprofit Quarterly in preparing for the Spring 2003 issue. Much of this section is taken from the drafts of an article by Clara Miller. My thanks to Clara and the folks at The Nonprofit Quarterly Raffa 12

16 Advanced Financial Review All NPO executives face the issue of tension between the pursuit of mission and the sustainability of their organization (financial viability). While one sometimes dominates the other, a healthy organization finds a balance between these two factors, and a third factor we can call Capital Structure. Capital structure exists in all NPOs, no matter how small, and it always has an impact on mission, on program and on organizational capacity. It is more closely tied to the underlying business of a NPO, which is distinct from (but not unrelated to) its programs. The Balancing Act Pursuit of Mission The Element of Capital Structure is the distribution, nature and magnitude of an organization s balance sheet: its assets, liabilities and net assets. There are as many kinds of capital structure as there are mixes of the elements of each of the balance sheet accounts listed on the slide and there is no one correct type or form. Preservation of Organizational and Financial Viability Capital Structure Let s use a medical clinic as an example of some variations on capital structure. It typically would have equipment, doctors and administrative staff who need to get paid on a regular basis, varying amounts and types of receivables which might include Medicare reimbursements, multi-year pledges from a fundraising campaign, government funds for work performed but not yet reimbursed under a federal grant, etc. The clinic may own its building that is financed by a long-term mortgage. It may use a line of credit at a bank or its own cash reserves to cover the payroll until the Medicare reimbursements arrive. It may have an endowment to help to subsidize its operations. The combination of each of these elements is the clinic s capital structure, and decisions affecting it how large a building, rent or buy, finance the purchase or not not only affect organizational capacity and program but also affect the financial viability of the operation. Growth and Change affect capital structure more patients necessitates larger facilities, more doctors, more equipment and thus, possibly large receivable balances or the need to increase debt. Such expansion of program requires expansion of capacity, which requires the expansion of the balance sheet as a whole and not just one part. Changes to capital structure will also drive changes in organizations and programs. A larger investment in a small organization can cause it to grow overnight. The NPO becomes a more complex organization with greater proportions of assets. The issue that is most often overlooked is the fact that the whole balance sheet is likely to change, not just one aspect of it. If such changes are anticipated by management of the NPO, it can effectively handle the effect of the change or growth in a capital structure with the two other factors in the triangle: mission and organizational capacity Raffa 13

17 Advanced Financial Review A real-life example can be given for a client that ran a community theater from a small location underwritten by the local government and arts council. An expansion was needed to accommodate the new works planned by the artistic director. After a successful capital campaign, they successfully built and moved into the new facility. However, the true effect of this larger space was not measured by the planners (or management), as more working capital was needed to fund production costs and operations. Because the total effect of these new capital campaign dollars was not effectively measured, the artistic director ended up needing to spend more time in fundraising and less in the production for which he originally needed the expanded facility. An inappropriate capital structure can often elevate fixed costs and tie up resources, which in turn can affect the quality of the programs being delivered. The point is not that buildings are bad or that an NPO should not accept a large gift or grant, but that management must plan for the total effect of these projects or occurrences understanding the bigger picture; that is, the need for the growth of the entire balance sheet and operations, including the program, to fully realize the potential of a good capital project or the receipt of a large grant. Footnotes to the Statements CONSULTING ACCOUNTING TECHNOLOGY Integral Part of the Statements Key to Determining Organization s Purpose/Mission Policies for Key Accounting Treatments Other Useful Insight into the Organization Footnotes to the Financial Statements (see page 6 and after of the sample financial statement handout) Footnotes to the financial statements are a required part of the financial statements. Certain notes are always found in GAAP financial statements. [Please note that not all required footnotes have been included in this sample set of financial statements.] The first note usually describes the NPO and its mission, and also identifies which accounting procedures management has selected to employ among the alternatives available as generally accepted (i.e., straight line versus accelerated depreciation; LIFO versus FIFO inventory costing). Other notes will be presented as conditions warrant (i.e., details of debt maturities, capital lease obligations, pension obligations, etc.). Finally, some disclosures will appear because management decides that the disclosure will give useful insight into the organization, to highlight an economic prospect or to explain poor results Raffa 14

18 Advanced Financial Review Thomas J. Raffa Phone: RAFFA, P.C. Fax: L Street, NW Direct: Washington, DC tom@raffa.com Visit our Web Site at: And for information for and about nonprofits visit RAFFA is the Community Partner with Volunteer Consulting Group (NYC) in the development of the National Capital Region s BoardnetUSA. This is a free online board matching service connecting candidates looking for board positions with nonprofits in need of new or more talent. There is a tremendous need for nonprofit board members and this tool enables any person interested in a board appointment to identify these leadership positions by matching location, desired program(s) and other important criteria with nonprofits meeting that criteria Raffa 15

19 Advanced Financial Review May 20, 2009 Key Components Auditor s Opinion CONSULTING ACCOUNTING TECHNOLOGY The Financial Statements Are Named Are Management s Responsibility The Audit In Accordance with GAAS Provides a Basis for the Opinion The Audit Opinion In Accordance with GAAP Consistently Applied BASIC FINANCIAL STATEMENTS Statement of Financial Position At a Point in Time Basic Financial Statements: Reporting on Business Activities Statement of Financial Position At a Point in Time Statement of Activities For a Period of Time Statement of Cash Flows For a Period of Time Beginning of the Year End of the Year January 1 December 31 Beginning of the Fiscal Year (July 1, 2005) End of the Fiscal Year (June 30, 2006) 1

20 STATEMENT OF FINANCIAL POSITION The Basic Formula Assets (resources of the organization) _ Liabilities (amounts owed to outside creditors) = Net Assets (amount of the resources owned by the organization) See sample financial statement handout page 2 $14,058,100 - $1,861,600 = $12,196,500 Three Classes of Net Assets CONSULTING ACCOUNTING TECHNOLOGY Unrestricted general operating support Temporarily Restricted donorimposed restriction as to use or time Permanently Restricted endowment funds; donor stipulates that gift can never be used Exchange vs. Contribution CONSULTING ACCOUNTING TECHNOLOGY Exchange reciprocal transfers; each party to the transaction received something of approximately equal value MATCHING PRINCIPLE Contribution unconditional voluntary transfer of something of value in which the donor gets no direct benefit SFAS #116 and #117 2

21 Contributions Received CONSULTING ACCOUNTING TECHNOLOGY No Donor-Imposed Restrictions Unrestricted Support Recognize revenue when received or promised Donor-Imposed Restriction Temporary Donor-specified use is satisfied by fulfillment of purpose or passage of time Permanent Donor imposed restriction cannot be removed by the NPO Recognize revenue when received or promised Donor-Imposed Conditions Specifies a future or uncertain event Contribution depends on overcoming a barrier Recognize revenue as condition is met Basic Analysis for Financial Position CONSULTING ACCOUNTING TECHNOLOGY Net Working Capital Ratios Current Ratio Quick Ratio Debt to Net Assets Fluctuation Analysis Comparison of Current Year Balances to Prior Year Balances Points to remember when working with ratios: Consider the type of NPO Consider the other ratios Statement of Activities CONSULTING ACCOUNTING TECHNOLOGY Revenue and Expenses reported in gross Present Four Columns of Activity: Change in unrestricted Change in temporarily restricted Change in permanently restricted Change in total net assets Transfer between funds reported separately Investment gains and losses may be netted Special events reported gross if ongoing and major 3

22 Statement of Activities (continued) CONSULTING ACCOUNTING TECHNOLOGY Revenue Classified as unrestricted unless donor restricts Differentiate between temporary and permanent based on donor intent Expenses Always reported as decreases in unrestricted net assets Breakout into program and supporting services being mgm t & general and fundraising Functional classification disclosure STATEMENT OF ACTIVITIES The Basic Formula Revenue and Support _ Expenses Program Services Mgm t and General Fundraising = Increase or (Decrease) in Net Assets See sample financial statement handout total column page 3 $4,309,800 - $4,849,300 = $(539,500) Basic Analysis for Activities CONSULTING ACCOUNTING TECHNOLOGY Contributions to Total Revenue Program Costs versus costs of Supporting Services Supporting Services as a Percent of Total Revenue Fluctuation Analysis Comparison of Current Year Balances to Prior Year Balances Points to remember when working with ratios Consider the type of NPO Consider in-kind support Consider the other ratios 4

23 Statement of Cash Flows CONSULTING ACCOUNTING TECHNOLOGY Broken into Three Categories: Operating Activities Investing Activities Financing Activities This Statement Can Give the Reader Information on Historic Cash Flow (as opposed to the accrual basis which is required for GAAP financial statements) FORECASTED Cash Flows CONSULTING ACCOUNTING TECHNOLOGY Future cash flow model based on certain realities and assumptions Use it to manage cash by Accelerating cash receipts as necessary to meet demands for cash payments Defer spending or payments to vendors to meet cash inflows Concentrate available funds and invest idle cash Report actual cash balances (not the balances from the bank) Monitor it a frequently as necessary CASE STUDY CONSULTING ACCOUNTING TECHNOLOGY Given an Historical statement of activities for the month of December 31, 2008 and the year then ended and A forecasted cash flow for the year ending December 31, 2009 Come up with questions you might ask a potential donee before your foundation makes a grant of $250,000 per year for three years. (Total of $750,000) 5

24 The Balancing Act Pursuit of Mission Preservation of Organizational and Financial Viability Capital Structure CONSULTING ACCOUNTING TECHNOLOGY Elements of Capital Structure Assets: Cash Investments Building and equipment Receivables Inventory Prepaids Liabilities Accounts Payable Debt (short and long term) Deferred revenue/contract advances Deposits Net Assets Restricted Unrestricted Permanently Restricted Notes to the Statements CONSULTING ACCOUNTING TECHNOLOGY Integral Part of the Statements Key to Determining: Organization s Purpose/Mission Policies for Key Accounting Treatments Other Useful Insight into the Organization 6

25 Financially Healthy Nonprofits CONSULTING ACCOUNTING TECHNOLOGY Ready source of cash (good liquidity) Sufficient resources to ensure stable programming Good revenue mix (earned income vs. contributions) Positive net asset balances that continue to grow each year If there is a deficit, surplus of prior years cover it Reasonable overhead Timely reporting (mgm t and board hold themselves accountable for financial stability) Operating reserves or a working plan to establish one Committed to income-based spending Financial Trouble? CONSULTING ACCOUNTING TECHNOLOGY Spends more money than received or earned Payables are growing faster than operations Old accounts receivables Poor cash flow consistently asking for grant advances Poor or late financial reporting Growing or unreasonable overhead or costs of fundraising Restricted net assets are in excess of liquid assets Mgm t and Board focus is lack of funds Net asset balances continue to decrease each year Questions? Consulting Accounting Technology 7

26 Sample Financial Statements

27 THE ABC NONPROFIT, INC. SAMPLE Financial Statements For the Year Ended June 30, 2002 (With Summarized Financial Information for the Year Ended June 30, 2001) and Report Thereon

28 INDEPENDENT AUDITOR'S REPORT To the Board of Directors of The ABC Nonprofit, Inc. We have audited the accompanying statement of financial position of The ABC Nonprofit, Inc. (ABC) as of June 30, 2002, and the related statements of activities, functional expenses and cash flows for the year then ended. These financial statements are the responsibility of ABC s management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year summarized comparative information has been derived from ABC s 2001 financial statements and, in our report dated October 11, 2001, we expressed an unqualified opinion on those financial statements. We conducted our audit 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 ABC as of June 30, 2002 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 United States of America. SAMPLE Raffa & Associates, P.C. Washington, DC September 28, 2002

29 THE ABC NONPROFIT, INC. NOTES TO FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION June 30, 2002 (With Summarized Financial Information as of June 30, 2001) ASSETS Current Assets Cash and cash equivalents $ 863,100 $ 181,400 Accounts receivable 50,900 62,100 Grants receivable 132, ,500 Pledges receivable 208, ,800 Charitable trust receivable 360, ,700 Inventory 100,600 53,600 Total Current Assets 1,715,400 1,663,100 Other Assets Net property and equipment 10,753,600 11,154,100 Investments 1,568,300 1,642,700 Deposits 20,800 15,200 TOTAL ASSETS $ 14,058,100 $ 14,475,100 LIABILITIES AND NET ASSETS Current Liabilities Accounts payable and accrued expenses $ 307,200 $ 665,000 Prepaid camp registration fees 141, ,100 Current portion of notes payable 428, ,000 Total Current Liabilities 877,000 1,139,100 Long-term Liabilities Notes payable 984, ,000 TOTAL LIABILITIES 1,861,600 1,739,100 Net Assets Unrestricted Undesignated 9,407,100 9,047,800 Internally designated 1,000,000 1,000,000 Total Unrestricted 10,407,100 10,047,800 Temporarily restricted 86,000 1,014,800 Permanently restricted 1,703,400 1,673,400 TOTAL NET ASSETS 12,196,500 12,736,000 TOTAL LIABILITIES AND NET ASSETS $ 14,058,100 $ 14,475,100 SAMPLE FINANCIAL STATEMENT The accompanying notes are an integral part of these financial statements

30 THE ABC NONPROFIT, INC. NOTES TO FINANCIAL STATEMENTS STATEMENT OF ACTIVITIES For the Year Ended June 30, 2002 (With Summarized Financial Information as of June 30, 2001) Temporarily Permanently Unrestricted Restricted Restricted Total Total REVENUE AND SUPPORT Contributions $ 1,466,500 $ 242,000 $ 30,000 $ 1,738,500 $ 1,826,400 Programs 1,163, ,163,000 1,341,200 Membership dues 1,017, ,017,500 1,086,900 Grants 133,600 56, , ,000 Rent 153, , ,700 Other 58, ,300 61,700 Gift shop sales 57, ,900 39,100 United Way 10, ,300 12,600 Advertising 8, ,900 7,300 Investment loss (88,200) - - (88,200) (16,400) Net assets released from restrictions 1,227,300 (1,227,300) TOTAL REVENUE AND SUPPORT 5,208,600 (928,800) 30,000 4,309,800 4,770,500 EXPENSES Program Services 3,888, ,888,900 4,135,700 Supporting Services Management and general 638, , ,500 Fundraising 321, , ,600 TOTAL EXPENSES 4,849, ,849,300 5,172,800 Change in Net Assets 359,300 (928,800) 30,000 (539,500) (402,300) NET ASSETS, BEGINNING OF YEAR 10,047,800 1,014,800 1,673,400 12,736,000 13,138,300 NET ASSETS, END OF YEAR $10,407,100 $ 86,000 $1,703,400 $12,196,500 $12,736,000 SAMPLE FINANCIAL STATEMENT The accompanying notes are an integral part of these financial statements

31 THE ABC NONPROFIT, INC. STATEMENT OF FUNCTIONAL EXPENSES For the Year Ended June 30, 2002 (With Summarized Financial Information as of June 30, 2001) Program Services Supporting Services Total Cultural Day Community Gift Membership Program Management Arts Camp Service Shop Services Newsletter Services and General Fundraising Totals Totals Salaries $ 57,613 $ 10,292 $ 163,705 $ 20,962 $ 88,495 $ 39,094 $ 380,161 $ 246,542 $ 152,586 $ 779,289 $ 2,141,639 Fringe benefits 7,757 1,154 25,943 1,816 12,254 5,802 54,726 83,631 18, , ,624 Total Salaries and Fringe Benefits 65,370 11, ,648 22, ,749 44, , , , ,680 2,446,263 Contracted services 600, , , , , ,000 2,903,242 77,144 7,918 2,988, ,859 Depreciation 20,000 18,000 36,103 14,000 20,000 8, ,725 49,724 30, , ,828 Utilities 9,604 1,716 27,291 3,494 14,753 6,487 63,345 27,768 25, , ,529 Program and office supplies 1,622 7,606 17, ,415 2,264 37,608 30,000 5,839 73, ,635 Bad debt expense ,324-61,424 2,859-64,283 - Food and beverage 2,801 1,801 2, ,731 7,815 41,871 56, ,350 Printing and copying 9,794 3, ,539 26,815 43,837 4,459 4,780 53, ,188 Other 3,995-1,508 1,616 33,452-40,571 11, , ,928 Maintenance 2, ,312 1,064 10,745 1,985 25,554 12,518 7,746 45, ,030 Advertising 7,622 4, ,214-35,773 5,602 1,625 43, ,040 Postage and delivery 9, ,054 10,424 21,861 3,280 14,368 39,509 82,981 Travel 10,334 15, ,507 7, ,773 73,171 Subscriptions and dues , ,404 31,215 Insurance 1, , ,560 1,131 17,998 7,132 4,414 29,544 87,831 Cost of goods sold , , ,531 53,682 Interest 2, , ,209 1,448 13,778 8,889 5,502 28,169 90,132 Equipment rental 6, ,913 18,813-25,726 36,376 Telephone - - 2, ,626 4,183-6,809 32,490 Occupancy ,272 TOTALS $ 754,335 $ 665,622 $ 708,134 $ 673,360 $ 582,800 $ 504,649 $ 3,888,900 $ 638,700 $ 321,700 $ 4,849,300 $ 5,172,800 SAMPLE FINANCIAL STATEMENT The accompanying notes are an integral part of these financial statements

32 THE ABC NONPROFIT, INC. STATEMENT OF CASH FLOWS For the Year Ended June 30, 2002 (With Summarized Financial Information for the Year Ended June 30, 2001) Increase (Decrease) in Cash and Cash Equivalents SAMPLE FINANCIAL STATEMENT The accompanying notes are an integral part of these financial statements CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (539,500) $ (402,300) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 197, ,828 Investment loss 88,200 16,400 Contributions restricted for long-term purposes (29,900) (854,900) Increase in value of charitable trust receivable - (12,800) Changes in assets and liabilities: Accounts receivable 11,200 58,600 Grants receivable 336, ,000 Pledges receivable 328, ,900 Inventory (47,000) 30,400 Deposits (5,600) 2,500 Accounts payable and accrued expenses (357,800) 338,100 Prepaid camp registration fees (33,500) 11,600 NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (51,476) 406,328 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment (13,700) - Purchases of investments (481,000) (807,728) Proceeds from sale of investments 684,176 - NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 189,476 (807,728) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments under notes payable (916,200) (433,300) Proceeds from contributions restricted for investment in permanent endowment 29, ,900 Proceeds from notes payable 1,430, ,000 NET CASH PROVIDED BY FINANCING ACTIVITIES 543, ,600 NET INCREASE IN CASH AND CASH EQUIVALENTS 681, ,200 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 181,400 36,200 CASH AND CASH EQUIVALENTS, END OF YEAR $ 863,100 $ 181,400 SUPPLEMENTAL CASH FLOW INFORMATION Actual cash payments for interest $ 76,900 $ 90,100

33 THE ABC NONPROFIT, INC. NOTES TO FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization The ABC Nonprofit, Inc. (ABC) is a non-profit organization established to provide health, welfare, and cultural benefits to members of the community and other interested individuals. ABC was created on July 1, 1985, when it separated from the XYZ Nonprofit Center, Inc. The primary sources of ABC s revenues are contributions, program fees, and membership dues. Cash and Cash Equivalents For purposes of the statement of cash flows, ABC considers all demand deposits and investments with a purchased maturity of three months or less to be cash and cash equivalents. Money market funds held as a part of ABC s long-term investment portfolio are not considered cash equivalents. Investments Investments consist of marketable debt and equity securities and are carried at fair value, as determined by quoted market prices. Property and Equipment and Related Depreciation Property and equipment are stated at cost. Expenditures for major additions, renewals and betterments are capitalized; conversely, expenditures for repairs and maintenance are charged to expense when incurred. Upon the retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in revenue or expenses. Depreciation of property and equipment is computed using the straight-line method over the estimated useful service lives of the assets ranging from three to five years, except for land and artwork, which are not depreciated. In fiscal year 1997, ABC occupied and commenced operations in its newly renovated building. The building is being depreciated using the straight-line method over its estimated useful service life of 30 years. SAMPLE FINANCIAL STATEMENT Continued - 6 -

34 THE ABC NONPROFIT, INC. NOTES TO FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies (continued) Classification of Net Assets The net assets of ABC are reported in three groups as follows: Unrestricted net assets represent the portion of expendable funds that are available for support of ABC s operations or that have been designated by the Board for a particular purpose. Temporarily restricted net assets represent amounts that are specifically restricted by donors or grantors for various programs, building renovation or future periods. At June 30, 2002, all temporarily restricted net assets are available for the periods subsequent to the year end. Permanently restricted net assets represent endowment gifts requiring that the principal be invested in perpetuity and that only the income be expended. Permanently restricted net assets at June 30, 2002 were $1,703,400, the income from which is available for operations. Revenue Recognition Grants and contributions are considered unrestricted and available for general operations unless specifically restricted by the donor. ABC reports gifts and grants of cash and other assets as temporarily restricted if they are received with donor stipulations that limit the use of the donated assets as to a particular purpose or to future periods. When a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Donor temporarily restricted contributions whose restrictions are met in the same accounting period in which the contribution was originally pledged are reported as unrestricted revenue. Pledged contributions promised for future years are recorded as revenue at their net present value on the date the enforceable pledge document is received. Membership dues are deemed to be in exchange for the benefits of the program services and facilities provided by ABC and are recorded as revenue in the period the services are provided. Membership fees received in advance of the period the services are provided are recorded as deferred membership fees. At June 30, 2002, there was no material deferred revenue. These are sample financial statements and therefore are not intended to include all the required footnote disclosures

35 Case Study

36 NONPROFIT Statement of Activities For the Month and the Twelve Months Ended December 31, 2008 Current Month Year to Date Revenues Unrestricted Grants & Contrib. $ 0.00 $ 4,300, Interest Income , Miscellaneous Income Checklist Total Revenues ,331, Expenses Salaries 110, ,052, Payroll Taxes 3, , Staff Development Other Employee Benefits 8, , Communications and Public Rel. 50, , Program Contracts 36, , Other Consulting Expenses 211, ,305, Accounting and Payroll Fees 52, , Legal Fees 58, , Bank/Late Fees 1, , Temporary Help , Catering 1, , Rent 18, , Utilities , Equipment Rental , Repairs and Maintenance 1, , Depreciation 3, , Supplies and Equipment 1, , Postage and Delivery , Printing and Copying , Telecommunications/Web Hosting 19, , Insurance , Travel 18, , Meeting Expenses 1, , Fees , Interest Expense Miscellaneous Expense , Suspense (1,073.90) 0.00 Total Expenses 598, ,927, Change in Net Assets ($ 598,085.78) ($ 595,437.05) TB 22-Statement of Cash Flows'!b9nt of Cash Flows'!C9 Negative due to reclass of p/m credit card invoices in c/m. 5/17/2009 at 4:06 PM For Management Use Only -4-

37 A NONPROFIT LOW END BUDGET/FORECASTED CASH FLOWS For the Year Ending December 31, January February March April May June July August September October November December Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected Projected TOTAL Beginning Cash Balance (actual) $ 714,875 $ 506,604 $ 563,540 $ 551,140 $ 594,645 $ 1,921,820 $ 1,753,495 $ 1,584,970 $ 1,415,645 $ 1,245,820 $ 1,075, ,720 $ 714,875 Revenue and Support (amounts not yet committed; not in totals) Grants - Gates , ,000 Heron - 250, ,000 Hewlett ,500, ,500,000 Carnegie 500, ,000 Carnegie , ,000 Revson , ,000 Sublease rental ,000 15,000 15,000 15,000 15,000 15,000 15,000 15, ,000 Interest income ,500 2,500 2,000 1,800 1, ,000 Total Revenue and Support - 250, , ,500 1,517,500 17,000 16,800 16,000 15,500 15,350 15,200 15,150 2,630,000 Expenses Salaries and Fringe Chief Executive Officer 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25, ,000 Jeri 24,167 24,167 24,167 24,167 16,917 16,917 16,917 16,917 16,917 16,917 16,917 16, ,001 Val 12,500 12,500 12,500 12,500 8,750 8,750 8,750 8,750 8,750 8,750 8,750 8, ,000 Howard 14,583 14,583 14,583 14,583 12,396 12,396 12,396 12,396 12,396 12,396 12,396 12, ,499 Benedette 6,875 6,875 6,875 6,875 6,875 6,875 6,875 6,875 6,875 6,875 6,875 6,875 82,500 PR tax & FB(at 20%) 16,625 16,625 16,625 16,625 13,988 13,988 13,988 13,988 13,988 13,988 13,988 13, ,400 Sub-Total 99,750 99,750 99,750 99,750 83,925 83,925 83,925 83,925 83,925 83,925 83,925 83,925 1,070,400 Consultants Institution CFO/HR/IT/Accounting Outsourced 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20, ,000 Audit Assistant and Tax Prep 5,000 4, ,000 11,000 Development - Holly 20,000 a 20,000 NPO/Lobbying 5,000 5,000 5,000 77,180 c 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5, ,180 Product Joel - 50% ,000 a ,000 Bill Marv 3,000 3, ,000 Scott 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000 Content Expert - (Nicki/Charlotte/50% Joel) 2,500 2,500 2,500 26,000 b 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 57,500 Suzette ,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 16,000 Sub-Total 40,500 39,500 32, ,180 35,000 35,000 35,000 35,000 35,000 35,000 35,000 37, ,680 Contract Institution - Audit ,000 6, ,750 ADP ,600 Product Content Weber Shandwick ,165 a ,165 Threespot ,000 35,000 d ,000 Velir ,000 30,000 30,000 30,000 30,000 30,000 30,000 30, ,000 Interim Site - - 5,000 5,000 5, ,000 Identity site 15, ,000 Sub-Total 15, , ,215 35,300 30,300 30,300 30,300 30,300 30,300 30,300 30, ,515 Non-Personnel Occupancy 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20, ,000 Office Capital Equipment Lease 3,100 3,100 3,100 3,100 3,100 3,100 3,100 3,100 3,100 3,100 3,100 3,100 37,200 Communications/Website ,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 8,000 Travel 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000 Capital Costs (to fund depreciation) ,000 Meetings ,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 15,000 Other (includes insurance) 4,000 4,000 4,000 4,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 4,925 55,925 Sub-Total 32,850 32,850 32,850 32,850 36,100 36,100 36,100 36,100 36,100 36,100 36,100 36, ,125 TOTAL EXPENSES 188, , , , , , , , , , , ,250 2,570,720 Adjust cash to actual (19,871) (20,664) (40,535) ENDING CASH BALANCE $ 506,604 $ 563,540 $ 551,140 $ 594,645 $ 1,921,820 $ 1,753,495 $ 1,584,970 $ 1,415,645 $ 1,245,820 $ 1,075,845 $ 905,720 $ 733,620 $ 733,620

38 NONPROFIT LOW END BUDGET/FORECASTED CASH FLOWS For the Year Ending December 31, 2009 LEGEND Note - NONPROFIT has been able to cut it costs since November of 2008 to under $190,000 per month. Prior to November, NONPROFIT got permission from some of its consultants and contractors to pay amounts due in 2008 in 2009 as more funding was to be received. These amounts were properly accrued as of December 31, Then, with the receipt of the Gates, Heron and Carnegie grants, NONPROFIT will now pay all these outstanding amounts in March and April. This is why this cash flow shows the expenses to be higher in these months (see tick marks below for further explanation). However, actual costs in these months exclusive of the prior year payables remains under $190,000 each monnth through December 31, As of December 31, 2009, NONPROFIT is projected to have over $700,000 in cash as of December 31, 2009 with little or no payables. This does not include the Revson or the additional Carnegie money (noted in Blue). Carnegie and Revson requested that NONPROFIT submit a proposal for $500,000 and $250,000 over two years, respectively so it is likely that NONPROFIT will receive this funding as well. However, only committed foundation support has been included in the total for this model. This model also does not include any additional fundraising NONPROFIT is actively pursuing which is sh a -amounts to be paid in April 2009 due for services in 2008 (accrued as of 12/31/08) b -amounts to be paid in April 2009 due for services in 2008 (accrued as of 12/31/08) as follows: Joel $10,000 and Charlotte $13,500. Remaining $2,500 is for Nicki's monthly amount in 2009 c -amounts due to be paid in April 2009 for services in 2008 (accrued as of 12/31/08)except for $5,000 which is due for current month. d -amounts to be paid in March and April of 2009 due for services in 2008 (accrued as of 12/31/08)

39 Articles

40 CRITERIA FOR NONPROFITS' OPERATING RESERVES by Thomas J. Raffa DEFINED Operating reserves or unrestricted fund balances are similar to retained earnings or owners' equity in business enterprises. They are funds, usually accumulated over several years, which are available for use by the organization at the discretion of the board of directors (i.e., net unrestricted money). PURPOSE Nonprofit organizations must maintain the balance between operating income and expenses in order to survive. Achieving this balance year after year is a considerable challenge due to fickle funders, economic uncertainties, etc. * Whether for-profit or nonprofit, most organizations can expect to incur some operating deficit at some time. Operating reserves can provide the cushion necessary for an organization to survive the lean periods and the unexpected events which can drain funds. Operating reserves perform the following functions: * Enable an organization to survive operating shortfalls caused by economic conditions or management error. Without such reserves or use of other assets, survival of an organization during a steep or protracted budget deficit may be threatened. * Enhance the flexibility of an organization when used as venture capital to develop new programs, replace outdated programs or expand the organization's interests and services. * Expand credit opportunities and permit favorable financing of an organization's growth and expansion. This includes permitting a change in direction or focus of programs and activities. HOW MUCH IS ENOUGH? The amount of operating reserves needed by an organization depends upon its individual characteristics and circumstances, as follows: - The reliability of sources of income. If income is derived primarily from a predictable, broad based membership or body of contributors, the level of operating reserves may generally be lower than if income is derived primarily from a few large grants or contributions. - Seasonality of cash flow. If cash flow is irregular, characterized by periods of dormancy (usually due to a large annual meeting/convention or a one-time anniversary date for all members), operating reserves should be generally higher than if cash receipts are consistent throughout the year. - Timing of cash flow. If there is a substantial delay in collection of receivables, reserves should be higher than if revenue receipt is prompt. There are several ways to spread out cashflow until reserves build up including: Stagger dues anniversary of members, Offer prepaid discounts for convention, Short-term use of government or foundation money until intended program begins (i.e., as an advance), Improve billing on cost reimbursement contracts.