Session 1: Telling Your Financial Story

Transcription

1 Session 1: Telling Your Financial Story Financial Management Training Program Hilda Polanco, Founder and CEO Rebecca Coker, Lead Consultant, West Coast Neela Pal, Senior Consultant September 27, 2016

2 INTRODUCTIONS & INITIATIVE OVERVIEW

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4 Organization Budget Mission Arts Council for Monterey County Arts Council Santa Cruz County Boys & Girls Club of North San Mateo County Mid-Peninsula Boys & Girls Club Monterey Jazz Festival $994K $1.7M $2M $1.8M $3.9M To improve the quality of life for everyone in our region through the arts. To promote, connect, and invest in the arts in order to stimulate creativity and vibrancy in Santa Cruz County. To inspire and enable young people to realize their full potential and contribute to their communities. To inspire and enable all young people, especially those who need us most, to reach their full potential as productive, responsible and caring citizens. The Monterey Jazz Festival celebrates the legacy of jazz, expands its boundaries, and provides opportunities to experience jazz through the creative production of performances and educational programs. 4

5 Organization Budget Mission San Jose Jazz $2.3M To enrich the community through music education and live performance. San Jose Taiko $625K Humanity connected through cultural understanding, artistic expression, and rhythmic heartbeat. Advancing the taiko art form by evolving and raising the visibility of SJT s unique style and philosophy around the world. Santa Cruz Museum of Natural History $686K Connecting people with nature and inspiring stewardship of the natural world. Silicon Valley Creates $2.9M To ignite investment and engagement in our creative culture. Youth Science Institute $1.2M To inspire enthusiasm for Science and a love of learning. 5

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7 What does excellence in financial management look like? Organizations engage in effective financial planning to prioritize the use of resources Leaders closely monitor results to understand how the organization is doing in relation to plans and to adjust accordingly Effective financial operations ensure that plans are being executed properly and that decisions are based on reliable information Governance sees that all of these elements are being carried out properly and in furtherance of the organization s mission 7

8 What do you hope to get out of this initiative? 8

9 Workshops (4) Coaching (avg 12 hours) Development of Work Plans Application & Selection Financial Trends Analysis Grant Proposals & Implementation Jul 2016 Aug 2016 Sept 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar Dec 2017 Cohort begins 9 #fiscalstrength

10 Workshop Topics Workshop 1: Telling Your Financial Story (September 27th) Workshop 2: Charting a Course Toward Long-Term Sustainability (October 26th) Workshop 3: Financial Monitoring: Managing for Results (December 6th) Workshop 4: Operational Excellence (January 10th) 10

11 As a result of participation, nonprofit leaders will gain: An understanding of business model drivers and financial health, as well as a heightened ability to align program strategy with financial goals An understanding of revenue risks for short- and long-term requirements as well as expenses Increased ability to effectively monitor financial results and use financial information to inform future Enhanced ability to communicate their financial story and full cost More effective communication using data-driven decisions that consider goals for short-term success and long-term sustainability Tools for short- and long-term financial planning and analysis 11 #fiscalstrength

12 Theory of Change If nonprofit organizations are strengthened financially, then those nonprofits will be better positioned to focus on the right mix of strategies that efficiently and effectively deliver on the mission of the organization. 12

13 Introductions & Initiative Overview Understanding Audited Financial Statements The IRS Form

14 UNDERSTANDING AUDITED FINANCIAL STATEMENTS

15 Annual Financial Audit: Definition A series of procedures followed by an independent professional accountant used to test, on a selective basis, transactions and internal controls in effect, all with a view to forming an opinion on the presentation of the organization s financial statements 15

16 Statements in the audit Statement of Financial Position (Balance Sheet) Statement of Activities (Income Statement) Statement of Functional Expenses (Required for Voluntary Health & Human Service Organizations) Statement of Cash Flows Opinion Letter Management Letter Notes 16

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19 Management Letter Issued by the auditor Identifies areas of operations or procedures that the organization may want to improve or redesign Reports any "material weaknesses" and significant deficiencies May include an organization s corrective action plan On a quarterly basis, the Finance and Audit Committee should check in on the progress toward implementing this plan 19

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21 Questions 1 & 2 21

22 Audited Financial Statements: How the Numbers Flow 2 4 Statement of Financial Position (Balance Sheet) Statement of Cash Flows Cash Flows from: Assets Liabilities Unrestricted Net Assets Restricted Net Assets Operations Investing (30) 15 Financing (30) (200) Change in Cash Beginning Cash Ending Cash Statement of Activities Unrest Temp Unrest Temp Income Released from Restriction 70 (70) 70 (70) Total Revenue (40) Expenses Change in Net Assets (110) (40) Beginning Net Assets Ending Net Assets Statement of Functional Expenses 2016 Program M&G Fundraising Total Personnel OTPS Total Program M&G Fundraising Total Personnel OTPS Total

23 Operating Results 1. What are the organization s trends in operating results? Surpluses or deficits Mix of revenue sources 2. How is the organization investing its resources? Net Assets 3. How liquid are the organization s reserves? 4. What is the composition of net assets? Cash on Hand 5. What is the organization s cash position? 23

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25 What We Own: Cash What We Owe: Bills due Receivables Investments Property, Plant & Equipment, net = Liabilities Line of Credit Deferred Revenue Debt (short- and long-term) Assets + Net Assets Our Available Capital Unrestricted Board Designated Fixed Assets Other Temp. Restricted Perm. Restricted

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27 LUNA / Working Capital Short-term Liquid Capital Accessibility Debt Repayment Facility Reserve Growth & Innovation Longer-term Reserves (may be board designated) Temp. Restricted Net Assets* Endowment** Donor restricted capital *To be accessed only if delivering on donor expectations **Only earnings are accessible

28 Liquid Unrestricted Net Assets (LUNA) The portion of unrestricted net assets that could be converted to cash relatively easily (may or may not include board designated funds, based on accessibility) Funds available for purposes such as supplying working capital, guarding against downturns, and pursuing new opportunities LUNA = Unrestricted Net Assets (Fixed Assets Debt Related to Fixed Assets) Other Illiquid assets Benchmark: LUNA sufficient to cover 3-6 months of operating expenses is generally considered healthy, but this depends on an organization s business model, plans, and goals. 28

29 Liquid Unrestricted Net Assets (LUNA) Indicator Calculation Months of Liquid Unrestricted Net Assets Liquid Unrestricted Net Assets Average Monthly Expense 29

30 8.00 Months LUNA Cohort Median Benchmark

31 How Are They Funded? Budgetary Line Item for Annual Replenishment Re-designation of Special Purpose Funds Annual Surplus Designation Reserves Targeted Foundation Investment 31

32 Balance Sheet: Months of Cash on Hand Indicator Months of Cash on Hand Calculation Total Cash and Cash Equivalents Average Monthly Expense 32

33 Months of Cash on Hand Cohort Median Benchmark

34 Questions 3 & 4 34

35 Composition of Net Assets Indicator Composition of Net Assets Calculation Unrestricted Net Assets Total Net Assets Temporarily Restricted Net Assets Total Net Assets Permanently Restricted Net Assets 35 Total Net Assets

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37 Age of Fixed assets Indicator Age of Fixed Assets Calculation Fixed Assets Accumulated Depreciation 37

38 38 Benchmark

39 Questions 5 & 6 39

40 Organizational performance for the fiscal year Revenues by type and restriction Expenses broken out functionally Fiscal year s operating results (gains/losses) Revenues released from restriction Amount released from restrictions Balance of Temporarily Restricted Net Assets being carried forward into the next fiscal year 40

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

43 Statement of Activities: Operating Results Indicator Operating Results Calculation Unrestricted Revenue Total Expenses Operating Margin Operating Results Operating Revenue 43

44 Median Operating Surplus/(Deficit) $30,000 $28,044 $25,000 $20,000 $15,000 $10,000 $5,000 $- Cohort Median

45 Statement of Activities: Revenue Composition Indicator Calculation Revenue Composition Contribution & Foundation Support Total Revenue Government Contracts Total Revenue Earned Income Total Revenue 45

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48 Expense Analysis What is the largest program? Is the program with the largest expense a program aligned with the organization s mission? What is the largest expense? Salaries and benefits are often an organization s largest expense Salaries and benefits commonly make up 60% or more of total expenses 48

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

50 Functional Expense Definitions Classification Description Examples Program, separated by major programs The direct provision of goods or services related to the organization s mission and purpose Program supplies, salaries of program staff Support Services: Management & General Activities such as oversight, business and financial management Audit costs, salaries of Finance and HR staff Support Services: Fundraising Incurred in inducing donors to contribute Costs to produce a donor event, salaries of fundraising staff 50

51 Investment of Resources Expense ratios: The percentage of funds spent by the organization in each functional area Program Expense Total Expense Mgmt. & General Expense Total Expense Fundraising Expense Total Expense Benchmark: Benchmark: Benchmark: 65%-70% 20%-25% 10%-15% Source BBB Wise Giving Alliance Charity Accreditation Standards: 51

52 Statement of Functional Expenses: Resource Allocations Indicator Functional Expense Composition Calculation Program Expense Total Expenses General & Administrative Expense Total Expenses Fundraising Expense Total Expenses 52

53 Functional Expense Mix Cohort Median Fundraising 9% 10% Management & General 81% Program

54 Questions 7, 8, and 9 54

55 Understanding the Statement of Cash Flows Looks at where cash was obtained and spent Reports on the following activities: Operations Investing Financing Must disclose any non-cash activity such as acquisitions of equipment on finance 55

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57 Matches cash amount on Statement of Financial Position

58 Significant Disclosures Description of the organization Basis of accounting (cash, accrual and modified accrual) Fixed assets Debt Temporarily and permanently restricted net assets Related party transactions Subsequent events Commitment and contingencies 58

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62 in the Monitoring section Excel Tool for Audits Online How-To Tutorial 62

63 Financial Health Narrative 63

64 IRS FORM 990

65 What is it? Information return for organizations exempt from income tax Provides the IRS and state charity agencies with information to assist them in enforcing the laws governing nonprofits The most publicly available document about an organization 65

66 How is Data in the 990 Different from the Audit? Form 990 does not provide detail about donor-imposed restrictions on revenue Does not show board designated net assets In-kind donations of services are not recognized in the 990 Sales of merchandise, special events, and rental activities are shown on the 990 net of expenses Audits conform to Generally Accepted Accounting Principles (GAAP), which is not required of data in the 990 Source GuideStar: Retrieved from: 66

67 Front Page: Part I, Summary

68 Part III: Statement of Program Service Accomplishments

69 Part VI, Section A: Governing Body and Management Use of management company Changes to organizational documents Documentation of board and committee meetings Presentation of 990 to board List of officers, directors, trustee or key employees Did the org become aware of a significant diversion of assets? Key Questions: How many board members? Are they reviewing the 990? Is there an unusual management structure? 69

70 Part VI, Section A: Governing Body and Management

71 Part VI, Section B: Policies Conflict of Interest Monitoring and enforcement of conflict of interest policy Whistle Blower Policy Document retention and destruction Key Questions: Does the organization have appropriate governance policies in place to set the right tone at the top? 71

72 Part VI, Section B: Policies

73 Part VI, Section C: Disclosure States in which 990 is filed How key documents are made public Key Questions: How wide is this organization casting its fundraising net? How committed to transparency is the organization? 73

74 Part VI, Section C: Disclosure

75 Part VI, Section B: Policies Process for determining compensation. Process should include: A review and approval by independent persons Comparability data Contemporaneous substantiation of the deliberation and decision Key Question: Is there a deliberate, fair, comprehensive process to set compensation for leadership? 75

76 Part VI, Section B: Policies

77 Section C: Disclosure States in which 990 is filed How governing documents, conflict of interest policy and financial statements are made public 77

78 Question 10 78

79 COACHING HOURS

80 Schedule and Content Each organization can receive up to 12 hours of coaching Initially scheduled in 1.5 hour increments following each workshop; remaining hours August 2017 Goal of coaching hours: To offer support in bringing home the lessons and practices communicated in the workshops To guide the collaborative development of a action plan of implementation projects What to bring: reflection tools and financial trends analysis 80

81 RESOURCES

82 The Key to Long Term Financial Health Liquid Unrestricted Net Assets (LUNA), Hilda Polanco, New York Nonprofit Press, May 2012: term-financial-health-liquid-unrestricted-net-assets-luna- Keeping it in Reserve: Grantmaking for a Rainy Day. Hilda Polanco and John Summers, Nonprofit Quarterly, May 2016: An Executive Director s Guide to Financial Leadership, Kate Barr and Jeanne Bell, Nonprofit Quarterly, December Maintaining Nonprofit Operating Reserves: A Whitepaper, by the Nonprofit Operating Reserves Initiative Workgroup, December

83 StrongNonprofits.org In collaboration with the Wallace Foundation, FMA has created a library of tools and resources to help organizations become fiscally fit Four Topic Areas: Planning Monitoring Operations Governance 83

84 Online Tutorials for StrongNonprofits.org FMA offers complimentary orientation one-hour webinars that feature an overview of the website and drill down on several of its key resources Upcoming webinar dates: November 29, 2016 at 2:00pm To register, or see upcoming webinar dates: For a 15-minute, on-demand webinar tour of the site: 84

85 Session 2: Financial Planning Date: October 26 Time: 9:00am 3:30pm Topic: Financial planning, including setting financial goals, budget development and forecasting Who Should Attend: Executive Director/CEO, Lead Finance Staff, Program Director(s), Development Director Remember to bring: Budget package as submitted to Board for approval for this fiscal year; any formats used for organization, program, or project level budgeting 85

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87 QUESTIONS?

88 How did we do? 88

89 Established in 1999 to serve not-for-profit organizations around the country Provides customized financial management, accounting, software, organizational development, human resources, and other consulting services Works directly with organizations or through funder-supported management and technical assistance programs FMA's mission is to empower not-for-profit organizations with the knowledge and skills to successfully serve their constituents and fulfill their missions New York Chicago Oakland LA /FiscalManagementAssociates 89 linkedin.com/company/fiscalmanagement-associates-llc