Financial Management Budgeting Basics For Non-financial Executives Presented by Chiquita T. Tuttle, MBA PROCEED Consultant PROCEED, Inc.

Transcription

1 Financial Management Budgeting Basics For Non-financial Executives Presented by Chiquita T. Tuttle, MBA PROCEED Consultant PROCEED, Inc. January 2008

2 Purpose of this Training To present the fundamentals and practical aspects of fiscal management for non financial managers. To provide basic budgeting information and terminology as tools for further exploration.

3 Building your Budget & Using Budgets as a Management Tool Pre Training Assessment checking your current knowledge Glossary of Terms Who should be involved in the budgeting process? Type of Revenues and Expenses

4 Pre Training Assessment An opportunity for you to check your knowledge against what you already know and what you will learn during this session. Assessment tool 5 minute to complete

5 Building your Budget & Using Budgets as a Management Tool Identify financial reports Understanding budget variances

6 LEARNING OBJECTIVES Understand THE BASIC COMPONENTS Fiscal Management System Know the differences between for-profit and NonProfit Organizations Describe the roles and responsibilities of the Board of Directors, the executive director and program managers in fiscal management

7 LEARNING OBJECTIVES Describe the linkage between financial and strategic planning State the basics principles of internal controls

8 Additional Information Differentiate Goals and Objectives Understand the types of Expenses and Revenues Define Vision and Mission Define a Strategic Plan Understand the value of Dashboard Reporting

9 Additional Discussion Understand accounting glossary of terms Explain cash flow and the importance of cash management Explain the importance and need for audits Describe the functions of a budget Describe the important elements of an agencies financial reports Understand assets, liabilities and variances

10 Additional Discussion Describe the importance and value of including financial information for practical decision making

11 Financial Management Successful community based organizations can attribute their success to employing 15 key components that support organizational effectiveness

12 Organizational Effectiveness Model Board Development Faith-Based Leadership Development Fiscal Management HIV Prevention Community Planning Human Resources Leadership Development

13 Organizational Effectiveness Model Needs Assessment Program Development Program Evaluation Starting a NonProfit Strategic Planning Surviving an Audit Technology Development Volunteer Management

14 Why are budgets important? A budget is a statement of the financial costs of an organization for a definite period of time based on estimates of expenses during the period and proposals for funding them.

15 Rules of Budgeting Any budget or plan is ONLY as good as the time, effort and information people put into it. Good budget practices should foster collaboration and exchange of information among the budget team participants No budget or plan is perfect because no one can predict the future In order to reach the goals, budgets must be monitored and changed as time goes on.

16 Rules of Budgeting Garbage in. Garbage out. No budget is perfect. Monitor and change.

17 Monitoring the Budget Budgets are used to monitor performance Financial reports are used to identify variances from the budget and possible problems Program and unit managers SHOULD receive reports on actual versus budgeted expenses and income for their areas of responsibility.

18 Components of a Fiscal Management System Financial Planning The process of identifying the resources that are needed to implement the strategic plan. A financial plan identifies revenues and expenses. Covers time period of 2 5 years

19 Components of a Fiscal Management System BUDGET MANAGEMENT System for developing, approving and managing the budget Each program /department develops a budget The CFO is responsible for monitoring revenues and expenses and variances for each departmental budget.

20 Components of a Fiscal Management System CASH MANAGMENET Ensures that the organization has sufficient cash to meet its needs. Bank statements are reconciled and account balances are reviewed to assure accuracy

21 Components of a Fiscal Management System THE ACCOUNTING SYSTEM Conforms to fiscal policies and procedures approved by the board or governing body. A Chart of accounts matches the revenues and expenses by funding source, organizational units and/or sites.

22 PAYROLL Components of a Fiscal Management System Operations of compensation of employees Time cards documentation, advances, withholding taxes and employer taxes

23 Components of a Fiscal Management System ACCOUNT RECEIVABLES A system used to manage the amounts owed to the organization by its customers. This usually includes billing to third party payers such as Medicare and Medicaid.

24 Components of a Fiscal Management System PURCHASING AND FIXED ASSETS Controls the buying of and accounting for assets and equipment Depreciation, which is the decline in the value of an asset over time, may be tracked in this system Periodic inventory of assets should be performed

25 Components of a Fiscal Management System General management Ensures compliance with requirements of grants and or contracts Grants normally specify line item controls, performance measures, deliverables and reporting requirements.

26 The Difference Between For-Profit & Nonprofit Organizations NON PROFIT ORGANIZATION Corporation that has been granted tax exempt status by the Internal Revenue Service. One of the differences between FPOs and NPOs is that shareholders provide equity for profit while donors provide equity through donations. However, both can, and in most cases should, gain equity through operations.

27 The Difference Between For-Profit & Nonprofit Organizations The major functional difference between FPOs and NPOs is what can be done with the profit gained through operations. FPOs can pay dividends with the profits generated through their operations. NPOs cannot distribute dividends to their members. Rather, the equity NPOs generate must be put back into their programs. In other words, NPOs can generate profits or surplus, and those that do so are in a position to provide their communities with more stable services.

28 For-profit Organizations (FPOs) Tax Exempted Status Sources of Capital / Revenue Usual Purpose When Operation Generates Earnings Usual Term for Positive Net Earnings Usual Term for Negative Net Earnings For Profit No Shareholders Operation of the Organization Increase shareholder value Shareholders may Receive dividends Profit Loss Nonprofit Tax-exempted Donors Operation of the Organization Charitable Service to the community No Dividends Paid; Earnings directed to charitable purposes Increase in Fund Balance or Net Asset; Gain Decrease in Fund Balance or Net Assets; Loss

29 Roles in fiscal Management The board of directors and its subcommittees has a responsibility for the public trust because the NPO is tax exempt. The board has responsibility for fiscal oversight

30 Roles in fiscal Management Establishing policies that govern the resources of the NPO Approving and monitoring the budget Selecting and engaging the auditor and receiving the report of the auditor

31 Types of Revenues Grants Contributions Earned Income Donated Goods and Services Fundraising Investment Income

32 Types of Expenses Program/Project vs. Agency Expenses Allowed and un-allowed expenses Capitalized vs. operating expenses Direct program expenses Direct services Direct admin Indirect expenses In-kind and donated good

33 Unallowed Costs Contributions Entertainment costs Alcoholic beverages Fundraising Lobbying Interest Expense Bad Debts Legal Costs OMB Circular A122

34 Capitalized vs Operating Operating expenses are everyday costs of keeping your program going. Expensed in the period incurred. e.g., salaries Capitalized expenses are depreciated over time and are carried on the balance sheet. Only depreciation is expensed in the operating statement. e.g., vehicles

35 Direct and Indirect Costs Direct Costs: Traced directly to program or activity. Indirect Costs: All other costs. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs. OMB A-122 Guidance

36 OMB A-122 Guidance Direct Costs Allowable Direct Costs for Personnel: Salaries, wages, director's and executive committee member's fees, incentive awards, fringe benefits, pension plan costs, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differentials. Vacation, holiday, sick leave pay, and other paid absences are included in salaries and wages and are claimed on grants, contracts, and other agreements as part of the normal cost for salaries and wages. Fringe benefits are specifically identified to each employee and are charged individually as direct costs. Allowable benefits include: FICA, Retirement, Group Insurance, Worker s Compensation, and Unemployment Insurance.

37 Fundraising Expenses Fundraising Expenses are neither Direct or Indirect Costs Fundraising Expenses are tracked separately Fundraising Expenses CANNOT be charged to a federal grant

38 The CFO Challenge The challenge and opportunity for the nonprofit chief financial officer (CFO) is to learn how to make numbers come alive for those on the frontline of the organization, and help them embrace numbers as a critical step on the path to achieving the mission of the organization.

39 Financial Intimidation There are several reasons why it can be difficult to get non-financial staff to pay attention to the numbers: Individuals may be intimidated by financial data. Some organizational cultures do not embrace financial information. Staff within nonprofit organizations may lack financial literacy.

40 Financial Intimidation In the nonprofit world, people tend to have expertise in issues such as youth development, education, or the environment, and may have no experience with financial matters (David Stolow- Bridgestar.org January 2008 )

41 Dashboard Reporting A process through which an organization selects certain indicators of performance for the organization as a whole and for each department and then tracks these by color (red = act now, yellow = monitor, green = celebrate) on a regular basis

42 Dashboard Reporting The dashboard method captures the organization s s most critical financial indicators in a few memorable and easy to follow metrics that anyone in the organization can understand. tcharts-reporting reporting-suite-examples.shtmlexamples.shtml

43 Dashboard Example

44 What Is Strategic Planning? Strategic planning can be used to determine mission, vision, values, goals, objectives, roles and responsibilities. Strategic planning is a management tool, used for one purpose only: to help an organization do a better job

45 What Is Strategic Planning? to focus its energy, ensure the members of the organization are working toward the same goals, and assess and adjust the organization s direction in response to a changing environment. In short, strategic planning is a disciplined effort to produce fundamental decisions and actions that shape and guide what an organization is, what it does and why it does it, with a focus on the future. (Adapted from John M. Bryson s Strategic Planning in Public and Nonprofit Organizations.)

46 What is strategic Planning? Step 1: Information gathering and analysis 1a: External assessment 1b: Internal assessment 1c: Market assessment

47 What Is Strategic Planning? Step 2: Identification of critical issues facing the organization Step 3: Development of a strategic vision statement that sets the future direction for the agency

48 What Is Strategic Planning? Step 4: Mission statement review/revision Step 5: Development of strategic goals Step 6: Formulation of strategies for each goal Step 7: Preparation for operational planning based on the strategic plan (developing annual objectives)

49 Vision and Mission. The vision of an organization is usually the brainchild of the founder and the organization s initial directors. It s the change or ultimate perfection an organization can imagine that would solve its reason for existence. The mission statement is a descriptive statement or guiding principle by which your organization is run that indicates why and how you have chosen to operate as an organization. It should be succinct, concise and compelling.

50 Organizational Goals and Objectives In order to describe your project, you must first start out with the goals and objectives What you want to ultimately accomplish (your goal) and what you must do specifically to achieve that goal (your objectives).

51 Goals and S.M.A.R.T. Objectives A goal is a broad statement that describes what your program will accomplish. An objective is a specific statement that describes a particular, expected program outcome.

52 Useful objectives are SMART: Specific Measurable Attainable Relevant Time-bound

53 Financial Planning and Budgeting Financial planning is the development and implementation of coordinated plans for the achievement of the enterprise s s overall financial objectives A Strategic plan identifies goals, Financial plans identifies objectives Financial objectives usually relate to improvements in the organizational financial position or increased profitability.

54 Financial Objectives Examples Maintaining a specified cash reserve Maintaining a set of percentages of program services, management and general or fundraising costs Maintaining a level of pay for staff to attract skilled employees Entering into a joint venture Limiting Medicaid revenues

55 What comes first? Strategic Planning should come BEFORE financial planning The financial plan identifies the resources that are needed to implement the strategic plan

56 Financial Reports Financial reports, usually produced on a monthly basis, gives managers the opportunity to review heir organization s financial position

57 Balance Sheet The statement of financial position presents the organizations financial position (i.e., The value or worth of the organization at a given time)

58 Consolidated Activity Statement Presents the overall organization s performance for the report period

59 Activity Statement by Cost Center Presents the performance of a cost center for the report period This could be a service center, program or area

60 Statement of Cash Flows Shows an organization s s cash receipts and payments

61 Statement of Activities Profit & Loss Statement Summary of a company s s revenues and expenses for an accounting period annually, monthly, quarterly

62 Statement of Activities Elements of the statement of activities include: Revenues from providing services, fundraising, investments or other activities of the organization Expenses incurred in the operation of the organization

63 Statement of Activities Gains or increases in net assets Losses or decreases in net assets

64 Additional Financial Statements Cash Flow shows cash receipts and payments over a period of time set up by principal categories and uses Functional Expenses (1) program services / activities carried out to fulfill organization s s mission or purpose (2) supporting services/fundraising, management & membership development

65 Interpreting Financial Statements Describes the FINANCIAL HEALTH of the organization Measures the organization s s efficiency Evaluates the adequacy of financial resources Identifies financial trends

66 What to Look For Surplus or Deficit Budget to Actual for Revenue and Expenses Vertical Analysis line items % of revenue or expense Horizontal Analysis compares line items to total with prior periods (current vs prior year) Ratio of administrative expenses- expenses associated with each program Current ratio ability to cover debt

67 Summary Budgeting Basics For Non-financial Executives

68 Purpose of this Training To present the fundamentals and practical aspects of fiscal management for non financial managers. To provide basic budgeting information and terminology as tools for further exploration.

69 LEARNING OBJECTIVES Describe the linkage between financial and strategic planning State the basics principles of internal controls

70 LEARNING OBJECTIVES Understand THE BASIC COMPONENTS Fiscal Management System Know the differences between for-profit and NonProfit Organizations Describe the roles and responsibilities of the Board of Directors, the executive director and program managers in fiscal management

71 LEARNING OBJECTIVES Describe the linkage between financial and strategic planning State the basics principles of internal controls

72 Chiquita T. Tuttle, MBA Thank you for your participation and attendance Have a Great Day!