Accountability 101: Basic Nonprofit Financial Documents

July 21, 2010

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Today’s Speakers

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Jennifer Ahern Lammers The Philanthropy Hub

www.philanthropyhub.com

ACCOUNTABILITY 101: BASIC NONPROFIT FINANCIAL DOCUMENTS

Presented By: Jennifer Ahern Lammers

Agenda

  Why the Numbers Matter   Looking Forward

 Budgets  Strategic Plans

  Looking Back  Annual Report   IRS Form 990  Financial Statements

Why the Numbers Matter

  They are an important management tool   The are essential for successfully:

 planning for the future

  responding to crisis

 preventing loss and fraud

Why the Numbers Matter to Others

  They communicate an organization’s priorities   They record an organization’s history   They are one of the only means stakeholders

have of comparing one organization to another quickly and “objectively”

LOOKING FORWARD

Financial Projections

Projection Documents

  Program/Project Budgets   Department/Division Budgets   Organizational Budgets   Strategic Plan

Budget Building

3 to 5 Year Strategic Plan

Organization

Department, Division, Location

Project, Program

The Budget

An Educated Guess

Based on Historical

Knowledge

Tempered by Environmental

Realities

A Plan Stated In Dollar Term

Purposes of a Budget

Control Spending

Allocate Resources

Express Plans Incent

Managers

Minimize Fraud

Budget Qualities

Effective

Flexible

Consistent

Realistic

Budget Narrative

What it Covers

•  Program? •  Department? • Organization?

What Period?

•  Year? • Month? • Multi-Year

Span?

Basis?

•  Cash? •  Accrual?

Budget Basis

  records all revenues and expenditures when cash is either received or disbursed

  easily manipulated to cover financial shortcomings

  records revenues and expenses when they are incurred, regardless of when cash is exchanged

  more accurately reflects financial position and is harder to manipulate

Cash Accrual

Budget Presentation

Revenues Sources

Grants

Contributions

Earned Income

Interest

Other

Expenses Categories

Personnel

Benefits

Other Than Personnel (OTP)

Personnel Costs

  Salaries   Benefits

  Insurance  Accrued Vacation   401k/403b contributions   Taxes

  Personnel Costs are often 70% or more of total expenses

  Fringe Benefit costs add between 18 – 35% over salaries

Common OTP Natural Categories

Depending

on

Mission

  Rent/Occupancy   Insurances   Utilities   Travel/Transportation   Small Equipment   Office Supplies   Professional Fees (accountants, lawyers)   Interest

Projects and Program Budgets

  Clearly labeled as to project/program and time period

  Present all sources of revenue, indicating any money transferred temporarily restricted funds raised in a prior period and/or allocated from the organizations unrestricted funds

  List expenses by Personnel/Benefits and then OTP costs

  Conform with organization’s total budget

After School Sports Program

2010 -2011 School Year Support (Fiscal Year July 2010 - June 2011)

Revenues

Enrollment Fees $33,350.00

United Way $17,750.00

General Support Funds Allocated to Program $5,500.00

Total Revenues $56,600.00

Expenses

Salaries

Full Time Instructor $28,000.00

Part-Time Aids $10,500.00

Benefits $9,205.00

Allocated Space & Utility Cost $1,300.00

Insurances $3,500.00

Allocated Depreciation $225

Program Marketing $500

Equipment $1,200.00

Snacks $950.00

Transportation $1,200.00

Total Expenses $56,580.00

Excess Revenue over Expenses $20.00

Department/Division Budgets

  Span the gap between projects and total organization

  Include revenues earned by and grants restricted to programs and projects in the division

  Include space costs, equipment depreciation, utilities and other “allocated” costs

  Should aim for a profit

Organizational Budgets

  Include all sources of revenue   Include all expenses for programs and support

areas   Should present expenses by major programs and

support areas   Additional information on natural classifications

(salaries, rent, supplies) should be provided when appropriate and in “column” fashion

Youth Organization for Urban Teen Health (YOUTH)

Fiscal Year July 2010 -June 2011

Revenue

Enrollment Fees $63,300.00

Grants $78,000.00

Contributions $33,250.00

Branded Item Sales $8,500.00

Interest and dividends $5,300.00

Totat Revenue $188,350.00

Expenses

Program

Breakfast Tutor Program $22,350.00

College Prep Program $45,000.00

After School Sports Programs $56,580.00

Total Program Costs $123,875.00

Support Services

Management and General $28,750.00

Fundraising $19,500.00

Total Support Costs $48,250.00

Total Expenses $172,125.00

Excess (deficit) of Revenue After Expenses $16,225.00

Strategic Plan

  3 to 5 year narrative and financial projection   Includes costs of proposed program growth or

expansion including but not limited to salaries, space, marketing, necessary fundraising, etc.

  Identified environmental issues that could impact revenues or expenses

  Is tied to the organization’s long term mission goals   A strategic plan without an attached budget is not a

strategic plan

Budget Communication

  Not every one needs to see the same level of detail   The standard Personnel/OTPs presentation of

expenses works for smaller projects, programs and internal uses of department or division budgets

  The more compact Program/Management/Fundraising presentation is often better for presenting the whole organization budget to stake holders

LOOKING BACK

Accounting for Prior Activities & Expenditures

Achievements of the Past Year

  The Annual Report   IRS Form 990   Financial Statements

The Annual Report

  A single document that includes:  Mission  Program highlights  Revenue and expenses for current year  Board roster

  Provided to anyone seeking information on your organization

Annual Report Tips

  Need not be an expensive glossy publication   Can be made “multi-year” by having a folder flap

on the back cover in which updated board roster and financial information are inserted

  Can be online and printed only for those without internet access

The IRS Form 990

  IRS form filed annually by public charities and private foundations

  Form list assets, receipts, expenditures and compensation of officers, among other facts

  Forms are publically available from the IRS, charities, and on Guidestar.org

Which Organizations have to File?

  Private foundations. They file a Form 990-PF.   Larger nonprofits that have gross receipts of more

than $25,000 have to file Form 990 or 990-EZ   Small nonprofits with gross receipts of $25,000 or

less must file the new form electronic 990-N (the e-postcard) to maintain exempt status

  Instructions and forms can be found at  http://www.irs.gov/pub/irs-pdf/i990.pdf  http://www.irs.gov/pub/irs-pdf/f990.pdf

Recent 990 Changes

  Guiding principles:  Enhancing Transparency  Promoting Compliance  Minimizing the burden on nonprofits

  Why is this important?

The Core Form

I.  Summary II.  Signature Block III.  Statement of Program Service Accomplishments IV.  Checklist of Required Schedules V.  Statements Regarding Other IRS Filings and Tax Compliance VI.  Governance, Management, and Disclosure VII.  Compensation… (with Sections A, B, C) VIII.  Statement of Revenue IX.  Statement of Functional Expenses X.  Balance Sheet XI.  Financial Statements and Reporting

Some of the Supplemental Schedules

A.  Public Charity Status and Public Support B.  Schedule of Contributions C.  Political Campaign and Lobbying Activities D.  Supplemental Financial Statements E.  Schools F.  Statement of Activities outside the US G.  Fundraising or Gaming Activities H.  Hospitals I.  Grants and other Assistance to Organizations J.  Compensation Information K.  Supplemental Information on Tax Exempt Bonds L.  Transactions with Interested Persons M.  Non Cash Contributions N.  Liquidation, Termination, Dissolution or Significant Disposition of Assets O.  Supplemental Information

The New 990 First Page Priorities

BEFORE

  No mission statement   No staff, volunteer or

board information   Revenue and its sources,

in detail   Expenses broken down

by Program Services, Admin, and Fundraising

AFTER

  Mission statement, line 1   Board, staff and volunteer info

before numbers   Revenue and its sources,

combined into larger categories   Expenses with less intuitive break

downs, highlighting salaries, member benefits and professional fundraising fees

  Program and Admin expenses joined in “other expenses”

More Information, Easier to Find

  Greater emphasis on narrative information, especially as it pertains to mission, policies, and procedures

  Real questions about management practices   Management and board should review the

document before it is filed with the IRS   The form, as filed, is available to the public

Complete Financial Statements

Audit Opinion

Statement of Position

Statement of Activity

Cash Flow Statement

Statement of

Functional Expense

Notes

The Audit Process

  Provides an independent review of procedures and accounting of significant transactions

  Provides constructive recommendations for improving systems and procedures

  Satisfies external compliance requirements from funders and some state agencies

  The Gold Standard

Audit Opinions

Unqualified

•  Considered a “clean opinion”

•  States that statements are presented fairly

Qualified

•  Statements have one or more material problems

•  Raises awareness of issues

Adverse

•  Statements do not conform to GAAP

•  Readers are provided “no assurance” on the figures

Disclaimer of Opinion

•  “No opinion” on statements

•  Auditors were unable to apply auditing standards

•  Very unusual, rarely issued

Other Options

Reviews

•  Step down from a full audit •  CPA provides only limited assurances based on staff inquiries

and spot checks of procedures

Compilations

•  Further step down •  CPA provides no assurance as to the validity of the numbers

Internally Generated

•  Should follow GAAP (FSB 116 and FSB 117) format •  If prepared correctly may be more useful than a compilation

The Statement of Financial Position

a.k.a:

The

Balance

Sheet

What you Own – What you Owe =

What’s left

Balance Sheet

Assets

•  Most liquid first •  Cash & Cash Equivalents, Contributions Receivable,

Investments, Prepaid Expenses, Fixed Assets, etc.

Liabilities

•  Due in 12 months or less first, then longer term •  Line of Credit, Accounts Payable, Accrued Expenses, Long

Term Debt, etc.

Net Assets

•  Unrestricted (includes fixed assets and any board reserves) •  Temporarily and Permanently Restricted

ABC Organization Statement of Financial Postion

December 31, 2010 and 2009

Assets 2010 2009

Cash $50,000 $82,768 Accounts Receivable $256,164 $314,709 Unconditional Promises to Give $229,382 $204,269 Grants Receivable $54,691 $215,875 Prepaid Expenses $28,463 $40,636 Property & Equipment (net of dep) $1,942,736 $1,993,281 Other Assets $19,054 $26,817

Total Assets $2,580,490 $2,878,355

Liabilities and Net Assets 2010 2009

Liabilities Line of Credit $117,319 $136,400 Accounts Payable $126,394 $151,759 Accrued Expenses $74,000 $91,080 Accrued Payroll and Taxes $48,461 $120,238 Long-term Debt $673,714 $686,150

Total Liabilities $1,039,888 $1,185,627

Net Assets Unrestricted 1,076,134 1,050,277 Temporarily Restricted 258003 435923 Permanently Restricted 206465 206465

Total Net Assets 1,540,602 1,692,665

Total Liabilities & Net Assets $2,580,490 $2,878,292

Asset Classifications

  Permanently: Money given that must be invested. The principal can not be spent, but earnings can

  Temporarily: Money given for a specific project or time period.

  Unrestricted: Money given without a specific assigned use. “In support of the important work of your organization.”

Statement of Activities

  Where money came from and what it was spent on over a particular period of time

  Most analyzed statement included in an audit packet

Revenues

  Sources of revenue are broken down and often include:   Individual support  Foundation and corporate support  Special events revenue  Earned income   Interest  Assets released from restriction

Revenues (cont’d)

  Revenues are presented according to donor restriction:  Unrestricted

 Temporarily Restricted

 Permanently Restricted

  Although both are accepted by GAAP the column format – not the stacked – is best as it is much easier to understand

  Only donors can make restrictions!   However, we often shape the nature of the

restriction by the language of the “ask”   Make sure your revenues are appropriately

categorized   Make sure you have back up to substantiate nature

of the restriction

Donor Restrictions

Expenses

  Expenses are presented by program, management & general, and fundraising

  Expenses occur in the “Unrestricted” column   Program expenses are broken down by program   Identified program areas conform with the

organization’s other materials

ABC Organization Statement of Activities For the Year Ended December 31, 2009

Temporarily Restricted

Permanently Restricted Revenue and Other Support Unrestricted Total

Service revenues $4,982,631 $4,982,631 Grants $238,000 $151,790 $10,000 $399,790 Contributions $109,058 $77,201 $186,259 Special Events (less of direct costs of $19,399) $1,976 $1,976 Interest & Dividends $38,032 $38,032 Unrealized Gain $117,425 $117,425 Misc. $21,382 $21,382 Net Assets released from restriction $406,911 $(406,911) $-

Total Revenue $5,915,415 $(177,920) $10,000 $5,747,495

Operating Expenses Program Services Association Services $2,842,480 $2,842,480 Children & Teen Services $675,153 $675,153 Family Supoort $822,531 $822,531 Therapy $1,038,814 $1,038,814

Total Program Expenses $5,378,978 $5,378,978

Supporting Services Management and general $188,896 $188,896 Fundraising $166,403 $166,403

Total Supporting Expenses $355,299 $355,299

Total Expenses $5,734,277 $- $- $5,734,277

Change In Net Assets $181,138 $(177,920) $10,000 $13,218 Net Assets Beginning of Year $2,348,570 $435,923 $206,465 $2,990,958 Net Assets End of Year $2,529,708 $258,003 $216,465 $3,004,176

Statement of Cash Flows

  Reports the cash generated and used during the year

  Least understood statement in the nonprofit setting   Less useful as an end of year analysis that as a

monitored management tool (cash flow projection)

Where the Cash Came or Went O

pera

ting

Act

iviti

es converts the

items reported on

the statement of

activities from the

accrual basis to cash

Inve

stin

g ac

tiviti

es

reports the purchase and sale of long-

term investments

and property, plant and

equipment

Fina

ncin

g ac

tiviti

es

reports on any loan

payments made or

credit secured

Misc. Organization for Good Statement of Cash Flow Fiscal Year Ended September 31, 2010

2010 Cash Flow from Operating System Increase (decrease) in net assets $XXXX Adjustments to reconcile decrease in net assets to cash Depreciation $XXXX

Net realized gain on the sale of investments ($XXXX)

Net unrealized gain on sale of investments ($XXXX) Change in opertating assets and liabilities

Reimbursable expenditures under contracts ($XXXX) Contributions receivable $XXXX Prepaid expenses and other assets $XXXX Grants payable ($XXXX)

Accounts payable and accrued expenses $XXXX

Net cash (used in) provided by operating activities

Cash flows from investing activities Purchase of investments ($XXXX) Proceeds from the sale of investments $XXXX Purchase of fixed assets ($XXXX) Sale of fixed assets $XXXX Use of restricted cash ($XXXX)

Net cash provided by investing activities $XXXX

Cash flows from financing activities Payment of note payable ($XXXX)

Net cash used in financing activities ($XXXX)

Net increase in cash and cash equivalents $XXXX

Cash and cash equivalents Beginning of year $XXXX End of year $XXXX

Statement of Functional Activities

  Required by GAAP for all voluntary health and welfare organizations

  Required by the BBB for all charities soliciting public support

  An important document for demonstrating priorities and clarifying necessary expenses

ABC Organization

Statement of Functional Expense

For the Fiscal Year Ended December 31, 2009 Program Support 2009

Soup Kitchen Night Shelter Homeless

Intervention Total Program Administration Development Total Support Total Expenses

Compensation and related expenses

Salaries and Wages 62,000 45,000 36500 143,500 75,000 58,000 133,000 276,500

Payroll Taxes 11000 3000 2000 16000 13,000 6000 19,000 35,000

Fringe Benefits 17360 12600 10220 40180 21000 16240 37240 77,420

Total 90,360 60,600 48720 199,680 109,000 80,240 189,240 388,920

OTP

Outside services 12000 9000 12000 33000 0 36000 36000 69,000

Rent 22000 22000 0 44000 11000 11000 22000 66,000

Depreciation and amortization 20000 14000 0 34000 2000 3000 5000 39,000

Telephone 1000 1000 5000 7000 3000 4000 7000 14,000

Utilities 975 975 1950 400 400 800 2,750

Travel - - 1500 1500 1000 400 1400 2,900

Insurances 6500 8000 2300 16800 1200 7000 8200 25,000

Printing 900 250 1100 2250 11250 18000 29250 31,500

Equiptment rental 4500 0 0 4500 0 6500 6500 11,000

Postage 0 0 0 0 2400 3500 5900 5,900

Event Space Rental 0 0 0 0 0 22000 22000 22,000

Misc. 222 457 354 1033 354 555 909 1,942

Total 68097 55682 22254 146033 32604 112355 144959 290,992

Total Expenses 158,457 116,282 70,974 345,713 141,604 192,595 334,199 679,912

The Notes

  Not to be ignored   If you think someone reviewing your financial

statements would be more informed if they knew (fill in the blank) . . . it should be in the notes

  Note 1 (or 1a) is the first narrative opportunity an organization has in its financial statements   Its content should be given the same care and

thought as any other publicly available materials

About the Speaker

Jennifer Ahern Lammers, Founder, The Philanthropy Hub Jennifer brings a passion for seeing nonprofits succeed and an in-depth knowledge of the sector to each of her training offerings. Her areas of special focus include accountability, governance, financial communication, and ethics. Jennifer has created and delivered dozens of nonprofit specific accounting, budgeting and management trainings for charities in a wide range of fields, including workforce development, AIDS services, housing, and volunteer management. In 2002, in NYC, she helped launch the Certified Nonprofit Accounting Professional (CNAP) program, through which 100s of nonprofit professionals have received intensive financial and accounting instruction. In partnership with Parent, McLaughlin & Nangel, Jennifer brought the CNAP training to MA in 2008.

Formerly, she was vice president and director of the New York Philanthropic Advisory Service for the Better Business Bureau, one of the largest charity watchdog and donor education programs in the country. While with the BBB, she managed the evaluation of over 1000 charities and developed the National September 11th Charity Database.

Jennifer holds a Masters of Public Administration from New York University, and received her Bachelor of Arts from the University of Chicago.

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