Telling Your Financial Story - sfcontroller.org · Telling Your Financial Story City & County of San Francisco May 31, 2018 Rebecca Coker, Lead Consultant Roxanne Hanson, Senior Consultant

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Telling Your Financial Story

City & County of San Francisco

May 31, 2018

Rebecca Coker, Lead ConsultantRoxanne Hanson, Senior Consultant

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Financially resilient organizations

Stay focused on the long-term while continually assessing and responding to current needs. They

understand and are able to tell their financial story.

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What does a financially resilient organization look like?Financial Resilience in Nonprofit Organizations

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What do you want to know about your organization’s financials?

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Order of statements in the audit

Statement of

Financial Position

BALANCE SHEET

Statement of

Activities

INCOME STATEMENT

Statement of

Functional Expenses

Statement of Cash Flows

Opinion LetterNotesOpinion LetterNotesManagement Letter

What does a financially resilient organization look like?Method of Accounting

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VS

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What does a financially resilient organization look like?Revenue restrictions

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What does a financially resilient organization look like?Depreciation

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What does a financially resilient organization look like?Statement of Activities & Statement of Functional Expenses

Unrestricted Revenue Expenses Surplus

(Deficit)

What was Earned What was Spent Results

Statement of Functional Expenses

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Operating Results TRNA

balance going into the

next fiscal yearReserve

Balance

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What does a financially resilient organization look like?Balance Sheet

Assets• Cash• Receivables• Investments• Fixed Assets

Liabilities• Bills due• Line of Credit• Deferred

Revenue• Debt (short-and

long-term)

Net Assets• Unrestricted

(Board Designated, Fixed Assets, Other)

• Temp. Restricted

• Perm. Restricted

What is Owned What is Owed Net Worth

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Cash

Property & Equipment

Investments

Receivables

Acce

ssib

ility

Assets & Liquidity

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What does a financially resilient organization look like?Statement of Cash Flows

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Cash from Operations

Cash from Investing

Cash from Financing

Change in Cash

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What does a financially resilient organization look like?Financial Health Analysis Tool

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What does a financially resilient organization look like?Operating Results

Unrestricted Revenue Expenses Surplus

(Deficit)

What was Earned What was Spent Results

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What does a financially resilient organization look like?Months of Cash-on-Hand

Cash and Cash

Equivalents

Average Monthly

Operating Expenses

Months of Cash on

Hand

Money in the Bank

What was Spent on Average Per

MonthOperating Runway

Money in the Bank

Unrestricted Net Assets

Illiquid Net Assets

Liquid Unrestricted Net Assets

What does a financially resilient organization look like?Liquid Unrestricted Net Assets (LUNA)

Unavailable Net Worth

Operating Reserves

Unrestricted Net Worth

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Months of Operating Reserves

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What does a financially resilient organization look like?Operating Revenue Mix

Unrestricted Revenue Source

Total Unrestricted

Revenue

Revenue Source %

Revenue for the Year

Amount of Revenue Source Relative to Total

Revenue from Source

What does a financially resilient organization look like?Expense Mix

Total Expenses

Program Management & General Fundraising

Overhead20

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What does a financially resilient organization look like?Functional Expense Mix: Program

Program Expenses

Total Expenses

Program Expense %

What was Spent in Total

Amount Spent on Program

relative to Total

What was Spent on Program (Direct and

Shared)

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What does a financially resilient organization look like?Notes to the Financial Statements

• Basis of accounting

• Fixed assets

• Debt

• Restricted net assets

• Related party transactions

• Subsequent events

• Commitment and contingencies

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Financial Storytelling

https://www.youtube.com/watch?v=uI4fVgVVpiw

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“When we consider responding to a challenge with purposeful action, we ask ourselves two questions:

why and how. Analytics helps answer the ‘how question’—how to uses resources efficiently, detect

opportunities, compare costs, and so on. But to answer the ‘why question’—why this matters, why we care, why we value one goal over the other—we turn

to narrative.”

~Marshall Gantz, Leading Change: Leadership, Organization, and Social Movements

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What does a financially resilient organization look like?IRS Form 990

What does a financially resilient organization look like?Resources

Public Website:

www.sfcontroller.org/nonprofits

– Training Materials

– Resources for Nonprofits

– Monitoring Form

– Monitoring Guidelines

Laura Marshall (Program Lead)

Project Manager(415) [email protected]

Marnie Purciel-Hill (Technical Assistance)

Sr. Performance Analyst(415) [email protected]

Jeff Pomrenke (SharePoint)

Performance Analyst(415) [email protected]

Emily Vontsolos (General Assistance)

San Francisco Fellow(415) [email protected]

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What does a financially resilient organization look like?Resources

• The Key to Long Term Financial Health Liquid Unrestricted Net Assets (LUNA), Hilda Polanco, New York Nonprofit Press, May 2012:

• Keeping it in Reserve: Grantmaking for a Rainy Day. Hilda Polanco and John Summers, Nonprofit Quarterly, May 2016:

• Operating Reserve Policy Toolkit for Nonprofit Organizations. The National Center for Charitable Statistics, Dec. 2008

• Nonprofit Audit Guide

• StrongNonprofits.org

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What does a financially resilient organization look like?Fiscal Management Associates (FMA)

• 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

@FMA4Nonprofits

linkedin.com/company/fiscal-management-associates-llcwww.fmaonline.net

Rebecca [email protected]

New York | Chicago | Oakland | Los Angeles

/FiscalManagementAssociates

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GUIDE TO AUDITED FINANCIAL STATEMENTS

Fiscal Management Associates, LLC © 2018 1

Financial Audit 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. Independent means the CPA is not on the board, doesn’t have a financial interest or is a family member of someone who does. California Audit Requirements

• Audits required for charitable organizations with gross annual revenue > = $2 million • No threshold or requirements for a Review or Compilation

Single Audit (A-133)

• Audits are required for organizations that expend at least $750,000 in federal funding Material Weakness A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. Significant Deficiencies A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance. Audit Components

• Statement of Financial Position (Balance Sheet) • Statement of Activities (Income Statement) • Statement of Functional Expenses • Statement of Cash Flows • Opinion Letter • Notes • Management Letter (for Management, if applicable)



Revenue Types

Unrestricted Description: Contributions are free of donor restrictions on their usage

Examples:

• Foundation grants for general operations • Individual, corporate and other contributions • Performance-based contracts • Fee for service revenue • Investment income

Temporarily Restricted

Description: Contributions have donor imposed restrictions and may be removed by (1) the passage of time or (2) an act of the organization. Temporarily restricted revenue is reclassified as unrestricted revenue once the restriction has been met.

Examples:

• Foundation grants for specific programs • Multi-year foundation grants

Permanently Restricted

Description: Contributions have donor restrictions in perpetuity

Example:

• Endowments



How it Works Purchases of fixed assets provide value not only in the year that asset is purchased but over the full useful life of the asset. Rather than accounting for the full value of a large asset in the year it is purchased (e.g. a new building), depreciation is a way to account for how much of the asset is being used each year of its useful life.

For example, a fixed asset costing $100,000 with a useful life of 10 years would be depreciated at $10,000 each year for 10 years.

Fixed Asset (aka Capital Assets) An asset that is valued over a pre-determined dollar threshold and will benefit the organization beyond a time span of 1 year.

Depreciation Depreciation is an accounting method of allocating the cost of a fixed asset over its useful life. Depreciation is defined as the reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Fixed Assets and Depreciation



Statement of Financial Position (Balance Sheet) The Statement of Financial Position is a financial statement that reports the assets, liabilities, and net assets of an organization on a given date. In the audit, it reflects the accumulated operating results for the life of an organization.





Liquidity Liquidity describes how easily you can access your assets as cash. Assets are listed on your Balance Sheet in order of liquidity, with the most liquid assets (cash) listed at the top.



Statement of Activities (Income Statement) The Statement of Activities is a financial statement that reflects organizational performance for a given period of time. In the audit, it reflects the changes to an organization’s net assets based on income and expenses in a given fiscal year.





Statement of Functional Expenses The Statement of Functional Expenses reports expenses by their function (program, management & general, and fundraising) and by the nature of expense (salaries, rent). The expenses are included in much more detail than the Statement of Activities.



Statement of Cash Flows

The Statement of Cash Flows is a financial statement that shows where cash was obtained and spent for a given period. This statement reports on Operations, Investing, and Financing, as well as any non-cash activity (e.g. acquisitions of equipment).





Financial Health Metrics

Liquid Unrestricted Net Assets (LUNA) LUNA represents the amount of unrestricted cash, receivables, and investments (excluding fixed assets) an organization has available to spend after board-designated reserves, bills, and debt are removed. LUNA consists of that portion of an organization's unrestricted net assets balance that could be converted to cash relatively easily if necessary. Months of LUNA is calculated as a percentage of average monthly operating expenses (excluding depreciation). LUNA represents an organization’s financial strength and flexibility to pursue new opportunities or weather financial challenges.



Months of Cash-on-Hand Months of Cash-on-Hand represents the amount of cash the organization has available divided by the average monthly operating expenses of the organization. This metric does not remove any bills that need to be paid or distinguish between unrestricted and restricted assets that may both be included in cash.

Operating Results Operating Results measures the difference between the amounts of unrestricted revenue an organization brings in and the amount it spends for one year. An operating surplus (positive number) means the organization brought in more than it spent. An operating deficit (negative number) means the organization spent more than it brought in.



Operating Revenue Mix Operating Revenue Mix shows the makeup of an organization’s unrestricted revenue. Revenue streams may include: contributions (individual, foundations, corporate, membership, and special events); government grants and/or contracts; earned revenue (e.g. program fees, rental income); and other revenue (such as interest from investment activities).

Organizations must plan for changes in revenue composition in addition to revenue growth or decline. The best mix of revenue streams will depend on the organization's business model and strategy.



Functional Expense Mix Functional Expense Mix shows how much was spent on Program, Management & General, and Fundraising relative to the total spend.



Citywide Nonprofit Monitoring Standards

Audited Financial Statements As Applicable (Per Departmental Requirements):

Complete: all sections and statements included; opinion and other audit letters are signed; sections include: o Opinion Letter o Statement of Financial Position (Balance Sheet) o Statement of Activities (Income Statement) o Statement of Cash Flows o Statement of Functional Expenses o Footnotes

Unmodified opinion No material weaknesses mentioned or going concern stated in the notes to the financial statements No current audit findings and/or questioned costs Audit completed within six months of the close of the contractor's fiscal year

For Contractors that Received a Management Letter:

Management letter has been signed by the audit firm For any prior year findings, the Contractor has provided a reasonable explanation of how the Contractor has corrected all the findings

For Organizations with a Single Audit:

No material weaknesses mentioned or going concern stated in the notes to the financial statements No current audit findings and/or questioned costs For any prior year findings, the Contractor has provided a reasonable explanation of how the Contractor has corrected all the findings

3a

3b

3c

3d

3e

3f

3g

3h

3i

3j



Financial Assessment:

Total unrestricted net income (change in net assets) is positive over 2 consecutive years or the contractor provides a reasonable explanation for how it will be positive by the end of the fiscal year [pilot standard] Total change in cash is positive over the sum of 2 consecutive years or agency has a reasonable explanation and/or plan to reverse cash outflow [best practice] In current audit, agency has at least 60 days of operating cash [best practice]

Financial Reports

Balance Sheet is current (as of the last four months, at least) Working capital ratio is greater than 1 Current bank reconciliation (as of the last four months, at least)

Profit and Loss Statement (aka Statement of Activity):

P&L Statement is current (as of the last four months, at least) Shows year-to-date (YTD) income and expense by program, contract or funding source, including indirect costs Year-to-date net income is either a positive number or the Contractor provides a sound explanation of how it will be positive by the end of the fiscal year

3k

3l

3m

6a

6b

6c

6d

6e

6f

FINANCIAL METRICS WORKSHEET

Year: ___________________

Operating Surplus (Deficit)

A: Unrestricted Revenue & SupportSource: Statement of Activities

B: Operating ExpensesSource: Statement of Activities

C: OPERATING SURPLUS (DEFICIT) C = A - B -$ Unrestricted Revenue & Support - Operating Expenses

Months of Cash on Hand

D: Cash & Cash EquivalentsSource: Statement of Financial Position

B: Operating ExpensesSource: Statement of Activities

E: DepreciationSource: Statement of Functional Expense

F: Average Monthly Expenses F = (B - E) / 12(Operating Expenses - Depreciation) / 12

G: MONTHS OF CASH ON HAND G = D / FCash and Cash Equivalents / Average Monthly Expenses

Months of Liquid Unrestricted Net Assets (LUNA)

H: Unrestricted Net AssetsSource: Statement of Financial Position

I: Board Designated Net AssetsSource: Statement of Financial Position

J: Fixed Assets, Net of DepreciationSource: Statement of Financial Position

K: Debt associated with Fixed Assets (e.g. Mortgages)Source: Statement of Financial Position

L: LUNA L = H - I - J + KUnrestricted Net Assets - Board Designated Net Assets - Fixed Assets, Net + Debt

F: Average Monthly Expenses F = (B - E) / 12(Operating Expenses - Depreciation) / 12

M: MONTHS OF LUNA M = L / FLUNA / Average Monthly Expenses

Fiscal Management Associates, LLC © 2017

GUIDE TO THE FORM 990


Difference between Form 990 and Audited Financials

The Form 990 • Donor Restrictions: Contains no details about donor restrictions on revenue. Unlike the

audit which separates out contributions that are temporarily and permanently restricted by time or purpose, the Form 990 only show total revenue (equivalent to the total column on an audit’s Statement of Activities).

• Board Designated Net Assets: Contains no information about board designated net assets. A nonprofit board may decide to designate a portion of its Unrestricted Net Assets for a specified purpose. Unlike the audit which separates out board designated net assets from Unrestricted Net Assets, the Form 990 only includes total Unrestricted Net Assets.

• In kind donations of services and space are not recognized. • Sales: Sales of merchandise, special events, and rental activities are shown net of

expenses. • GAAP: Is not required to conform to Generally Accepted Accounting Principles (GAAP).

Unlike the audit which is performed by an auditor to provide an independent opinion to the management whether or not the nonprofit’s financial statements/records comply with GAAP, the Form 990 uses a blend of GAAP and tax-basis accounting as the reporting framework.

Critical Areas to Focus • Part I: Cover Page (Summary) • Part III: Statement of Program Service Accomplishments • Part IV: Checklist of Required Schedules • Part VI: Governance, Management & Disclosure • Part VII: Compensation of Officers, Directors, Key Employees, etc.

• Schedule A: Public Charity Status and Public Support: Proof that the organization

receives support from the general public, not just one person or family • Schedule D: Depreciation of Fixed Assets: Shows depreciation of fixed assets by

category: land, buildings, leasehold improvements, and equipment • Schedule G: Fundraising Activities: Types of fundraising activities conducted,

engagement of outside contractors for fundraising, and financial return on special events

• Schedule J: Additional Compensation: Provides additional information on compensation practices for officers, directors, trustees and key employees



Example: Central Asia Institute

Part I: Summary

Fiscal year

Revenue shown without restrictions

Expenses

Total surplus/ (deficit)



Part III: Program Services

Part IV: Checklist of Required Schedules

Mission

Description and expense totals for major programmatic

Conflicts of interest



Part VII: Officers, Directors, Key Employees

List of Board Members and highest paid staff members.



Part IX: Statement of Functional Expenses

Functional areas



Part X: Balance Sheet

Schedule O: Supplemental Information

The difference between these two numbers give you the unrestricted operating results

Documents

Telling Your Financial Story - sfcontroller.org · Telling Your Financial Story City & County of San Francisco May 31, 2018 Rebecca Coker, Lead Consultant Roxanne Hanson, Senior Consultant