Nonprofit Accounting 101

Transcription

1 Nonprofit Accounting 101

2 Today s Lesson Plan 1. Introductions 2. Why Finance & Accounting for Nonprofits? 3. The Three Steps to Financial Accountability 4. Presenting to Your Board & Funders 5. Wrap Up * Please Submit Questions Thru GoToWebinar Question Tool 2

3 Lesson Topic 1 of 5 : Introductions Meet Your Instructors Host Ron Kwak, Director of Strategy & Marketing, Jitasa Ron has over a decade of business process consulting, marketing, and business strategy experience across for-profit and nonprofit sectors. He holds a B.A. in Math & Economics from Northwestern University and an MBA from Kellogg School of Management Ron lives out his spirit of serving others through Zimele USA a nonprofit he founded that empowers women in South Africa via microsavings and microbusiness programs. Instructor Mary Soper, CPA & Director of People Development, Jitasa Mary has over 20 years of accounting experience, 14 years of which were direct accounting and bookkeeping experience with a nonprofit in the Washington, D.C. area. She holds a Bachelors of Science in Accounting from the University of Maryland. Mary lives out her spirit of serving others by volunteering in her local community and using her accounting skills to assist nonprofits with financial reporting so they can focus on their mission. 3

4 Lesson Topic 1 of 5 : Introductions Jitasa is the first and largest national accounting services provider exclusively focused on the nonprofit sector We are currently serving 200+ nonprofits Arts & Humanities Education Environment Health & Medicine Human Services International Affairs Religious / Churches Youth Development Associations / Foundations from federations to start ups in every sector 4

5 Lesson Topic 2 of 5: Why F&A for Nonprofits Why Finance & Accounting for Nonprofits? Risks If You Don t Benefits If You Do 5

6 Lesson Topic 2 of 5: Why F&A for Nonprofits Risk # 1 Loss of Confidence from the Donor Community Two of the most important lessons I learned as a philanthropist First is to look very carefully at the financial numbers Before getting really involved with an organization, it is important to understand where they stand financially. Give Smart Video: Lessons on Due Diligence Carolyn Lynch shares what she looks for in a grantee before investing Carolyn Lynch Co-Founder & President & Chairman Lynch Foundation 6

7 Lesson Topic 2 of 5: Why F&A for Nonprofits Risk # 2: Increasing Fines & Regulations from IRS Over the last few years, the IRS has revoked 500,000 tax exempt designations for failing to file their 990 documents. levied $ fines for each day day tax filings are late 7

8 Lesson Topic 2 of 5: Why F&A for Nonprofits Risk # 3: Susceptible to Fraud It Can Happen to Anyone Santa Rosa Salvation Army bookkeeper suspected of stealing $50,000 from Season of Sharing fund via payroll advances. Jan 2013 NYC Educational Housing Services founder and board members agreed to a $5.5M settlement with NY State Attorney General. Dec 2012 Three Cups of Tea founder Greg Mortenson, $1M settlement

9 Lesson Topic 2 of 5: Why F&A for Nonprofits Risk # 3: Susceptible to Fraud Finding: nonprofits disproportionately impacted by fraud* < 100 employees, $98,000 per fraud incident > 100 employees, $106,000 per fraud incident audits only discover ~ 12-14% of fraud! Best Practice: 2/3 of fraud incidents identified via proper controls * Source: Hauser Center for Nonprofit Organizations, Harvard University An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents 9

10 Lesson Topic 2 of 5: Why F&A for Nonprofits Benefit #1: Long Term Health For nonprofits, financial sustainability & program sustainability cannot be separated Jeanne Bell CEO of Compasspoint 10

11 Lesson Topic 2 of 5: Why F&A for Nonprofits Benefit #2: Access to Funding Grant Makers Reveal Most Common Reasons Grant Proposals Get Rejected by Marilyn Dickey 80% of grant applications that cross the desk of the W.K. Kellogg Foundation are immediately rejected [ One of key reasons mentioned is poor financials ] It is important for the financials and proposed budget to be right and realistic. When program staff without a strong finance background do the work, details often get missed It's not enough for the math to be right, it also needs to be realistic. I would be concerned about the ability to get those kinds of funds. 11

12 Lesson Topic 2 of 5: Why F&A for Nonprofits So How Are Nonprofits Doing? Study Overview 5 yr study by Indiana University s Urban Institute Center on Nonprofits & Philanthropy analyzed 250,000 IRS 990 filings surveyed nonprofits (1,500 responses) surveyed of nonprofit auditors in depth case studies 12

13 Lesson Topic 2 of 5: Why F&A for Nonprofits So How Are Nonprofits Doing? Study Findings 50% nonprofits do not follow Generally Accepted Accounting Principles (GAAP) 25-50% report financials that were worse if they used GAAP, suggesting a lack of expertise not malfeasance only 16% properly filed their IRS % report implausible numbers, such as negative numbers in 990 document 13

14 Lesson Topic 2 of 5: Why F&A for Nonprofits Challenges of Implementing Financial Best Practices? Challenge: Bandwidth & Time Executive Director & nonprofit staff forced to wear several hats Challenge: Nonprofit F&A Expertise Few CPA s become Executive Director s & vice versa Nonprofit accounting is more complicated than for profit accounting Need access to a wide range of skills and expertise that typically do not reside in any single person 14

15 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability How Do We Do It? Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Provide reporting insights to drive decision making The investment in a solid finance accounting infrastructure will help you achieve your mission! 15

16 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability Step 1 Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently 3 Critical Resources Provide reporting insights to drive decision making 1. people 2. financial processes / systems should be flexible to your organization should be consistent should involve appropriate checks-and-balances pay attention to document storage and retention 3. technology. 90% nonprofits use QuickBooks and it meets 95% of their needs 16

17 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability Step 1 Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Key Activities Provide reporting insights to drive decision making 1. setup appropriate chart of account (COA) structure alignment with IRS 990 requirements accounting best practices funder requirements 2. understand & align financial processes to client requirements baseline best practice audit ready processes / procedures adapt (as appropriate) to client specific processes / requirements 3. educate client 17

18 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Build: Chart of Accounts Benefits of a Chart of Accounts provides foundation for strong financial reporting use an accounting system (Quickbooks*, Peachtree, Fund E-Z) big differences between profits and nonprofits COA structure National Center for Charitable Statistics publishes Unified Chart of Accounts (UCOA) 18

19 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Build: Unified Chart of Accounts (UCOA) Statement of Financial Position (Balance Sheet) assets liabilities net assets 19

20 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Build: Unified Chart of Accounts (UCOA) Statement of Financial Position (Balance Sheet) assets liabilities net assets 20

21 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Build: Unified Chart of Accounts (UCOA) Statement of Financial Position (Balance Sheet) assets liabilities net assets 21

22 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Build: Unified Chart of Accounts (UCOA) Statement of Activities (P&L) contributions support earned revenues other revenues personnel related expenses non personnel related expenses non GAAP expenses 22

23 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Build: Unified Chart of Accounts: Customization Why Customize? UCOA is designed to work for all non-profits akin to killing a mosquito with a sledgehammer for smaller nonprofits, we use a scaled down version flexibility to adjust line items ability to use class system view revenue / expenses by appropriate classification (e.g. program, admin, fundraising, etc) 23

24 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability Step 1 Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Key Activities Provide reporting insights to drive decision making 1. setup appropriate chart of account structure alignment with IRS 990 requirements accounting best practices funder requirements 2. understand & align financial processes to client requirements baseline best practice audit ready processes / procedures adapt (as appropriate) to client specific processes / requirements 3. educate client 24

25 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability Step 2 Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Provide reporting insights to drive decision making once you build the infrastructure (COA), you must manage it the key to useful financial statements is accurate and reliable data 1. capture all transactions: remember: garbage in > garbage out 2. reconcile accounts to balance 3. close monthly books 25

26 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Run: Grant Tracking 101 Grant Tracking - The Basics 2 forms: revenues first or expenses first varies by accounting system Jitasa Webinar Grant Tracking 101 requires a 3 rd attribute per transaction ultimate goal is to pull a Statement of Financial Position per grant 26

27 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability Step 3 Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Provide reporting insights to drive decision making monthly & quarterly activities monthly financial reporting package financial insights to empower effective decision making year end activities federal & state financial filings (990 EZ & Full) audit strategic planning & annual budgeting 27

28 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Financial Reports Overview 1. internal reporting (monthly basis) Executive Director should understand finances focus on cash flow management review spending across all categories ensure giving trends are on target 2. board reporting (quarterly basis) higher level reporting with supporting detail 28

29 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Financial Reports Standard Reports Produced on a Monthly Basis 1. Statement of Financial Position (Balance Sheet) 2. Statement of Activities (Profit & Loss) 3. Budget vs. Actuals Statement 4. Statement of Functional Expenses 29

30 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Financial Reports Statement of Functional Expenses measurement of a nonprofit s efficiency known as net income in for-profit sector world key ratio % programs vs (% admin+% fundraising) 80/20 rule 30

31 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Financial Reports Statement of Functional Expenses allocation of expenses 1. methodology must be documented, reasonable and consistent most popular method based on employee time approved by Executive Director and auditor 2. examples of possible allocated expenses (indirect costs) salaries rent office expenses 31

32 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Financial Reports Statement of Functional Expenses Key Points for Review: detailed overhead analysis; can problem be corrected in 2H09? allocated expense methodology extenuating, one-time circumstances 32

33 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Financial Reports Tracking Budget vs Actuals another layer of Statement of Activities plan vs. reality review major discrepancies definition of major varies by organization review any line item with budget but no actuals 33

34 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Financial Accountability Step 3 Jitasa s Approach Build Run Analyze Build a best practice accounting foundation Run consistently Provide reporting insights to drive decision making monthly & quarterly activities monthly financial reporting package financial insights to empower effective decision making year end activities federal & state financial filings (990 EZ & Full) audit strategic planning & annual budgeting process 34

35 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Annual Budgeting Process Importance of Accurate Budgeting establishes credibility sets expectations provides a measurement tool ensures emphasis on programs vs. fundraising vs. administration allows for increased cash management 35

36 Lesson Topic 3 of 5: 3 Steps to Financial Accountability Analyze: Annual Budgeting Process Creating Annual Budget: Best Practices 1. separate budgets for all programs, administration & fundraising 2. budget on a monthly or quarterly basis 3. set reasonable targets project from prior history if large change, require justification 4. use financial modeling as a sanity check Jitasa Webinar Annual Budget Process 36

37 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tips 1. focus before flow 2. keep it simple 3. send a preview 4. prepare & relax 37

38 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tip 1: Focus Before Flow 1. What is the story you want to communicate? First get the heart of the story straight What is the purpose of the discussion? Is there a decision you are trying to reach? 2. Write out the flow for your story Write an outline / story board Context is important. Know your audience, where they are coming from, & WIFM 3. Build Your PowerPoint slides Write your outline across the slide headers One idea / message per slide 38

39 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tip 2: Keep It Simple 1. Start with an Agenda & Executive Summary 2. Do NOT copy entire Excel spreadsheets onto your slide Instead use summary charts and graphs to tell your financial stories Bring life to numbers: use of key performance metrics / ratios with trends and benchmarks Put the detailed financials in the appendix 39

40 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders 1. Start with an Agenda & Executive Summary Best Practice Tip 2: Keep It Simple 2. Do NOT copy entire Excel spreadsheets onto your slide Instead use summary charts and graphs to tell your financial stories Bring life to numbers: use of key performance metrics / ratios with trends and benchmarks Put the detailed financials in the appendix 3. Simplify and Educate Nonprofit accounting is very different from for-profit accounting, you may need to educate / translate concepts i.e. Balance Sheet = Statement of Financial Position 40

41 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presenting to Your Board and Funders Best Practice Tips 3 & 4 Send a Preview Send the board packet at least a week before your board meeting Tee up agenda items and highlight critical decisions / desired outcomes Provide background reading (homework) to make the best use of meeting time Prepare & Then Relax Less about remembering do s and don ts of public speaking / giving a presentation More about preparing a good story and knowing the story / talking points > Relax! 41

42 Lesson Topic 4 of 5: Presenting to Your Board & Funders Presentation Book Recommendations 42

43 Lesson Topic 5 of 5: Wrap Up Who We Are Our Two Passions 1. Love for Numbers 2. The Spirit of Serving Others 43

44 Lesson Topic 5 of 5: Wrap Up Why We Exist We do what we do best so you can do what you do best 44

45 Lesson Topic 5 of 5: Wrap Up Our Solutions BOOKS & ACCOUNTING FINANCIAL ANALYSIS ONSITE CONSULTING 45

46 Lesson Topic 5 of 5: Wrap Up Educational Resources Additional Webinar Topics Nonprofit Financial Statements for Executive Directors Grant Tracking 101 The Power of Financial Analysis for Decision Making Performance Management to Drive Fundraising Educational Updates Regulatory Updates: IRS, State, and Payroll / Tax Year End: What To Know Best Practice Tips & Deep Dives

47 Lesson Topic 5 of 5: Wrap Up Questions & Contact Information Ron Kwak, Director of Strategy & Marketing, Jitasa (e) ron.kwak@jitasa.is (o) Mary Soper, CPA & Director of People Development, Jitasa (e) mary.soper@jitasa.is (o)

48 Lesson Topic 5 of 5: Wrap Up Closing Thoughts strong financial management is essential any nonprofit s success engage your board s finance members at a minimum, develop a basic understanding of key F&A terms build, run, analyze = financial success 48