Best Practice Manual for Accounts people working for Not for Profit organisations BY PETA WALKER. bwaccountants.co.nz

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1 Best Practice Manual for Accounts people working for Not for Profit organisations BY PETA WALKER

2 Hi! I m Peta a Chartered Accountant and business coach at BW Chartered Accountants. I m a born and bred Wellingtonian and I live on a lifestyle property in the rugged Makara Valley. Grab a coffee and let s talk about some best practices for your not for profit organization This book is for people that look after the accounts for a charity. Depending on the size of your organisation your financial skills may range anywhere from a fully qualified accountant to an administrator who also processes the books. The most usual thing we hear from these people is I m not an Accountant, but I do the accounts To do this you need to be organised, systematic and have a basic understanding of book-keeping and accounts.

3 You may be responsible for the: Responsibilities Financial Administration making sure all incomes get into the bank collection, recording, organising approval and payment of invoices/bills Payroll Filing of returns with IRD and payment of those tax s Liaising with auditors Cash flow management Funding applications Managing tagged funds Filing returns with the Charities Commission Financial reporting Making sure all financial transactions are recorded accurately in the accounts system Preparing management accounts monthly and reporting on them to the Manager/CEO and the Board/Committee Obtaining explanations for, and reporting on, variances from budget Compilation of the end of year annual accounts and associated reports Financial Planning Helping prepare the budgets for the coming year Advising Board on financial strategy Helping the board establish and maintain a reserves policy Managing Investments according to the Board s policy

4 Monthly Management reports Providing accurate, timely reports and management to the governance body is vital for them to be able to direct the organisation. Reports should be completed and presented within three weeks of the end of the month. These reports should include: Income & Expenditure Account showing current month v budget Income & Expenditure Account showing year to date v budget. Balance Sheet as at the month end. Understanding and explaining those reports to them also helps prevent mistakes and means they can (and should) ask meaningful questions and use the accounts reports to help manage and guide the organisation.

5 Cash versus Accrual Accounting reports Usually the reports on the previous page are prepared using accrual accounting. Many people find the terms accrual and cash accounting confusing. Accrual Accounting In accrual accounting, revenue is recognised when it is earned rather than when it is received, and expenses are recognised when they are incurred, rather than when they are paid. So if you buy an item on credit, record the date you bought the item, rather than the date you paid your bill. Accrual accounting is generally preferable because it gives a better idea of your organisation s overall financial status.

6 Cash Accounting With cash accounting, you record entries according to the date you paid someone or someone paid you. So if you invoice someone, you record the date you receive the money, rather than the date you sent the invoice. At its simplest, cash accounting uses the receipt book and bank deposit details to track income and the cheque book to track expenditure. Cash accounting is the simplest form of bookkeeping and small organisations may find it adequate. If your organisation operates largely on short term transactions and you don t have long term debts or commitments, cash accounting will work as long as your organisation stays small. When the new reporting laws come in, any charity with expenses of less than $125,000 will be allowed to use Cash Reporting for their annual accounts However, the risk of using cash accounting is that it doesn t include bills you owe so risks understating your liabilities it s not an accurate picture of your position Some financial accounts include a mixture of cash and accrual accounting, which can lead to further confusion. When preparing and reading financial statements, it is important to understand what s included and what s not.

7 Taxes you pay While charities are exempt from income tax under the Charities Act they have to file and pay other taxes Goods & Services Tax (GST) Though charities are exempt from income tax if they earn income of more than $60,000 each year they must register for GST, collect and pay it to the Inland Revenue Department. Your accounting system should always show your income and expenses without the GST portion included. Any GST owing to the IRD or claimable from them is shown on the balance sheet It is not as straight forward for charities as other businesses as some incomes are exempt from GST. Using a good computer system for your accounts processing and making sure it s set up properly will make this easy. For example: income from donations does not have GST on it but income from sponsership or grants do. Get this wrong and your organisation could end up with a massive GST liability.

8 Taxes you pay Payroll Taxes Once an organisation employs people, it is responsible as any other employer for deducting tax from them and forwarding it to the IRD. This includes PAYE, kiwisaver, student loans and family support. Fringe Benefit Tax As organisations can t always afford to pay high wages to their employees, it is tempting to compensate them in other ways. Any payment made on behalf of an employee, or gift to them without tax deducted at source can incur Fringe Benefit Tax.

9 Other things to keep track of Restricted or tagged funds are amounts received by the organisation that must be used for a specific activity. Even though the cash is received in the bank, only amounts actually spent in the year, should be shown as income. The remainder should be held as a liability as any unspent funds may need to be returned. This treatment will also match your actual income with expenditure incurred. For example, a lotteries grant received for twelve months of operating costs should be held as a liability with a monthly allocation added to income over the course of the twelve months. Cashflow While the accounts may show a surplus of income over expenditure, there may be no cash in the bank or it may be running out! All NFP s need to manage their cashflow so they have enough money to pay the bills. These bills include day to day running expenses and large sums predicted and planned for in your annual budget. In cashflow management, timing is critical. You must have money available to pay the bills when they fall due. If you run out of cash and can t pay your bills on time, you may end up in financial difficulty. This could be as trivial as paying the phone bill late. But if you are not in control of your cashflow, minor problems can escalate and at its worst you may be trading insolvent which could trigger personal liability for the board! Even profitable organisations have gone under because of cashflow problems. It is the responsibility of every Board member (and especially the accountant) to ensure that systems are in place that will prevent the organisation from trading while insolvent.

10 Other things to keep track of Good accounting processes and software It s really important that sound business processes are used to complete all financial tasks. Even if you are a volunteer. Often there are not enough people to spread tasks over several people and you get to do everything. Having good, recorded systems and processes that are transparent protects you from anything accidently going wrong or you being accused of mishandling the accounts or money. Most NFP s must undertake an annual audit of the accounts and accounts processes. Auditors will test the systems to ensure they can be relied on to produce accurate accounts. There is no one method of bookkeeping. Small organisations may use a paper based system (highly not recommended), but larger organisations will use a software package. Spreadsheet programs (also not recommended) may not have the security of tailored packages, in that anyone can alter a figure. We strongly recommend using good accounting software. Our current favourite for use by NFP s is Xero for many reasons. Mainly it s ease of use, ease to train people and transparency. Accounting software for NFPs should be transparent for audit and also provide good reporting for various users such as managers, board, and funders. There are several software systems that are recommended for NFPs and we have had experience with many of them.

11 Other things to keep track of Not for Profit but Not for Loss What NFPs all have in common is that they don t operate to make a profit for their owners or members. However, they do have to perform like a business to ensure they don t make a loss either. This is because they have to be accountable and often more accountable to stakeholders than most businesses. Stakeholders may include board members, staff, members, volunteers, donors and government.

12 How we can help We ve had many years experience in working with NFP s. We re big believers in using good processes and systems to help the accounts person make sure the accounts are always up to date and accurate all through the year. That the reports given to your committee or board can be relied on, that the audit is painless and doesn t bring up any surprises in the accounts. With modern systems like Xero this is easy. We can access it remotely, and run a check over the accounts every month to ensure everything is included and where it should be. We also help set up best practice process, useful reports for the board and comment on those if need be. We see ourselves as being the part time CFO. Supporting both the accounts person and the manager, providing the skills and experience to that role for the time required each month or year. As we build a good understanding of the organisation we re also able to act as back up to the accounts person in case they are ever unable to be there for a while. We d love to talk to you more about how we could help your organisation. Please call: Peta Walker or Terri Churton on (04) or us, clientservices@ We aim to make your life easier let s talk