The Cash Disbursement Journal is a chronological record of checks that are written, categorized using the chart of accounts.

Transcription

1 NYSCHP FINANCIAL MANAGEMENT: Accunting fr Nnprfits Accunting basics An accunting system is cmprised f accunting recrds (checkbks, jurnals, ledgers, etc.) and a series f prcesses and prcedures assigned t staff, vlunteers, and/r utside prfessinals. The gals f the accunting system are t ensure that financial data and ecnmic transactins are prperly entered int the accunting recrds and that financial reprts necessary fr management are prepared accurately and in a timely fashin. Traditinally, the accunting system includes the fllwing cmpnents: Chart f Accunts The chart f accunts is a list f each item which the accunting system tracks. Accunts are divided int five categries: Assets, Liabilities, Net Assets r Fund Balances, Revenues, and Expenses. Each accunt is assigned an identifying number fr use within the accunting system. General Ledger The general ledger rganizes infrmatin by accunt. The chart f accunts acts as the table f cntents t the general ledger. In a manual system, summary ttals frm all f the jurnals are entered int the general ledger each mnth, which maintains a year-t-date balance fr each accunt. Jurnals and Subsidiary Jurnals Jurnals, als called bks f riginal entry, are used t systematically recrd all accunting transactins befre they are entered int the general ledger. Jurnals rganize infrmatin chrnlgically and by transactin type (receipts, disbursements, ther). There are three primary jurnals: The Cash Disbursement Jurnal is a chrnlgical recrd f checks that are written, categrized using the chart f accunts. The Cash Receipts Jurnal is a chrnlgical recrd f all depsits that are made, categrized using the chart f accunts. The General Jurnal is a recrd f all transactins which d nt pass thrugh the checkbk, including nn-cash transactins (such as accrual entries and depreciatin) and crrectins t previus jurnal entries. The Payrll Jurnal, which recrds all payrll-related transactins. This may be useful as the number f payrll transactin s grws and becmes t large t handle reasnably within the cash disbursements jurnal. The Accunts Payable Jurnal and Accunts Receivable Jurnal track incme and expense accruals. These are useful fr gruping incme and/r expense accruals which are t numerus t track effectively thrugh the general jurnal. The prcess f transferring infrmatin frm the jurnals t the general ledger is called psting. Checkbk In very small rganizatins, the checkbk may serve as a cmbined ledger and jurnal. Mst financial transactins will pass thrugh the checkbk, where receipts are depsited and frm which disbursements are made. Smaller rganizatins receiving few r n restricted cntributins find it easier t keep track f financial activity by running all f their financial transactins thrugh a single

2 checking accunt. Very small rganizatins, with few depsits and disbursements, may prepare reprts directly frm the checkbk after the balance has been recnciled with the bank balance. Accunting Prcedures Manual The accunting prcedures manual is a recrd f the plicies and prcedures fr handling financial transactins. The manual can be a simple descriptin f hw financial functins are handled (e.g., paying bills, depsiting cash and transferring mney between funds) and wh is respnsible fr what. The accunting prcedures manual is als useful when there is a changever in financial management staff. The accunting cycle may be represented schematically as fllws: financial transactins -> analyze transactin -> recrd transactin in jurnals -> pst jurnal infrmatin t general ledger -> analyze general ledger accunt and make crrectins -> prepare financial statements frm general ledger infrmatin The rutine aspects f the accunting cycle (recrding transactins, psting, etc.) are generally dne by bkkeepers r data entry clerks. Accuntants fcus n the mre analytical aspects f the accunting cycle (analyzing transactins, preparing financial statements.) Many small rganizatins rely n a single individual t perfrm all f these functins. The key tasks fr maintaining the integrity f an accunting system include the fllwing: Trial Balance In a manual system all balances frm the general ledger are tallied n a mnthly basis t make sure that debit balances equal credit balances. Once debits equal credits, financial statements can be prepared using trial balance amunts. Bank Recnciliatin Each mnth yu will need t recncile the balance in yur checkbk with the balance in yur accunt accrding t yur bank. This prcess has three basic steps: 1. Cmpare depsits and checks as they are recrded in the checkbk with thse reflected in the bank statement. Adjust any discrepancies. 2. Adjust fr bank charges r interest earned int the checkbk balance. 3. Subtract uncashed checks frm the bank s balance and add in checks yu have depsited which are nt yet reflected in the bank's balance. Executive Directrs and bard members must ensure that there is enugh mney in the bank t pay the bills each mnth. Cash flw must be planned and prgrams must be based n the availability f funds. What is cash flw and hw shuld we manage it? "Cash flw" management refers t the need t have cash cme in -- flw in -- at the right times, s that it is available t flw ut as needed. Everyne knws that if an rganizatin has mre expenses than incme, sner r later it will find itself in truble. Hwever, even if incme matches r exceeds expenses in a given year, the cash frm the incme may nt arrive in time t pay the bills as they cme due. A cash shrtage can be very disruptive t yur ability t carry ut yur missin. T avid disruptins f business r t take advantage f temprary cash surpluses, cash flw can and shuld be prjected, mnitred, and cntrlled.

3 Chart f Accunts A Chart f Accunts is a list f items that yu want t track thrugh the accunting system. Fr example, d yu want t track ffice supplies, r d yu want t track paper, pens and ink? Yu will need t decide the answer t this questin befre yu develp yur accunting system. Sme funders r gvernments require that yu reprt abut certain items s check ut these tw web sites and develp a gd, useful Chart f Accunts. What shuld ur chart f accunts include? In rder t decide what t include in yur chart f accunts yu will want t cnsider each f the fllwing questins: What reprts d yu want t prepare? What financial decisins, evaluatins and assessments d yu need t make n a regular basis? What level f detail d yu require? What is yur capacity fr tracking financial infrmatin? Assets Assets are the tangible items an rganizatin has as resurces, including cash, accunts receivable, equipment and prperty. Assets are usually listed in descending rder f liquidity. This means that cash and ther assets which are easily cnverted t cash are listed first, and fixed assets such as prperty and equipment are listed last. Liabilities Liabilities are bligatins due t creditrs, such as lans and accunts payable. Current liabilities, thse bligatins which fall due within the next year, are usually listed first, fllwed by lng-term liabilities. Accunts payable and payrll taxes payable are usually listed befre ther payables. Deferred revenue and ther liabilities are ften further dwn n the list. Net Assets (r Fund Balances) Net assets, frmerly referred t as the fund balance(s), reflect the financial wrth f the rganizatin. They represent the balance remaining after bligatins are subtracted frm an rganizatin's assets. Accunting sftware designed with fr-prfits in mind may reprt net assets under the heading "equity." Yu will ntice that accunt numbers prceed frm lwest t highest, with rm between numbers in each categry. This allws yu t expand the level f detail presented in the chart f accunts as yur activities grw. Certain related accunts are gruped tgether with related numbers. Financial Reprts Financial infrmatin must be reviewed and understd by staff and bard members. Gd financial reprts give the relevant infrmatin t the right peple at the right time s that they can make sund business decisins. The reprts shuld include infrmatin frm the Revenue and Expense Statements and the Balance Sheet. What financial reprts d management and the Bard need? Mnthly Reprts Statement f Psitin (Balance Sheet) What is ur financial health? Can we pay ur bills? Statement f Activities (cnslidated) shwing budget t actual infrmatin What has been ur verall financial perfrmance this mnth and t date? Departmental Incme and Expense Statement shwing budget t actual infrmatin Hw des actual financial experience cmpare with the budget? Is specific actin called fr, such as limiting expenses in certain areas? Des experience indicate a change in the budget is apprpriate?

4 Quarterly Reprts Fundraising Reprts; actuals vs. prjectins fr dnatins; status reprt n all fundatin prpsals. Are fundraising results n track? Cash flw prjectins fr the next six mnths D we anticipate a cash surplus r shrtage? Payrll tax reprts Have payrll tax reprts been submitted n time and tax depsits been made? Fee fr service reprt shwing number f fee-paying clients and revenue against prjectins? Are we servicing apprximately the same number and type f clients as we had anticipated? If nt, what actin r change is apprpriate? Annual Reprts Annual Federal frms, including 990 and Schedule A; State Reprts Has the rganizatin fulfilled its reprting respnsibilities t federal and state gvernments? Draft financial statements fr year: Statement f Activities; Statement f Psitin; Incme Statement fr each prgram. Aggregated financial statements with narrative shwing key trends Fcus: Internal management decisin-making. What was ur financial perfrmance ver the past year? In what ways and fr what reasns was perfrmance different frm the budget? What financial implicatins must be taken int accunt when planning the upcming year? Audited financial statements fr the entire rganizatin, including Statement f Psitin, Statement f Activities, Statement f Cash Flws, Statement f Functinal Expenses Fcus: External accuntability and financial disclsure t funders and the public Management letter frm the auditr What recmmendatins has the auditr made related t the accunting system, internal cntrls, and financial planning? Wh Prepares These Reprts and Wh Shuld Review Them? In a small nnprfit the bard treasurer r utside accuntant/bkkeeper might prepare the financial infrmatin fr all in huse financial statements, and wrk with the executive directr t prepare the narrative with financial highlights t be presented t the bard. The executive directr reviews all reprts prir t presenting them t bard members t ensure that the financial infrmatin makes sense and can be translated int issues and pprtunities facing the rganizatin. In additin, key staff members such as prgram directrs and the directr f develpment shuld have the pprtunity t review incme and expense reprts fr the whle rganizatin. When the bard is large enugh t include a finance cmmittee, that cmmittee reviews all financial statements and reprts n financial activity t the full bard. In a smaller nnprfit, the executive directr might reprt first t the bard treasurer, wh can then keep the full bard apprised f the rganizatin s financial status. The finance cmmittee will ften review the numbers in greater detail than the full bard. The full bard may be better able t respnd t aggregated infrmatin with imprtant financial trends and issues highlighted in an accmpanying narrative reprt. While each bard member shuld have the pprtunity t review rganizatinwide incme and expense reprts t understand the impact their department's activities have n the whle rganizatin, members wh are inexperienced at reading financial statements may get lst in verly detailed statements. T help the bard fulfill its versight functin, it is imprtant fr the executive directr and the finance cmmittee t present the infrmatin in as clear and cncise a manner as pssible.

5 Hw d we interpret ur financial statements? Readers f financial statements can learn a great deal abut the health f a nnprfit rganizatin by examining the numerical infrmatin presented. In particular, financial infrmatin helps readers: Measure the rganizatin's efficiency, using factrs such as: Units f service prduced cmpared t csts Fundraising incme cmpared t amunts spent n fundraising Net incme in a fee-prducing prgram cmpared t the fees received Evaluate the adequacy f financial resurces, ften thrugh: Liquidity ratis, such as the current rati Cmparisn f ttal liabilities r ttal assets with net assets (frmerly called fund balance) Cash flw prjectins Seek significant financial trends by: Vertical analysis (lking at a simple line item as a percentage f ttal revenue r expense) Hrizntal analysis (cmparing prir perids with the current perid) Fr different rganizatins, different numbers will have different meanings. Fr example, imagine an rganizatin that shws an perating deficit fr the year f $20,000. Is that a red flag? In a small rganizatin with few reserves, such a deficit may indeed indicate serius ver-spending f failure t generate revenue. In a large rganizatin, $20,000 may represent less than ne percent f revenue and may nt be significant. Yet anther rganizatin may be purpsefully spending dwn cash reserves n an imprtant prgram and this "deficit" may represent that decisin. Fr still anther rganizatin, a lss f $20,000 may nt be a cncern by itself, but because it represents the third cnsecutive year f deficits, des cause cncern. Ratis, t, have different meanings in different situatins. Fr example, a new rganizatin may find it spent 90 percent f its dllars n fundraising. In an established rganizatin, such a rati wuld certainly be a red flag. But n clser lk, this new rganizatin's services are delivered by vlunteers, and the nly paid staff they have is a fundraiser. Althugh accuntants have determined certain standard ranges fr these ratis within sme nnprfit industries (arts, libraries, human service agencies, etc.), it is mst imprtant t identify the trends in yur wn rganizatin and analyze changes ver time. Surplus r deficit If incme is greater than expenses within a given perid, say a year, the rganizatin has generated a surplus. If expenses are greater than revenue, the rganizatin experiences a deficit fr the perid. There is n rule that says rganizatins shuld have surpluses, deficits, r break even. Typically nnprfits budget t break even. Hwever, rganizatin may deliberately decide t spend dwn their cash reserves (expandable net assets) fr a specific purpse such as starting a new prgram. Ding s results in an perating deficit, but ne which is planned. Similarly, if a nnprfit has determined that it needs a cash reserve fr specific future purpses (cash flw, investing in a new prgram guarding against future declines in funding, etc.), the Statement f Activity shuld reflect an perating surplus. An "unplanned" surplus, deficit, r even a break even psitin shuld be analyzed t determine its causes and t plan fr the implicatins.

6 Budget t Actual fr Revenue and Expense Perhaps the mst cmmnly used financial indicatr is a cmparisn f budgeted revenue t actual revenue, and budgeted expense t actual expense. These cmparisns are made n bth a mnthly and a year-tdate basis. Significant variatins frm budget shuld be investigated t see whether new prjectins shuld be make based n actual experience, and/r whether managerial interventin is apprpriate. Functinal Expense Ratis When cmpleting Federal Frm 900, nnprfits must reprt expenses functinally, brken dwn int the categries f Prgram, Management and General Activities, and Fundraising. Dnrs and agencies wh evaluate nnprfit perfrmance, ften lk t see that mst f yur rganizatin's funds are being used fr prgrammatic purpses. As a result, it is imprtant t develp cnsistent guidelines within yur wn rganizatin t determine which f yur expenses g t prgram supprt, and which t management and general activities r fundraising. Sme functinal expense ratis are: Prgram Expense and divided by Ttal Expense If high, mst f the expenses are related t prgram. Relatively little is spent n management r n fundraising. Take Fundraising Expense and divided by Ttal Expense If high, a large percentage f expenses are spent n fundraising effrts. Prspective dnrs may draw the cnclusin that t high a prtin f their cntributin will be spent n fundraising, rather than n prgram services. Shrt term liabilities cverage rati (quick rati) Will there be enugh cash t pay bills in the immediate r near future? Add tgether all assets that can be used t pay bills ver a specific perid f time, such as ne mnth r three mnths and cmpare this with the bills that must be paid within that same perid f time. Take Cash + Unrestricted Investment + Accunts Receivable and divided by Current Accunts Payable + Current Accruals If high, there may be t much in cash, sme culd be earning mre if invested. If lw, yu may be in danger f a cash flw crisis, nt enugh cash t pay pressing bills. Current Rati Will cash flw be adequate t pay bills ver the next year? Take the Current Assets and divide by Current Liabilities If high, Same as abve. Cautin: Even if current rati is adequately calculated fr the year, there may be perids within the year where there is an inadequate cash t pay bills. Deffered Revenue r Net Temprarily Restricted Assets Deferred revenue traditinally refers t cash which has been received fr sme restricted cnditin which has nt yet been met. Under the new Statement f Financial Accunting Standards N.116 issued by the Financial Accunting Standards Bard (FASB), mst f these funds will be held nt as deferred revenue, but as an additin t temprarily restricted net assets. T determine the rati, take the Deferred Revenue and divide by the Cash + Savings - r - take the Temprarily Restricted Net Assets and divide them by the Cash + Savings.

7 If deferred revenue r temprarily restricted net assets exceeds cash and savings, yu may be spending restricted cash fr purpses ther than thse which the funder intended, r using mnies designated fr future purpses (such as magazine subscriptin fulfillment) t meet current expenses. Fund Balance Rati r Unrestricted Net Assets Rati The fund balance rati, nw called the unrestricted net assets rati, measures the amunt f unrestricted, spendable equity t the rganizatin's annual perating expense. T determine the rati, take Expendable Unrestricted Net Assets and divide them by Annual Expenses. If lw, the rganizatin has little unrestricted, spendable equity available t meet temprary cash shrtages, an emergency, r deficit situatin in the future. This may be the case even in rganizatins with significant unrestricted net assets, if the majr prtin f equity is tied up in fixed assets. Days Receivables The days receivables rati measures the average number f days it takes t cllect n a sale r service perfrmed fr a fee. This rati is useful t rganizatins which earn significant prtins f their revenue frm fees charged t clients r frm prduct sales. T determine this rati take the Accunts Payable times 365 days and divide by purchases. If high, payments taking lnger than 30 r 60 days are incnsiderate and may result in frictin with cmmunity vendrs. In additin, the rganizatin may be incurring additinal csts as a result f late r deferred payments (e.g., late fees, interest expense, etc.). A very lng days payables rati r a sudden increase in days payable may indicate an inability t pay bills. Failure t Prduce Financial Infrmatin In rder t assess the financial health f yur rganizatin, timely and reliable financial infrmatin must be available. Lack f adequate financial infrmatin may indicate that nt enugh time is available frm staff r utside cntractrs t perfrm the accunting functin, that staff needs mre training in financial statement perpetratin, r that financial systems need t be imprved. Final Cmments Ultimately, the mst imprtant perfrmance measure f a nnprfit is nt t be fund in financial statements at all. T determine "success," a nnprfit must measure prgress against its gals. It is imprtant t remember that financial indicatrs are pwerful tls fr nnprfit managers, when used in pursuit f meaningful gals. Audits There are many gd reasns t have an audit. An audit will ensure that financial recrds are in accrdance with generally accepted accunting principles. An audit may be a gd planning and budgeting tl fr yur agency. An audit may be a gd public relatins tl fr what it says abut yur rganizatin's financial integrity. An rganizatin's granting agency may require an audit r may use the infrmatin in the audited financial statements when they evaluate the rganizatin applying fr funds. Lenders and suppliers may require it befre credit apprval.

8 What is an audit? An audit is a prcess fr testing the accuracy and cmpleteness f infrmatin presented in an rganizatin's financial statements. This testing prcess enables an independent certified public accuntant (CPA) t issue what is referred t as an pinin n hw fairly the agency's financial statements represent its financial psitin and whether they cmply with generally accepted accunting principles (GAAP). GAAP is determined by the American Institute f Certified Public Accuntants (AICPA). Bard members, staff, and their relatives cannt perfrm audits because their relatinship with the rganizatin cmprmises their independence. The audit reprt is addressed t the bard f directrs as the trustees f the rganizatin. The reprt usually includes the fllwing: A cver letter, signed by the auditr, stating the pinin, as described abve. The financial statements, including the statement f financial psitin (balance sheet), statement f financial activity (incme statement), and statement f cash flws. Many audits shw cmparative infrmatin between fiscal years. In additin t the materials included in the audit reprt, the auditr ften prepares what is called a management letter r reprt t the bard f directrs. This reprt cites areas in the rganizatin's internal accunting cntrl system which the auditr evaluates as weak. What an Auditr Des The auditr will request infrmatin frm individuals and institutins t cnfirm bank balances, cntributin amunts, cnditins and restrictins, cntractual bligatins, and mnies wed t and by yur rganizatin. The auditr will review physical assets, jurnals and ledgers, and bard minutes t ensure that all activity with significant financial implicatins is adequately disclsed in the financial statements. In additin, the auditr will select a sample f financial transactins t determine whether there is prper dcumentatin and whether the transactin was psted crrectly int the bks. In additin, the auditr will interview key persnnel and read the prcedures manual, if ne exists, t determine whether the rganizatin's internal accunting cntrl system is adequate. Auditrs are nt expected t guarantee that 100 percent f the transactins are recrded crrectly. They are nly required t express an pinin as t whether the financial statements, taken as a whle, give a fair representatin f the rganizatin's financial picture. In additin, audits are nt intended t discver embezzlements r ther illegal acts. Many auditrs prvide nnprfits with year-end financial management services which are nt part f the audit. These include preparing: year-end financial statements based n client recrds ntes t the financial statements depreciatin schedules accrual and ther adjustments based n client infrmatin Smaller nnprfits with limited accunting expertise may chse t pay their auditrs fr these tasks. Hwever, yu shuld knw that these services are prvided in additin t the audit and can be cmpleted by staff r vlunteers t lwer the cst f the audit.