Accounting Best Practices Part 3 of 3: Surveys Results & Recommended Practices December 2014
Table of Contents Click on page number to jump to section Executive Summary 3 Introduction 4 Background 5 Month End Policies and Procedures 6 Reconciliations and Management Reporting 10 Budgeting 16 Net Asset/Reserve Policy 20 Conclusion 21 What s Next? 22
Executive Summary The Survey was conducted online in June and July 2014 and 90 responses were received. Key findings and takeaways are summarized below. More than half (53%) of nonprofits take more than 10 days to close the month end, and approximately six out of 10 (63%) nonprofits usually experience delays in month end closings for the first quarter of a new fiscal year. Nonprofits can avoid the cycle of delays by defining and enforcing clear procedures for month end tasks and reconciliations of balance sheet accounts. In fact, nonprofits who have a checklist/closing calendar for the month end are less likely to experience delays in month end closings for the first quarter of a new fiscal year and are less likely to fall behind on completion of balance sheet account reconciliations. Having a defined policy for the timing of reconciling balance sheet accounts decreases the number of business days required to close the month end, as well as the likelihood that nonprofits will experience delays in month end closings or fall behind on completion of balance sheet account reconciliations. Despite these numerous benefits, less than half (47%) of nonprofits have a defined policy for the timing of balance sheet account reconciliations. Four out of 10 nonprofits say that department heads/operations mangers are not responsible for analyzing actual to budget variances on a monthly basis. Organizations should strive to develop a culture of accountability in which managers who own a part of the budget are responsible for performance against the budget, including explaining any variances of actual performance versus projected performance. Six out of 10 nonprofits say non-financial data is minimally or somewhat integrated into monthly management reports, and approximately one-fourth (26%) say non-financial data is not at all included in monthly management reports. By failing to integrate financial information with key drivers of the business, such as membership growth, member retention, and expense reduction, nonprofits fail to acquire meaningful insights and develop predictive capabilities about their organization s operations and performance. While most respondents perform longrange strategic planning, less than half (46%) say that the long-term strategy is closely linked to the annual budgeting process. The organization s strategic plan provides critical context for development of the budget. Also, nonprofits and currently 31% do not should perform continuous planning or rolling forecasting outside of the annual budget process. This helps an organization adapt quickly to changes in its internal or external environment. Nearly six out of 10 nonprofits (59%) do not benchmark their operations against peer operations, and of those that do, only about one-fourth (24%) include benchmarking as part of their annual budget process. Benchmarking against peers is a critical step in identifying opportunities to improve performance or efficiency. While each nonprofit is unique, benchmarking against similar organizations can help nonprofit leaders recognize operational weaknesses that are potentially detrimental to organizational health. 3
Introduction Nonprofits often miss opportunities to improve the efficiency and performance of their financial processes by neglecting important strategic activities, including: To help nonprofits better understand how their current practices compare to similar organizations and where there are opportunities for improvement, Tate & Tryon conducted a three-part series on accounting best practices that entails (1) collecting information on the accounting practices of nonprofits and (2) providing survey results with recommendations for improving financial process performance and efficiency. You may recall seeing the results from the Billing and Collections Survey and Procurement to Payment Survey. This report includes findings from the Survey, the third and final survey in the Accounting Best Practices Series. The Survey examines policies and procedures related to month end reporting, reconciliations, management reports, and budgeting. In addition to survey results, this report includes best practice descriptions and critical questions that can help guide a strategic discussion about financial processes. For example, when examining their general accounting, management reporting, and budgeting procedures, nonprofit leaders may want to consider the following: These questions and the best practice summaries throughout this report can help nonprofit leaders take the first steps toward strategically evaluating their approach to accounting and budgeting. 4
Background The Accounting and Budgeting Survey was conducted online in June and July 2014. Ninety survey submissions were received, primarily from professional/ trade organizations (80%) (Figure 1). Figure 1. Please select the option that best describes your organization. Approximately four out of 10 (42%) organizations have annual revenue of $1M - $9.9M. The same percentage have annual revenue of $10M -$49.9M (Figure 2). Professional/ Trade 80% Other 7% Philanthropic/ Charity 13% Figure 2. Please select the option that best describes your organization s annual revenue. 5
Month End Policies and Procedures When asked what financial report writer software their organization uses, nearly three out of 10 (28%) respondents indicate they use the reporting module of their accounting software (Figure 3). Approximately one-fourth (24%) use FRX, while 14% use Management Reporter and 11% use Excel. Figure 3. Please indicate your financial report writer software. Respondents were asked how many business days it usually takes to close the month end and distribute internal management reporting (Figure 4). Slightly less than half (47%) say it takes 10 or fewer business days to close month end, and nearly nine out of 10 (87%) close month end in 20 or fewer business days. Figure 4. How many business days does it usually take to close the month end and distribute internal management reporting? 6
Figure 5. Business days required to close the month end and distribute internal management reporting, sorted by annual revenue. Generally, as revenue size increases, the number of organizations needing 21 or more business days to close month end decreases (Figure 5). For six out of 10 respondents (60%), department heads/ operations managers have responsibility for analyzing actual to budget variances on a monthly basis (Figure 6). Figure 6. Do department heads/operations managers have responsibility for performing analysis of actual to budget variances on a monthly basis? Organizations should strive to develop a culture of accountability in which managers who own a part of the budget are held accountable for performance against the budget. This responsibility would also include explaining any variances of actual performance versus projected performance. 7
Approximately six out of 10 (63%) respondents usually experience delays in month end closings for the first quarter of a new fiscal year (Figure 7). This seems to plague all nonprofits regardless of size and type of organization. Figure 7. Does your organization usually experience delays in month end closings for the first quarter of a new fiscal year? Many nonprofits are constrained in resources, which impacts the accounting department as well. There may be insufficient time or staff required to efficiently finalize and audit the prior fiscal year. This in turn means that the monthly management reporting for the new fiscal year may be delayed, creating a snowball effect of delays, haste, errors, and more delays. Nonprofits are advised to avoid this cycle by devoting adequate resources to the month end closings and utilizing methods discussed in this report, including use of a closing calendar and checklist and having a defined policy for the timing of reconciling balance sheet accounts. As shown in Figure 8, approximately seven out of 10 (72%) respondents use a checklist or closing calendar for the month end closings. Figure 8. Does your organization use a checklist or closing calendar for closing the month end? 8
Nonprofits that use a checklist or closing calendar are slightly less likely to experience delays in the month end closing for the first quarter of a new fiscal year (62%) than those that do not (68%) (Figure 9). Also, as will be shown in Figure 13, nonprofits that have a defined policy for timing of reconciling balance sheet accounts are less likely to experience these delays (40%) than those that do not (60%). Figure 9. Have checklist or closing calendar vs. experience delays in month end closings for first quarter of new fiscal year. The use of a checklist or closing calendar for month end procedures is beneficial because organizations are more likely to produce timely and accurate month end reporting if the process is properly staged, delegated, and managed. A checklist with defined, incremental due dates is a critical management tool. Nonprofits are also advised to benchmark how long it takes to close the month end reports and monitor the impact of any changes or improvements. 9
Reconciliations and Management Reporting Nearly two out of 10 respondents (18%) say they frequently (three or more times per year) fall behind on completion of balance sheet account reconciliations (Figure 10). Approximately four out of 10 respondents (43%) rarely or never fall behind on completion of balance sheet account reconciliations. Figure 10. How often does the accounting department fall behind on the completion of balance sheet account reconciliations? Nonprofits that use a checklist or closing calendar for the month end are less likely to frequently fall behind on balance sheet account reconciliations (14%) than those that do not (28%) (Figure 11). Figure 11. Have checklist or closing calendar vs. how often fall behind on completion of balance sheet account reconciliations. How often fall behind Have Checklist? 10
Accounting departments often fall behind on the completion of balance sheet account reconciliations due to lack of resources and the organization neglecting to prioritize the process. This often leads to large corrections in months subsequent to when the work is made current. In addition, disparate systems and inaccurate postings make reconciliations more complex. For example, bank account reconciliations are often difficult because credit card reports may be formatted differently than AMS reports and bank deposits. Nonprofits should implement practices that enable easy tracking and reconciliation of information, such as including a unique ID number for each transaction in the AMS and merchant system, and reconciling the AMS system and payment processor/bank statement daily. Additionally, the needs of the accounting department should be considered when configuring the AMS. Figure 12. Does your organization have a defined policy for the timing of reconciling balance sheet accounts? Slightly less than half (47%) of respondents have a defined policy for the timing of reconciling balance sheet accounts (Figure 12). Nonprofits that have a defined policy for the timing of reconciling balance sheet accounts are less likely to experience delays in month end closings (40%) than those that do not (60%) (Figure 13). Figure 13. Experience delays in month end closings vs. have policy for timing reconciliations. 11
Nonprofits that have a defined policy for the timing of reconciling balance sheet accounts reap additional benefits as well: they are less likely to fall behind on the completion of balance sheet account reconciliations (only 12% indicate they frequently fall behind) than those that do not have a defined policy (88% indicate they frequently fall behind) (Figure 14). Figure 14. How often fall behind on completion of balance sheet account reconciliations vs. have policy for timing reconciliations. Finally, nonprofits that have a defined policy for the timing of reconciling balance sheet accounts are more likely to take fewer than 10 business days to close the month end (52%) than those that do not have a defined policy (48%) (Figure 15). Figure 15. Business days required to close the month end and distribute internal management reporting vs. have policy for timing reconciliations. 12
Why are there so many benefits to having a defined policy for the timing of reconciling balance sheet accounts? A policy assuming it is enforced ensures that the reconciliation process is deliberate, strategic, and organized. By prioritizing this task, the accounting department can minimize the amount of surprises and needed year end adjustments. Nearly all respondents say that all investment accounts and all cash accounts are reconciled on a monthly basis (97% and 93%, respectively) (Figure 16). Figure 16. Are all accounts reconciled on a monthly basis? Reconciling cash and investment accounts on a monthly basis helps to ensure that monthly reporting is accurate and thus is a key control in financial statement production. It is also a key control over cash disbursement as it can detect fraud. For most respondents (93%), the CFO has visibility into the status of balance sheet reconciliations (Figure 17). Figure 17. Does your senior finance person (e.g., CFO or Director of Finance) have visibility as to the status of balance sheet reconciliations? Because the CFO has responsibility for executing balance sheet account reconciliation, they should have visibility to the status so that they can make necessary resource decisions to ensure the process is performed in an accurate and efficient manner. 13
Six out of 10 respondents say that non-financial data is minimally or somewhat integrated into monthly management reports, and approximately one-fourth (26%) say that nonfinancial data is not at all presented (Figure 18). Figure 18. To what extent is non-financial data integrated into the monthly management reports produced by finance? Management reporting becomes more meaningful when financial information is integrated with key drivers of the business. Key drivers, or key performance indicators (KPIs), may include number of members (or donors), number of registrants for meetings, renewal rates, and total revenue per employee. Providing context for the data, such as presenting revenue per member rather than just overall revenue, is more valuable than reporting dollars alone. For example, if an organization exceeds its revenue targets, it should determine whether it accomplished this based on rate or volume. Or if an organization s annual meeting expenses are under budget, was the meeting department efficient or were there simply fewer registrants than expected. Additionally, including comparisons to the prior year can help an organization identify important trends. Organizations that invest time in developing meaningful metrics and reports will have greater predictive ability. Reviewing KPIs and ensuring they are aligned with strategy is a worthwhile exercise that has technological, procedural, and cultural implications. In fact, only one out of four nonprofits feel they are very effective in capturing and reporting data from their AMS or donor system. Because successful data management is a complex task, Tate & Tryon offers a variety of data strategy and business intelligence consulting services that help ensure the data being captured provides nonprofits with meaningful information. 14
The survey asked whether the Finance Department produces dashboard reports in addition to the monthly reports for management. Slightly less than half (46%) of respondents said they do produce additional dashboard reports (Figure 19). Figure 19. Besides the monthly reports, does your finance department produce dashboard reports for management? For the finance departments that produce dashboard reports, most use Excel (85%) versus another option. Other tools used are Word, Prophix, PowerPoint, NetCharts, BI 360, and Adobe Illustrator (Figure 20). Regardless of the tool used, Tate & Tryon has several recommendations for improving the value of dashboards. Figure 20. If Finance does produce dashboard reports, how are the dashboard reports for management primarily created? Dashboard reports beyond the monthly reports can be helpful for focusing senior management and boards on key performance metrics. For example, they can be used to present KPIs targeted for specific audiences or KPIs that may only be important at particular times of the year. They can also provide deep dives (additional information) on any important or unusual data trends. 15
Budgeting Approximately six out of 10 (63%) of respondents use multiple linked (e.g., through formulas or references) Excel spreadsheets to complete their annual budget (Figure 21). Nearly three out of 10 (28%) use budget software. Figure 21. What tool(s) does your organization use to complete its annual budget (select all that apply)? A fully integrated budget tool permits a more efficient budget process wherein the finance team can devote more time to analyzing data and less time to gathering and loading budget details into the account system. While many organizations may not be able to afford an automated tool, ensuring that Excel worksheets are linked minimizes the risk of data entry error and eases tracking. Tools like Full Circle Budget are low-cost, simple, and flexible Excel-based solutions that permit users to quickly input budget and forecast amounts and directly process them into Dynamics GP, SL or NAV. 16
Less than half (46%) of respondents say that the annual budgeting process is closely linked to longrange strategic planning, and approximately 49% say that the annual budgeting process is minimally linked or not at all linked to long-range strategic planning (Figure 22). Only a handful of respondents do not perform long-range strategic planning. Figure 22. To what extent is the annual budgeting process linked to your longrange strategic planning? In addition to the annual budget process, nearly seven out of 10 (69%) respondents perform continuous planning or rolling forecasting (Figure 23). Figure 23. Does your organization perform continuous planning or rolling forecasting outside of the annual budget process? Nonprofits should have a strategic plan for at least one year in advance, and the annual budget should always be considered within the context of this long-range plan. Also, because economic and business realities change over the course of a year, strategic and budgetary planning should be a continuous exercise. Tate & Tryon describes a rolling forecast as a document that looks 15 to 18 months ahead and is updated monthly or quarterly throughout the year. As each period passes, it is dropped from the forecast and another period is forecasted. The advantage of a rolling forecast is that it has versatility that traditional static budgets lack. 17
Approximately one-third (34%) of respondents have 51 to 200 budgeted unique line items, and another 32% have between 201 and 500 budgeted unique line items (Figure 24). Nearly one-fourth (24%) of respondents have more than 500 budgeted unique line items. Figure 24. What is the total number of budgeted unique line items (i.e., at the chart of accounts level)? When asked what level(s) of the organization individuals are held accountable for the budget, respondents are most likely to indicate Directors or Direct Reports of the CEO/CFO/COO (79%), followed by the CEO/CFO/COO (61%) (Figure 25). Only three out of 10 respondents indicate that front line managers are held accountable for the budget. Figure 25. At what level(s) of the organization are individuals held accountable for the budget (select all that apply)? The entire C-suite is responsible for the organization s performance and budget managers are responsible for their piece of the budget. Therefore, all levels of the organization should be held accountable for the budget. 18
Nearly six out of 10 respondents (59%) do not benchmark operations against peer organizations (Figure 26). Of those that do, nearly one-fourth (24%) include benchmarking as part of their annual budget process (Figure 27). Figure 26. Do you benchmark operations against peer organizations? Figure 27. If you do benchmark operations, is this part of your annual budget process? Benchmarking operations against peers is a critical component of identifying opportunities to improve performance or efficiency. While each nonprofit is unique, benchmarking against organizations similar in size, geographic scope, or purpose can help nonprofit leaders recognize operational weaknesses that are potentially detrimental to organizational health. Internal benchmarks, such as chronological trends, are important for assessing the organization s performance in response to changes in the internal or external environment. Also, incorporating context and benchmarks into the budgeting process is important for ensuring a responsive, accurate, and flexible budget. 19
Net Asset/Reserve Policy Approximately eight out of 10 (83%) respondents have a net asset/reserve policy (Figure 28). Figure 28. Does your organization have a net asset/reserve policy? However, slightly more than one-third (35%) of respondents who have a net asset/reserve policy say the annual budget or rolling forecast does not present the effects upon that policy (Figure 29). Figure 29. If you do have a net asset/reserve policy, does the annual budget or rolling forecast present the effects upon the net asset/ reserve policy? A net asset/reserve policy defines the agreement between senior management and the board regarding the operational limits of the organization and the use of reserves. For example, if an organization wants to make an investment in new technology or a new program, it will need to decide whether and to what extent reserves can be used for funding, and what risks are associated with the investment. When guided by a sound policy that ensures adequate reserve balance, reserves allow for deficit spending in a particular year, an important element of organizational growth. However, accurate monitoring of reserve levels requires understanding and incorporating the impact of the budget and the organization s financial performance on a regular basis. 20
Conclusion Our Accounting Best Practices series examines the opportunities nonprofits often neglect to improve the efficiency and performance of their financial processes. Many nonprofits struggle to perform fundamental accounting procedures efficiently. More than half of nonprofits in our survey require more than 10 days to close the month end, approximately six out of 10 usually experience delays in month end closings for the first quarter of a new fiscal year, and more than half fall behind on the completion of balance sheet account reconciliations at least two times per year. However, by adopting the following strategies, nonprofits can more successfully meet accounting deadlines, minimize error, and improve overall accounting function performance: Use a checklist or closing calendar for month end closing procedures Have a defined policy for the timing of reconciling balance sheet accounts and provide the CFO with visibility as to the status of balance sheet reconciliations Reconcile all cash and investment accounts on a monthly basis Foster a culture of accountability in which managers who own part(s) of the budget are held accountable for financial performance and explaining any variances of actuals versus projections Nonprofits are also encouraged to review their reports and dashboards and identify opportunities to augment their value. This includes: Presenting both financial and non-financial data that relate to the organization s KPIs into the monthly management reports Providing context for the data, including deep dives on any unusual trends Developing dashboard reports beyond the monthly reports to help focus senior management or your board on important performance metrics Finally, nonprofits should review their budgeting process and ensure that: The annual budgeting process is tied to the organization s long-range strategic plan The organization is using an integrated budget tool, or at minimum Excel sheets that are linked by formulas or references The organization conducts continuous planning or rolling forecasting beyond the annual budgeting process Operational benchmarks against peer organizations are established and incorporated into the budgeting process The budget or rolling forecast presents the effects upon the net asset/reserve policy By adopting these approaches, nonprofits can ease many of the headaches they experience regarding their accounting and budgeting responsibilities, as well as free up additional time for the CFO to focus on high value services, such as decision support, management reporting, and forecasting. 21
What s Next? Check out our additional tools, research, and services that will help guide your strategic discussions and identify opportunities to improve your financial performance and efficiency. Also, stay informed about future survey opportunities! Resources About Tate & Tryon Procurement to Payment Whitepaper Billing & Collections Whitepaper Data Management Checklist IT Staffing and Spending Benchmarks Membership Metrics: A Review of Current and Best Practices Tate & Tryon is a public accounting and consulting firm that specializes in accounting, financial management, and research services for nonprofit entities. We offer unparalleled experience and financial solutions through a wide range of accounting, audit & attest, tax preparation, and advisory services. We also provide financial systems consulting through T3 Information Systems, which is a wholly-owned subsidiary of Tate & Tryon. T3 specializes in the Microsoft Dynamics GP (Great Plains) accounting system, as well as business intelligence and planning software that meet the unique needs of the nonprofit community. Services Business Intelligence (BI) Advisory Services AMS/CRM/Donor Database Software Data Capture Process Design Data Outsourcing Services Benchmarking and Diagnostic Tools Risk Management Assessment CFO and Controllership Services Contact Us 2021 L Street NW, Suite 400 Washington, DC 20036 Email: research@tatetryon.com Website: www.tatetryon.com The professionalism of every staff member we have been in contact with is exceptional. I have worked with many CPA firms during my long accounting career in the Washington DC Metro Area, and without a doubt, Tate & Tryon is number 1. -Lynn Craig, VP of Finance & Administration The American Waterways Operators Phone: (202) 419-5191 22