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FINANCIAL RECORDS AND REPORTING

FINANCIAL RECORDS AND REPORTING. FOR NON-PROFIT ORGANIZATIONS Presented by Henrietta Jordan. Why Financial Statements Matter. Internal management and decision making Accountability and transparency Donor confidence and information Reporting to funders Internal Revenue Service

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FINANCIAL RECORDS AND REPORTING

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  1. FINANCIAL RECORDS AND REPORTING FOR NON-PROFIT ORGANIZATIONS Presented by Henrietta Jordan

  2. Why Financial Statements Matter • Internal management and decision making • Accountability and transparency • Donor confidence and information • Reporting to funders • Internal Revenue Service • State regulatory agencies

  3. PURPOSE OF FINANCIAL REPORTS • Snapshot of where you are • Story of what happened – financially • Help you understand what you need to do to achieve your goals

  4. Financial Statements • Statement of Financial Position (aka Balance Sheet) • Statement of Activities (aka Profit and Loss Statement) • Statement of Cash Flow • Budget Comparison

  5. Relationships between Statements • Statement of Financial Position – assets and liabilities at a single point in time • Statement of Activities – financial activity over a period of time • Budget Comparison – performance vs. expectations • Cash flows – sources and uses of cash over a period of time

  6. Statement of Financial Position • Snapshot – single point in time • Assets of the organization – what it owns • Liabilities of the organization – what it owes to others • Net assets – what is left over

  7. Assets: what you own • Cash & cash equivalents • Investments • Real property • Accounts receivable (contracts, grants) • Pledges receivable • Prepaid expenses • Leasehold improvements • Furniture • Equipment • Depreciation (a minus number!)

  8. What’s a Restricted Asset? • Donation for a specific purpose • Bequest for a specific use • Funds to be used during a specific time period • The asset is RESTRICTED and can only be used in keeping with the donor’s intent

  9. Temporary vs. Permanent Restrictions on Assets • Temporary Restriction: Asset given for a specific purpose, but it can be expended for that purpose (released from restriction) • Permanent Restriction: Asset can NEVER be expended; interest/dividends may be used, in keeping with donor intent (endowment)

  10. Liabilities • Unpaid wages • Undeposited payroll taxes • Accrued vacation pay • Unpaid bills • Loans payable • Unearned income (deferred revenue) • Other?

  11. Chart of Accounts • The heart of your accounting system • Method of classifying assets, liabilities, income and expenses • Should reflect the programs and activities of the organization • More accounts = more information but also more work! • Develop with professional advice

  12. Why is it called a balance sheet? The Accounting Equation • Assets = net assets plus liabilities Or, more logically, • Assets minus liabilities = net assets

  13. Statement of Activities • Financial activity over a period of time – a month, a quarter, a year • Income (revenues) and expenses • Transactions posted and classified by source and function (accounts) • Sometimes called profit/loss statement

  14. Functional Classification of Expenses • Program – expenses related to carrying out the work of the organization (salaries/benefits of program staff, program supplies, portion of occupancy) • Fundraising – expenses related to soliciting contributions for the organization (portion of salary & benefits of staff participating in grantwriting, special events, donor cultivation, portion of occupancy) • Administration – expenses not related to program or fundraising but that are essential to the organization’s operation (salaries, benefits of finance staff, portion of ED’s salary and benefits, board-related costs, portion of occupancy)

  15. Accrual basis accounting • Matches income with revenue (shows costs in the period they were incurred; matches them with revenues) • More accurate picture of financial activities & status than cash basis • Shows accounts receivable, accounts payable

  16. Capitalization and Depreciation • Spreads the cost of major equipment over its useful life • Computer system costing $3,000 with a 3-year depreciation schedule • Initially listed as an asset • Depreciation (cost) = $1,000/yr • Annual cost listed as expense on Statement of Activities • Accumulated depreciation subtracted from asset’s value on balance sheet • At end of 3 years?

  17. You decide: what is it?Asset, liability, income or expense? • Rent • Supplies • Land owned by the organization • Grant • Payroll taxes • Donation • Lawyer who gives services for free • Loan • Computer system • Depreciation on computer system

  18. The Answers . . . • Rent (EXPENSE) • Supplies (EXPENSE) • Land owned by the organization (ASSET) • Grant (INCOME and LIABILITY) • Payroll taxes (EXPENSE and LIABILITY) • Donation (INCOME and ASSET) • Lawyer who gives services for free (IN-KIND INCOME) • Loan (LIABILITY) • Computer system (ASSET) • Depreciation on computer system (EXPENSE and CONTRA-ASSET)

  19. Budgeting • Critical document for management • Sources of information (prior year’s income & expenses, anticipated increases/decreases, new programs) • What’s the plan? • Process: who develops the first draft? How is it marked up? • Contingency • Final approval by the board

  20. Budget Comparison • Side by side: Budgeted vs. Actual • Percentage of anticipated revenues and expenses to date • Annotate to explain why income & expenses happening unusually quickly or slowly • Reviewed by board or finance committee at least quarterly

  21. Financial Reserves • Your rainy-day fund • Enough to cover 3-6 months of operating expenses • Liquidity? • (Net unrestricted assets)

  22. Internal Controls • First line of defense against misuse of organization’s funds • Documented in accounting procedures • Based on segregation of duties among several different people in: • Receiving donations • Preparing deposits • Authorizing expenditures • Reconciling the bank statement

  23. More important safeguards • Account for staff time through timesheets • Lock it up! • Secure recordkeeping systems

  24. Independent Financial Review(by a CPA) • Compilation of Financial Statements • Review of Financial Statements • Audit

  25. What is financial leadership? Decision makers . . . . • Have timely and accurate financial data • Periodically assess the financial condition of activities and the organization as a whole • Plan around a set of meaningful financial goals • Effectively communicate progress internally and to stakeholders

  26. Board Responsibilities • Overall fiduciary responsibility for the organization • Hiring top management • Approve budget • Monitor results (reports) • Take corrective action, if necessary • Hire independent auditor

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