Financial Management Overview

1. Financial Management Overview USDA/State agency Biennial Conference November 30, 2011 Lynn Rodgers-Kuperman

2. Agenda • Financial management of the nonprofit school food service account (NSFSA) • Procurement basics • Overview of indirect costs and assessment of such costs

3. Financial Management of the NSFSA

4. So what is financial management in simple terms? • It is the management of the finances of an organization in order to achieve financial objectives • Key Elements include: • Financial Planning: Managing ones needs • Financial Control: What is being done to ensure funds are being used properly • Financial Decisions: Determining how are funds spent

5. Why is financial management important in SMPs? • Managing the financial resources of Federal school meal programs(SMPs) is critical to the success of maintaining quality standards and ensuring nutritious meals are served to children • Dollars spent by the Federal government, states and paying students added together represent a significant level of public funding

6. OMB statement -- we are stewards of taxpayers’ money The Federal Government has a fundamental responsibility to be effective stewards of the taxpayers’ money. We must be responsible with money that comes to the government, money that is spent by the government, and money that is used in running the government itself. Decision makers and the public itself must have confidence in financial management efforts.

7. Poor financial management…

8. Transparency the New Buzz Word • Moreover, given the Federal Government’s fiscal challenges there is a significant need for transparency and control regarding financial systems • Internal financial control systems need to be reviewed to ensure that they minimizing improper payments

9. Receiving Funds in a Reimbursement Program? • In many other programs, program operators bill the Federal awarding agency for program costs for reimbursement • In the SMPs, SFAs do not bill USDA/FNS for the reimbursement of program costs • What does this mean?

10. What does this mean? • SFAs receive certain monies (rate of reimbursement) for each meal served • This is not free money, there are strings attached: • Meals must conform to program regulations • SA and SFA must adhere to Department-wide and program-specific regulations (i.e., Federal cost principles, procurement regulations, etc.)

11. Federal regulations 7 CFR Part 210 End Hunger • SMPs operate on a nonprofit basis, with all revenue used to support or improve the food service operations • SFAs must establish a NSFSA in which all of the revenue from all food service operations conducted by the SFA, principally for the benefit of school children, is retained and used only for the operation or improvement of the nonprofit school nutrition program

12. Imposed controls -- restrictions placed on funds • The funds provided by FNS to the SA and in turn to the SFA for the SMPs are granted with terms and conditions • These terms and conditions are outlined in the Federal regulations and Office of Management and Budget (OMB) cost circulars (i.e., Federal cost principles)

13. OMB cost circulars • Federal cost principles are general rules for charging costs to grants, thereby billing the Government for the costs • They explain if a cost is allowable, in other words, whether a cost can be paid for with funds in the NSFSA • These include, but are not limited to, being necessary and reasonable for efficient performance of the SMPs, and allocable thereto (that is, providing a benefit to the program commensurate with the cost incurred)

14. OMB cost circulars, contd. 2 CFR Part 225 (OMB Circular A-87) applies to State, local, or Indian Tribal governments 2 CFR Part 230 (OMB Circular A-122) applies to nonprofits Note: They also describe the different allocation methodologies that can be used by the school district and the general criteria for charging or billing costs as direct or indirect (more on this in the 3rd section of this presentation)

15. OMB cost circulars, contd. • Remember, all costs (direct or indirect) must be allowable • 2 CFR 225 (A-87) • Appendix A provides a list of criteria for allowable costs (more general in nature) • Appendix B classifies certain costs in three categories: • allowable, • allowable with prior SA approval, or • unallowable

16. What does this mean? Appendix B must be read in conjunction with Appendix A in order to determine whether a cost is allowable

17. General criteria for allowable costs? Necessary; Reasonable; Allocable; Legal under State and local law; Conforms with Federal law, regulation, and grant terms; Consistently treated as direct or indirect; Determined in accordance with Generally Accepted Accounting Principles (GAAP); Not included as a cost or matching contribution of any other grant (except where allowed by Federal regulations); Net of applicable credits; and, Adequately documented

18. In a nutshell… SFAs follow a multi-step process to determine whether funds from the NSFSA may be used for a certain cost

19. Procurement Basics

20. Remember earlier I mentioned financial planning, control, and decision making ? Do we use these processes in procurements? • Yes, we do!

21. But first, what is procurement? • Generally, the purchasing of goods and services • In the SMPs, this process involves: • distinct phases of planning; • drafting specifications; (decision making) • advertising the procurement; • awarding a contract; and • managing the contract (control)

22. So it makes sense that before purchasing for programs… • An SFA must plan and evaluate: • Food Service Operations • Food Service Needs • This is also called forecasting

23. Evaluate Operations • SFAs must evaluate their schools’ current food service operations to determine their needs • Self-Op/Central Kitchen/FSMC • Storage capacity • Processing abilities • Staff resources • Food safety practices • Prior year menus • Current food inventory

24. Evaluate Needs • SFAs must then evaluate their school’s current food service needs • Necessary volume • Students’ preferences • Menu requirements • Required transportationand delivery needs

25. Next step: inventory management • Inventory is the value of food and supplies on hand, whether at the food preparation site or in a central warehouse or facility • Effective inventory management is essential for managing and controlling costs • Includes effective receiving procedures, a system for accounting for items removed from inventory, effective counting of items in stock, and determining appropriate methods for calculating the financial value of the inventory

26. Understanding how much food you need • Calculating the amount of food needed to purchase, to equal the amount of food needed for a recipe or service, is an important part of meal production planning • As Purchased (AP)refers to the weight of the product as it exists when purchased. E.g., pineapples are whole with skin and the top; whole turkey have skin and bones • Edible Portion (EP)refers to the part of the product that can be consumed; Using EP conversion information is very important in determining the total amount of a product needed

27. Resource? Tip: USDA Food Buying Guide is a helpful resource (http://www.fns.usda.gov/tn/resources/foodbuyingguide.html) • Provides the yields, or the amount of servings obtained in a purchased unit of different products (such as canned fruits), yields from raw to cooked product (such as raw ground beef), and how to determine contributions of menu items towards the meal pattern for the National School Lunch Program (NSLP) or School Breakfast Program (SBP) • Contains very useful general information for menu planning, procurement, and food production

28. Storage area organization • Storage areas should appropriately hold goods under proper conditions to assure quality and safety until time of use (prevents spoilage/loss)

29. Controlling waste • Order only food needed for menu production • Store food properly • Portion control • Plan to utilize leftovers • Survey students to determine menu preference • Food presented in appealing manner

30. Understanding staffing costs • Managing staffing and scheduling is a critical part of financial management • Staffing is the determination of the appropriate number of workers needed for the operation to do the work that needs to be accomplished

31. Theft & fraud prevention, contd. • Implement procedures to prevent: • Customer theft • Employee theft • Vendor theft • Implement key and lock control Next, we will discuss procurement of goods and services, a key aspect of financial management

32. What else is key to the procurement process? What is the most important principle? • Free and open competition! • Free and open competition means: All suppliers are on the same level playing field and have the same opportunity to compete

33. Why is competition important? • Cost of products and services • Quality of products and services • If playing field is level it encourages more vendor participation

34. What regulations must SFAs follow when conducting procurements? • Program Regulations for Procurement: • NSLP: 7 CFR 210.21 • SBP: 7 CFR 220.16 • Uniform Administrative Requirements for Procurement: • State/local governments: 7 CFR 3016.36 • Non-profits: 7 CFR 3019.44

35. Who created these regulations? Are they complex?

36. This skit isn’t quite accurate ….. • The regulations found at 7 CFR Part 3016, Uniform Administrative Requirements for Grants and Cooperative Agreements State and Local Governments may seem complex but the regulation actually encompasses a pretty clear set of principles

37. Let’s break the regulation down by starting with procurement methods • Informal procurement • Small Purchase Threshold • Formal procurement • Competitive Sealed Bidding • Competitive Negotiation

38. Informal Procurement (small purchase threshold) • Procurement contract under $100,000 in value • States or localities may set a lower small purchase threshold (which imposes more formal procedures) • SFAs should put solicitation in writing before contacting any potential offerors (i.e. draft specs) • Recommend at least 3 sources be contacted who are eligible, able, and willing to provide the product or service

39. Formal Procurement Methods • Value of purchase exceeds Federal, State, or local threshold for small purchases • More rigorous and prescriptive: • Competitive Sealed Bidding (i.e., IFB) • Competitive Negotiation (i.e., RFP) • Allows for the identification of evaluation factors and their relative importance

40. What does this mean? • Detailed specs must be developed • Technical and cost factors • Bids/Proposals must be publicly solicited • Measure and document why one company’s response to a particular criterion is better than another (lends itself to an RFP)

41. Keep in mind… SFAs may not intentionally split purchases to fall below the small purchase threshold and avoid formal procurement methods

42. Sometimes however… • There may be instances in which a specific market supports the need to separate certain products from the overall procurement. For example, milk and bread are commonly procured separately because there are fundamental differences between them and other food products, such as shorter shelf-life, specialized pricing mechanisms, and durability. • Similarly, an SFA may find that fresh produce may be considered a separate market given that it shares similar characteristics as bread and milk, and may want to separate this procurement from their overall food procurement. • Another example may be If an SFA is participating in an activity such as a “Harvest Week” for their school lunch programs where they are trying out new vegetables and it is necessary to procure specific food items, it may make sense for the SFA to conduct a separate procurement for those specific products.

43. Do the procurement methods result in the same contract types? • For formal purchasing, an SFA must decide if their solicitation will result in a: • Fixed Price Contract (IFB or RFP) • Cost Reimbursable Contract (only RFP)

44. Fixed price contract Provides a stated price that is fixed, without any upward or downward adjustment for the duration of the contract, including for all renewal periods (Note: may contain an economic price adjustment tied to an appropriate index)

45. Fixed price contract, contd. • Provides the maximum incentive for the contractor to control costs and perform effectively • Imposes the least administrative burden on the contracting parties

46. Cost Reimbursable Contract • Provides for payment of allowable costs incurred in performing the contract • Appropriate to use when uncertainties involved in contract performance will not permit costs to be estimated with enough accuracy to use fixed price

47. Cost Reimbursable Contract, contd. • Frequently occur in the SMPs as cost plus fixed fee contract • Provides for the reimbursement of allowable costs plus the payment of a fixed fee to the contractor • For cost reimbursable contracts, SFAs must include the following provisions in all cost reimbursable contracts and in solicitation documents:

48. Cost Reimbursable Contracts, contd. Allowable costs will be paid from the nonprofit school food service account to the contractor net of all discounts, rebates and other applicable credits accruing to or received by the contractor or any assignee under the contract, to the extent those credits are allocable to the allowable portion of the costs billed to the school food authority [210.21(f)(1)(i)]

49. Next step: developing a solicitation • Once the decision is made regarding what goods and services are needed and the appropriate method to acquire them, a solicitation must be developed which contains specifications & all necessary contract elements • Remember, forecasting helps the SFA determines what types of goods and services it needs

50. Solicitation: clear & accurate