Accountants: Taxes, Budgets, & Audits

1. Accountants: Taxes, Budgets, & Audits Robin L. Powell, CPA, MBA October 14, 2009

2. Why Nonprofits need trained Accountants • Why does a nonprofit need to hire an Accountant rather than a Bookkeeper? • Nonprofits are held to a higher standard. • The level of transparency required for nonprofits is absolute. • The reality of penalties (and other scary things). • How does an accountant add value?

3. The highest standard • People, organizations, foundations and corporations give to nonprofits and they expect that their money is put to an acceptable use. • Past instances of fraud and wastefulness have made donors wary and more careful. • Educated donors read and understand financial statements and they therefore must be accurate and timely or donors may be lost. • Issuing inaccurate financials is tantamount to committing fraud. • Professional looking financial statements may be the difference between a funder taking your organization seriously, or not.

4. Transparency • We want our donors to feel that we are safeguarding the assets they give and that their donations are used prudently. • The Federal Form 990 requires that salaries larger than $100,000 be disclosed and expenses are carefully itemized and on display for the world. • Percentages of Programs Expenses can easily be compared to Management & General and Fundraising Expenses to assure that 75% or more of dollars donated are used for Programs.

5. Charities have heavy reporting burdens • Reporting requirements include monthly financial statements which at a minimum should include a Balance Sheet, an Income Statement and a Statement of Cash Flow. (In nonprofit world these first two are referred to as Statement of Financial Position and Statement of Activity.) • Annually an audit report should be issued and there is considerable work involved with preparing for audits. • Frequent comparisons to budget should be done to report to the Board of Directors along with financial statements. • Reports for restricted donations. • Reports for donation requests.

6. Tax Reporting for Charities?(But I thought we were tax exempt?) • Nonprofits are tax exempt but still have to file many tax returns. • The Federal form 990 information return is required even though Nonprofits do not pay Federal Income Tax. • Sales tax returns are required for the sale of any tangible goods. Even though the Nonprofit is not required to pay taxes on the goods they purchase they are required to remit taxes they collect on goods sold. • Payroll taxes are not exempt for Nonprofits and tax deposits must be made on time and tax returns filed for both Federal and State payroll taxes which include: Federal Income Tax Withholding, Social Security Tax, Medicare Tax and State Unemployment Tax. • Returns are required for 401(k) and 403 (b) savings accounts. • There are significant penalties associated with late payments and late filings on all of these returns.

7. How Accountants Add Value • A Bookkeeper is a person who can input data and push a button to generate a report. An Accountant can read that report and understand it. More importantly they see it as a story written about your organization and can tell you what the users of that report will ask questions about. • Accountants can help you look at historical trends and create reports that help you run your nonprofit more efficiently. • Accountants can help you create budgets and projections. • Accountants are familiar with tax reporting requirements and will keep you from getting blindsided. • Accountants can help you prepare for an audit by reconciling accounts and presenting the data and materials in an efficient manner, thus keeping the cost and frustration level of and audit to a minimum. • Accountants can help you present your case to potential donors and help you determine what to ask for.

8. Why Budgeting is important • How do budgets affect everyday operations? • When should a budget be done and who should be involved? • Why is it important to have staff input and staff understanding of the budget? • What is a Program Budget and what is an Organization Budget? • Why is it important to have the Board review and understand the budget? • How do Budgets get put together? • What do we do with a budget once we have one? (Besides file it.) • What is the difference between a Budget and a Projection?

9. Day to Day use of a Budget • A budget is a document written to estimate income and expense for a period of time. The staff of an organization need approval to spend the organization’s funds. The Budget is approved by the Board and thus the spending included in the Budget is approved. The Budget includes enough income to cover the spending. • Through constant comparison of “Actual” Expenditures and “Actual” Revenues to Budget, management and staff are able to keep on target and to notify the Board if they will need to go over Budget in a particular area and thus get the Board’s approval.

10. When should a budget be done? • Obviously, since the budget is a tool by which the Board approves expenses the Budget should be completed and approved by the Board prior to the start of the Budget Period. • Multiple year budgets are helpful to the Board and Staff and should be included as often as possible. Budgeting helps the Board and the Staff look past the current period and think about the “Big Picture”. (Where are we going and how will we get there?)

11. Who should be involved? • Mid-level managers should be included in the Budgeting Process. Their input is invaluable and their “buy-in” necessary to the success of the Budget. • The Budget should be viewed by staff as something that they helped create and will work to achieve rather than a hassle that has been dumped on them. • When the first draft of the Budget is completed then the Executive Committee and/or the Treasurer should begin reviewing and asking questions about the Budget. Their support is necessary in getting the Budget passed when it is presented to the entire Board of Directors. • It helps to have a new set of eyes look at your work and ask questions and avoids this important group from asking questions during presentation to the entire Board that both undermine confidence in your budget and could stump you.

12. Organization Budget versus Program Budget • An Organization Budget is the Budget for the entire period for all activities included in the organization’s charter. • A Program Budget is for a specific program or activity. It can be for a Specific Fundraising Event or for an Children’s Program. It can be as narrowly defined as needed but should include all the income generated for and direct expenses from the activity. • Many donors prefer to donate restricted funds. In order to sell a program to a donor the organization needs a budget that includes all expenses even if you are not requesting the entire amount from the donor. Often they will also want to know where your other funds for the program will come from.

13. How do Budgets get put together? • The budgeting process should start with a review of the prior year financials. Especially the expenses. • What will change in the new budget period? Which expenses will need to be increased or decreased? Were there any one-time expenses or revenues that should not be included this year? • Start with programs and determine the level of services desired for the new year as compared to the previous year and then look at each expense and determine if the desired program level will require an increase or decrease in that expense. • Once you have a good estimate of your expenses, then start building your revenue streams to cover those expenses. • Look at grants and contributions and fundraising. • If you maintain levels will it be enough to cover expenses? • Which grants can you realistically expect to receive this year? • How many fundraising activities are planned and how much will each activity net?

14. Budgeting Process • If your Revenues do not cover your Expenses then you will need to find a new source of revenue or cut your desired program level back so that you can meet your expenses. • This is where it is very important that staff be part of the process. Not only can they help you determine a realistic goal for both programs and expenses, but they will need to commit to the increased levels of activity and increased fundraising required to achieve the necessary funds. • Documentation should include a Programs Budget, a Salary Budget a Grant Budget and a Fundraising Budget. Each of these feed into the total Budget and the separate worksheets will help you organize your thinking and help you answer questions about the budget. • Finally, you have a Budget that you think will support the level of activity desired for the budget period. Your staff agrees they can do the work to increase services and increase fundraising, now you just have to convince the Board. This will not be a problem, because the steps you go through with your staff to build the budget give you documentation of all of your decisions.

15. What is a Projection? • As you move through the year the estimate of the Revenues you will earn and the Expenses you will have changes. • Comparing Actual data to Budget only gives you half the story. What the Board wants to know is how are we doing currently and what do we now think our year end will look like? That is what a Projection does. A Projection is the best estimate of Income and Expenses for a budget period. • The Board wants the best information you have currently, not a budget that is six months old. So as you move through the year you start to project the information you know forward. • Most people start by creating a hybrid combining the actual data they have accumulated and filling in the blanks with some budget data. • Depending on how accurate the Budget is, new estimates may have to fill in the last months of the year if we know the Budget is incorrect.

16. When does a nonprofit need an audit? • As soon as you can afford one, generally when revenues exceed $750,000. • Audits are required if the organization receives Federal Funds of over $500,000. Be careful with this because state funds are often pass through Federal Funds. A state grant might actually be Federal funds. Even some grants from schools and other nonprofits can actually be pass through Federal Dollars. • Catch 22, many funders require audits but you can’t afford the audit until you get the grant!

17. Who Does the Audit Team work for? • The independent CPA firm that will do your audit should be selected and approved by the Board of Directors. • The auditors work for the Board of Directors and indirectly for all users of the financial statements. • Audits can be time consuming and frustrating if not managed properly. • The number one thing that will speed up the audit is to have all documentation organized and available at the beginning of the audit. • All Balance Sheet accounts should be reconciled before the auditors arrive. • Auditors should be given a single contact person. This does not mean they cannot talk to other staff members, but one person should be responsible for getting them the data and paperwork they need.

18. Working to get the most from your audit • The Executive Director and Accountant will definitely have some say in who the auditors are. Make sure your audit firm has a teaching approach. • Audits are meant to assure the users of your financial statements that they fairly presented. Each time your auditors find a problem, learn from it. • Auditors will look at internal controls and may spot areas of concern before they become problems. Be honest about how you really operate and listen to what they tell you.

19. Last note • Accounting has been around for thousands of years. Your Accountant knows all the ways that assets can be lost or wasted. Internal controls are put in place to protect the staff as much as the organization. Do your best not to circumvent controls even if you do not see their purpose immediately. • Learn from your auditors, you organization pays them lots of money, get your money’s worth! They see many different organizations during the year and may have good ideas that can save you time and money!