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 State regulatory agencies

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

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

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

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

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!)

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

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)

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

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

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

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

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)

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

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

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

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)

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

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

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

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

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

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

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

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