1 Developing Financial Practices at the Unit Level and Beyond

Financial Practices Curriculum Strategic Financial Function Financial Management Cycle Stewardship & Accountability Finance Committee Responsibilities Systems & Procedures Policies Operating Reserves 2

Strategic Financial Function REACTIVE: taking whatever the world gives OPPORTUNISTIC: seeking out opportunities and positioning themselves to take advantage of them PROACTIVE: defining their own destinies by working to achieve success 3

Financial Management Cycle 4

Stewardship & Accountability Accurate & dependable accounting Effective internal controls & procedures Transparent reporting Informed analysis Responsible planning Appropriate responses to financial data 5

Finance Committee Responsibilities 1.Budgeting and financial planning 2.Monitors that adequate funds are available for the plan 3.Safeguards assets 4.Drafts fiscal policies 5.Anticipates financial challenges 6.Ensures that the board receives accurate and complete information 7.Helps the board understand the organization’s financial statements and the general financial situation 8.Ensures that federal, state and local compliance reporting takes place 6

Systems & Procedures 1. Design internal processing forms 2. Do things on a regular schedule 3. Keep a calendar with finance-related deadlines 4. Develop a month-end checklist 5. Write notes as ideas, issues and questions arise 6. Keep a financial statement binder 7. Keep an audit folder 8. Update your chart of accounts 9. Securely store organization documents and records 7

Policies Bank Accounts Credit Cards Cash Mgmt. Investments Record Retention Internal Controls Employees Insurance Coverage Volunteers Conflict of Interest Gift Acceptance Privacy IT & Security Whistleblower 8

Operating Reserves What are they & why have them? Rainy day fund Unrestricted surpluses that are liquid Allow for mission-related risks Absorb or respond to temporary environmental changes NOTE: Not-for-profit does not mean “no surplus allowed.” 9

Financial Practices Curriculum Practical How-To’s Setting Financial Goals Key Expense Benchmarks Key Revenue Benchmarks Investment Income/Savings/Financial Reserves Developing an Annual Operating Budget 10

Setting Financial Goals Using your financial and strategic data: Reflect on trends of the recent past and their implications for the current and future on financial planning for the organization. Potential donors expect that the majority of the funds collected by a nonprofit organization are designated to supporting the mission of the organization through its programs. Strive to reach the Key Financial Indicators including the benchmarks expected by the Internal Revenue Service (IRS) and nonprofit watchdog organizations: 11

Key Expense Benchmarks Program Services Expenditures related to the organization’s primary mission and purpose. Target should be percent. Management/General Administrative Expenditures spent on managing operations of the organization. Target should be 5-10 percent. Fundraising Expenditures spent on raising additional funds for the organization’s purpose and mission expenses (i.e., grants, planned giving, endowments, direct mail campaigns). Target should be percent. 12

Key Revenue Benchmarks Setting revenue targets More difficult than expense targets because there are no specific industry benchmarks other than to have a variety of revenue streams that reduce your dependence on any one income source. Since the American Legion Auxiliary is a membership organization, we rely on member dues to cover our expenses. By bringing in other resources such as grants, donations, corporate sponsorships, special events and bequests, we lower the dependence on dues and/or reserves alone to meet our obligations. 13

Investment Income/Savings/ Financial Reserves The ability to build up financial reserves is vital for the future to ensure proper resources are available to maintain operations of the organization if necessary. “It Depends,” but usually the recommended amount of reserves/savings is approximately 2.5 times the annual budget of the organization. For example: An organization with a $100,000 budget would try to maintain $250,000 in reserves for emergencies and have a plan to replenish when withdrawals are made. 14

Developing an Annual Operating Budget Create a three-member Finance Committee for your unit/district/department. Conduct a budget planning meeting of the Finance Committee prior to the start of your fiscal year; make sure to invite unit/district/department officers at which time the agenda should include, but not be limited to the following: Review your current financials in comparison to the IRS Benchmarks. Review your progress status of your long-range goals (i.e., fundraising for new building). Review your annual Auxiliary obligations (VA&R, poppy promotion, ALA Girls State, VCAF, etc.). 15

Developing an Operating Budget (continued) Review your annual operating expenses (i.e., rent, heat, bank fees and conference registrations, etc.). Review your membership numbers and the related dues income. Review other sources of revenue (donations, events, bequests, etc.). On a 12-month calendar, plot out when you anticipate your revenue and expenditures will occur. Compare your total estimated revenue versus your total estimated expenses. 16

Developing an Operating Budget (continued) Try to create a positive bottom line. Have the Finance Committee vote to recommend adoption of the budget by the DEC. Remember: Budgets are just a guide. 17

18 Time to Share Your Unit and Department Best Practices

19 Final Duties Each Year for the Finance Committee

Financial Stewardship & Accountability The Finance Committee is responsible for hiring a professional outside auditing firm to conduct the annual audit. This responsibility transfers to the Audit Committee once this committee establishment is adopted. This cannot be a staff or management function because: Auditors must provide the audited financials to the governing body and report on staff/management activities. Management needs to report on the auditor’s activities. 20

Financial Stewardship & Accountability (continued) In 2008 the IRS began requiring small charities, many of which previously were not required to file tax returns, to submit an annual report the IRS Form 990. There are 4 versions of the 990, based on the asset size of the organization/financial criteria of the organization. Filing a 990 is mandatory for every unit and department. Which 990 you must file is based on your nonprofits annual gross receipts. 21

Financial Stewardship & Accountability (continued) The federal Pension Protection Act requires the IRS to revoke the tax-exempt status of any organization that fails to meet its annual filing requirement for three consecutive years. This requirement now applies to all tax-exempt organizations. The Finance Committee works with the Audit Committee to ensure that all federal, state and local tax reporting is completed and filed by the due dates. The Audit Committee works with staff members and external auditors. The governing body approves filing the 990, or may on record, assign the responsibility to its Audit Committee. 22

Important Information Regarding TINs/EINs ALA Departments and units are separate entities that operate independently as affiliates of the ALA Units and Posts are separate entities and must operate separately. A Unit and Post cannot have the same TIN/EIN If a Unit or Post are erroneously using the same TIN/EIN. The error MUST be corrected. 23

Tax-Exempt Status Revocation/Reinstatement 24 A Unit/Dept/District/County/Council that has its own tax-exempt status revoked by the IRS must handle its own reinstatement with the IRS. Units/Depts/District/Counties/Councils should confer with legal and/or tax professionals regarding revocation and reinstatement matters, such as: Seeking reinstatement for 501( c )(19) tax-exempt status using IRS Form 1024 Deciding to remain a taxable entity and filing the appropriate annual tax forms. (e.g. IRS Form 1120 – Corporate Tax Return)

25 Questions?

Resources Association of Fundraising Professionals: Fundraising Success (Periodical): Grassroots Fundraising Journal (Magazine): Donor Development Databases: Board Source: National Council of Nonprofits: Internal Revenue Service: American Legion Auxiliary: 26

Contact Information Nicole Clapp National Finance Chairman 27