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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on May 20th for IT upgrades. Limited availability from May 21-24 due to team training. We may experience short delays in accessing records and responding to inquiries.
When reviewing financial statements, nonprofit board members and managers sometimes make the mistake of focusing solely on bottom-line figures. But financial statements also may include a wealth of information in their disclosures.
Savvy constituents and potential supporters know this and will examine the notes to your financial statements to gain a sense of how well your organization is pursuing its mission. This means that you, too, need to be familiar with the common types of disclosures and the information they make available for scrutiny.
The summary comprises two sections: a brief description of your nonprofit (including its chief purpose and sources of revenue) and a list of the main accounting policies that have been applied in preparing your financial statements (with a subsection for each specific policy). A policy is generally considered significant if it could materially affect the determination of financial position, cash flows or changes in net assets.
The summary outlines specific policies such as:
The disclosure of accounting policies should describe accounting principles and methods that have been selected from acceptable alternatives, and explain industry peculiarities or unusual or innovative applications of Generally Accepted Accounting Principles (GAAP).
Nonprofits must disclose in the notes a variety of information related to investments, beginning with the types of investments, such as equities, U.S. Treasury securities and real estate. Among other information, the notes must disclose the carrying amounts for each major type of investment, current year income, realized and unrealized gains and losses, and information about how fair value is determined.
Constituents may look to the related party transaction disclosure to determine if the not-for-profit is susceptible to conflicts of interest. The note describes transactions entered into with related parties such as board members, senior management and major donors. The description should include the nature of the relationship between the parties, the dollar amount of the transaction and any amounts owed to or by the related party as of the date of the financial statements, and the terms and manner of settlement. Guarantees between related parties also must be disclosed.
The not-for-profit must disclose any reasonably possible loss contingencies. Contingencies are existing conditions that could create an obligation in the future but arise from past transactions or events. Constituents may find loss contingencies of particular interest because of their potential effect on financial position and net assets. The financial statement notes must disclose the nature of the contingency and provide an estimate of the loss (or state that an estimate can’t be made). In certain circumstances, gain contingencies also may need to be disclosed.
Examples of nonprofits’ contingencies include:
Contingencies related to noncompliance with donor restrictions also should be included in the disclosures.
Contributors, funding sources and regulators tend to be more interested in total expenses by function, such as fundraising costs, than expenses for line items like professional fees, postage and supplies. Nonprofit financial statements should disclose information that allows users to compare the total amount of fundraising costs with the related proceeds and total program costs. If a ratio of fundraising expenses to funds raised is disclosed, the organization also should describe the method used to compute it.
Bottom-line numbers don’t always tell the whole story of an organization’s financial health. Board members and management need to follow the lead of their savvier constituents and take the time to read the disclosures so they know the facts behind the figures and can plan for their organization accordingly.
Do you bite your nails before your entity’s external audit each year? Does your staff start showing signs of anxiety in anticipation of the auditors walking in the door?
If this sounds like your situation, take a deep breath. Here are five tips for making the audit experience run more smoothly for you and your auditors.
Ask your auditor for a list of items they’ll need during the audit, with deadlines for each item, if such a list isn’t provided automatically. Talk to your auditor before the fieldwork if you have questions about any of the items, and let your auditor know right away if you won’t be ready by the agreed-upon dates.
Because unpredictability is a required element in the audit, you’ll also need to produce some information on the spot, such as specific expense reports, journal entry support, or grantor or program reports. But you can still prepare by establishing files during the year to collect the information you may need.
Your expectations of the audit should mirror your engagement letter with the auditing firm. It will spell out what the audit will accomplish and your responsibilities.
Auditors once did accounting “clean-up” work for their clients during the audit, such as preparing year-end journal entries, fixed asset schedules, and various prepaid expense and accrued liability analyses. But today’s professional standards draw a clear line between accounting and auditing services, and your auditor must stay independent of your accounting processes, and as a result may be limited as to what he or she can do.
If there are accounting tasks you can’t do internally due to a lack of expertise, consider hiring a different firm to handle them. But if you’re fully capable and “own” the process, you can engage your audit firm to assist with certain analysis and adjustment information outside of the audit.
Your auditor will apply risk standards during the audit. AICPA AU-C Section 265, Communicating Internal Control Related Matters Identified in an Audit, defines deficiencies in internal control and other “material weaknesses” and “significant deficiencies.”
The auditor, for example, will look to see if there’s:
After reviewing the risk and internal control information you’ve assembled, your auditor could determine there is a “significant deficiency” or the more serious “material weakness.”
For any matter identified in the auditor’s AU-C Section 265 letter, prepare a written response including whether you have taken or intend to take any action in response to the finding. This is important to the audit committee and board as they oversee the audit and the overall system of checks and balances.
Don’t let the annual audit be the only time you talk to your auditor. If you save up all your questions, it’s likely to extend the length of the audit.
Also ask if there are new accounting pronouncements or changes for the year so you and the board aren’t surprised after year end. Be proactive in understanding the new guidance and its impact on your next audit and future financial reporting.
Although the audit — and the preparation that precedes it — requires some work, the benefits are plentiful. The audit not only assesses your overall financial condition, but also can pinpoint problems with financial management and financial reporting, identify ways to reduce risk and strengthen internal controls.
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The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) which would significantly change a 20-year-old financial reporting model. ASU No. 2015-230, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, is intended to simplify the current net asset classification requirements and the presentation of information in financial statements and footnotes about liquidity, financial performance and cash flows. The ASU wouldn’t change the information being reported, but would require it to be presented in a more consistent manner that would be easier for users of financial statements to understand.
Among other changes, the proposed update would eliminate the requirement that nonprofits present temporarily restricted assets and permanently restricted net assets — and transactions in each of those asset classes — separately. Instead, a nonprofit would report amounts for “net assets with donor restrictions” and “net assets without donor restrictions,” along with the currently required amount for total net assets.
The proposed update also would require changes to the reporting of operating activities on the statements of activities, with investment income generally not included in the results of operations. The proposed presentation would be more consistent with the method many nonprofits currently use to track budget vs. actual results. In another change, nonprofits would be required to present on their statements of activities a uniform measure of operations — reflecting their mission and the availability of funds.
Additionally, nonprofits would be required to present their operating cash flows using the direct method, which provides more meaningful information to users than the currently allowed indirect method. And nonprofits would need to provide enhanced disclosures on several matters, including liquidity of assets and operating expenses by nature and function.
This fall, the FASB received harsh feedback on the proposal and has decided to focus its efforts on the aspects of the proposal that received support and delay work on some of the more controvercial parts.
A U.S. charity recently made the news when it was accused of reporting an inaccurately high percentage of every donated dollar that went to its program services. The media outlet that uncovered the discrepancy looked beyond that claim, though, to scrutinize the organization’s outcomes — a strong sign of the growing importance of outcome measurement. Savvy stakeholders, as well as savvy not-for-profit's, realize that outcomes can convey a more complete picture of an organization’s performance than figures pulled from financial statements.
Outcome (or performance) measurement is essentially a method of determining the impact of a program or activity. Unlike traditional measures, such as number of clients served or the amount of donations received, outcome measures allow an organization to assess whether a program is achieving its intended results. An “outcome” is generally described as a specific desirable result or quality of a not-for-profit’s services.
Outcome measures should gauge the level of accomplishment of a program goal in terms of changes in the lives of individuals, families or the community at large. For example:
Bear in mind, though, that outcome measurement won’t prove that the results — good or bad — are due solely to your efforts.
An outcome measurement program will require an organization to identify appropriate outcomes and indicators of those outcomes. It will also involve the collection of data relevant to the indicators and analysis of that data. This is done utilizing surveys or interviews of clients, program dropouts and their family members
The not-for-profit should release regular user-friendly reports of its findings to stakeholders. And, of course, the organization must take appropriate action based on the findings.
Some not-for-profit's may have no choice when it comes to outcome measurement — grant makers or other stakeholders often require it. But even organizations free of such demands should consider engaging in the process.
Outcome measurement can act as a check that the not-for-profit is successful in reinforcing its mission and goals for board members, staff and volunteers. Measuring and reporting outcomes can take the focus away from how resources are being allocated, such as the percentage of funds spent on “program related activities.” Achieving sustainable success may include investing in such non-program-related activities as training, leadership development and strengthening internal controls, all of which improve outcomes.
The results of outcome measurement can be shared with other existing and potential stakeholders to demonstrate the impact of the organization’s programs and activities and, in turn, support marketing and fundraising efforts. The results can also prove helpful with short and long term planning. It makes it easier for the not-for-profit to identify effective programs and activities, as well as those in need of improvement.
Yes. Outcomes need to be measured on an ongoing basis, rather than examining client or other conditions only shortly after the completion of service. A not-for-profit should also return to evaluate the conditions down the road.
Additionally, not every important outcome will be immediately measurable. Some outcomes take years or longer to materialize. In such cases, a not-for-profit can identify milestones to measure progress as time goes by. For example, stronger relationships among community members can be difficult or impossible to measure but still merit regular consideration.
Finally, while outcome measurement can be helpful for planning, organizations should remember that it’s an approach used for looking backwards. Budgeting, policymaking and other long-range planning decisions, on the other hand, are about the future, and conditions should be treated as such.
While different organizations will take different approaches to outcome measurement, every not-for-profit can expect some stumbles along the way. Nothing is written in stone, though. The process can be adjusted as necessary. The important thing is to make outcome measurement a regular, ongoing activity that reflects the organization’s mission-driven priorities.
Outcome measurement isn’t only effective for larger organizations — in fact, it might be even more important for smaller not-for-profit's with fewer resources. Organizations that need to make every dollar and staff or volunteer hour count can use outcome measurement to determine which programs and efforts truly work and then either eliminate or strive to improve those that don’t.
Moreover, smaller not-for-profits can’t afford to stick with traditional metrics such as overhead ratios while larger organizations move on to outcome measurement. Like it or not, those organizations tend to set the trends. As larger not-fot-profit's increasingly make their outcome measures available, grant makers, social investors and individual donors will increasingly expect to see such measures before they pull out their wallets. Smaller organizations that fail to adopt outcome measurement risk being left behind when it comes to funding support.
Feel free to contact us with questions, clarifications, or assistance with Outcome Measurement.
In a slow economy, many nonprofit leaders worry about having enough money to meet their organizations’ financial obligations each month. But those who effectively monitor their nonprofits’ cash flow can successfully predict when the money coming in will balance with the money going out, when they’ll have a surplus of cash, and when they’ll have a shortage. They can plan — and take actions — accordingly.
Cash flow management involves analyzing cash inflows and outflows based on the timing of receipts and payments. It’s more than taking your annual budget figures and dividing by 12 to come up with a static, monthly amount — this won’t give you an accurate snapshot of your cash flow.
Take an annual event. If it’s a holiday dinner, costs rise in November and December as you plan, and pay for, the event. Costs also may bump up noticeably in, say, January if you publish an annual membership directory then. In fact, costs can vary significantly from month to month for a variety of reasons — for example, as heating and cooling costs rise and fall or staffing needs change.
To begin managing your not-for-profit’s cash flow, create a cash flow report using a simple grid. Along the top, list all 12 months and label them either “actual” or “projected.” Going down the page, create rows for the following information:
Beginning balance. This line shows the amount of cash you had at the start of the month.
Cash coming in. Create line item entries for the largest income categories you’ll have for each specific month. Total all the individual entries to calculate the amount of incoming cash.
Cash going out. Make line item entries for the largest categories of expenses, combining as necessary. Total all individual entries to calculate the amount of outgoing cash.
Net inflow/outflow. Subtract your cash going out from your cash coming in to determine your net inflow or outflow.
Ending balance. Add the beginning balance to the net inflow/outflow number to get an idea of your cash position for each month.
Use historical data in addition to what’s on your calendar for the year ahead to help create your projections. Remember, you’re creating a time-based report, not simply averaging expenses and income over 12 months.
Be realistic about when cash will actually come in. If your big fundraiser is cash-based, you’ll have the money in the month of the event. But if you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections.
To complete your cash flow report, compile a total of your cash on hand and estimates of cash receipts and their due dates. You’ll also need to enter into the report payment amounts and schedules for personnel expenses (including salaries, wage increases, taxes and benefits).
Other data you’ll need includes consulting and professional services fees, occupancy charges (including rent and insurance), and office charges (including telephone service, equipment rental, service contracts and supplies). Last, be sure to include financing costs and all other expense categories (including travel, postage and printing).
We can help you devise your cash flow report and review maiden entries. We can walk you through the analysis process to help ensure that your reports are used to your nonprofit’s best advantage. Over time, the ability to successfully project and manage cash flows and positions — along with effectively managing the budget and having sufficient liquidity — will be key to your organization’s viability.
Has your nonprofit frozen wages or awarded minimum pay increases over the last few years while asking employees to take on new responsibilities? Are they being asked to contribute more to your benefit plan, or take a benefits cut?
Such organizational moves often are necessary during tough economic times. That said, don’t lose sight of the importance of your staff, from hiring and training them to rewarding them for their performance, and providing motivation to stay.
When asked to list their organization’s assets, nonprofit leaders are likely to name investments, facilities, real estate, cash and other tangible assets. Too often, personnel are left off the list.
But without a knowledgeable and canada goose black friday sale 2015 committed staff, you stand little chance of delivering program services or raising enough money to fund them. And when you consider the cost of hiring, training and mentoring staff, not to mention the losses your nonprofit incurs when an experienced employee leaves, it’s easy to see why you should assign a high value to your people.
Finding and keeping good staff starts with smart hiring. Just as you wouldn’t buy a mutual fund without researching its performance and strategy, don’t hire staffers without thoroughly vetting them for potential rewards and risks.
Experience, education, canada goose black friday sale skills and employer recommendations are merely a starting place. Good hiring requires employers and job candidates to honestly assess their respective objectives. Don’t hire someone simply because you’re desperate to fill an empty position. Shaky starts rarely lead to long-term success. Similarly, don’t court a candidate who seems likely to jump ship when a “better” offer comes along — no matter how impressive his or her resumé.
When a new employee comes aboard, ensure he or she receives comprehensive training — not only related to job responsibilities, but also about your not-for-profit’s culture and ethics. Staffers need to buy in to your mission and support the programs you’ve established.
Also ensure that employees understand your evaluation and compensation system — and feel like full participants. Often, they leave a job claiming their employment expectations weren’t met and the employers are left scratching their heads about what went wrong. Staffers must be able to voice perceived obstacles to their successful long-term employment without fear of reprisal. If you want to keep them, listen and try to find ways to help them succeed.
Although financial compensation is generally the best way to reward and retain people, there are other ways you can let employees know you value them — without busting your budget. For example, consider tangible rewards other than money. You could write a personal “thank you” note and enclose a small gift card when a staff member achieves something special. Or you could reward that person with an extra vacation or personal day. Another idea: Offer the employee more flexible hours, such as earlier starting and leaving times or the option to telecommute.
And don’t forget the value of praise and recognition. Acknowledge employees for a job well done at staff meetings or in your nonprofit’s newsletter. Or invite “star” employees to be introduced at a board meeting, or to represent your nonprofit at an industry conference. All of these actions reflect your confidence in those individuals and indicate their importance to the organization.
Your nonprofit may be unable to compensate employees quite as well as its for-profit counterparts. But, if your focus is on valuing and growing your assets — that is, your employees — all you need is a little creativity in order to reward them in many other ways.
As expected, the Financial Accounting Standards Board (FASB) issued an Exposure Draft on April 22, 2015 on a proposed Accounting Standards Update on the "Presentation of Financial Statements of Not-for-Profit Entities."
The FASB’s Not-for-Profit Advisory Committee indicated the reason for the proposed update is that existing standards for financial statements of not-for-profit entities are sound but could be improved to provide better information to donors, creditors, and other users of financial statements.
Public comment on the proposal is now open with a deadline of August 20, 2015.
While board members typically bring a variety of talents and expertise to the table, they don’t always have extensive experience with financial and accounting matters. So how can you best communicate the essential financial information they need to do their jobs?
There’s no denying it — board members can’t properly perform their functions if they don’t obtain and understand information about the organization’s financial position. Without timely financial information, they can neither make informed decisions about goals and planning nor monitor the organization’s progress toward those goals. They also can’t fulfill their fiduciary responsibilities.
Members of boards with finance or audit committees might be under the false impression that only the committee members need to concern themselves with the financial nitty-gritty. That couldn’t be further from the truth — every board member must possess at least a basic understanding of the financial statements to make decisions that satisfy his or her duty of care.
At a minimum, the board needs to receive the following financial information. On a monthly or quarterly basis, they should receive it in an accurate and timely manner:
IRS Form 990 should be presented to the board annually. And the board should remain up to date on the nonprofit’s current goals and programs. Benchmarks make the data more meaningful.
This information will help a board in evaluation mode. When engaged in planning, board members also need trend analyses, information about the external environment and its impact on the organization, financial projections and multiple budget scenarios. Capital projects or new programs under consideration may require specialized budgets of their own.
Several steps can help management present financial information to their boards more effectively. For starters, every board member should receive some training on how to read and use financial reports.
The board orientation process should allocate time for new members to meet with the chief financial officer or similar staff person to go over the financial report format, and to understand the organization’s critical financial factors. The board members can meet with the CEO or executive director, too, for a review of the organization’s financial results and the goals for upcoming programs and new strategic directions.
Periodic refresher sessions for veteran board members also are advisable. Your CPA can make valuable contributions to these meetings and sessions, bringing an independent perspective to the discussions and shedding light on the audit process.
Before you get to the point of training your board, you’ll need to develop a user-friendly format for your financial reports. Bear in mind that graphs are often easier to understand than columns of numbers, and can provide a useful vehicle for sharing trending information.
Similarly, board members may find it easier to process ratios, which combine two or more pieces of financial data to provide a more comprehensive view. For example, fundraising efficiency can be expressed as a ratio that divides contributed income by fundraising expense.
Use summarized information for income and expenses, rather than providing detailed line items. This makes it easier for board members to focus on the big picture and steers them away from day-to-day micromanaging.
You also should provide a narrative section along with the numbers. You can use the narrative to highlight significant items and explain notable variances between budgeted and actual figures.
Make sure the necessary financial statements are prepared well in advance of board meetings and distributed to board members at least one week before the meeting. This gives them time for review.
No single financial reporting approach or format works for every organization. Take the time to consider your audience and its level of financial expertise when determining how to convey the information they need to fulfill their responsibilities.
As part of the Financial Statements of Not-for-Profit Entities project, the Financial Accounting Standards Board (FASB) plans to issue an Exposure Draft mid-April on a proposed Accounting Standards Update focused on improving:
Under the proposal, the current three net asset classes will be reduced to two: with donor-imposed restrictions and without donor-imposed restrictions. (The Board also decided to make conforming changes to the terminology and definitions of the net asset classes.)
In addition, all not-for-profits would be required to report expenses both by their nature and by function.
The proposed changes are required to be applied on a retroactive basis. In the initial year of application of the proposed changes, the annual financial statements would disclose the nature of any reclassifications or restatements and their effect, if any, on the change in the net asset classes for each year or period presented. Application to interim financial statements would not be required in the initial year of application.
Over the course of this project, the Not-for-Profit Advisory Committee and many external stakeholders have provided valuable input to FASB. The Exposure Draft is intended to allow many others to contribute. Based on the expectation that the Exposure Draft will be issued by mid-April, the comment period will conclude on July 31, 2015.
The Financial Accounting Standards Board recently proposed Accounting Standards Update No. 2015-230, which would significantly change a 20-year-old financial reporting model. The changes are intended to simplify the current net asset classification requirements and the presentation of information in nonprofits’ financial statements and footnotes about liquidity, financial performance and cash flows.
Outcome (or performance) measurement should gauge the level of accomplishment of a program goal in terms of changes in the lives of individuals, families or the community at large. This article defines outcome measurement, discusses its importance to a not-for-profit and highlights the caveats.
In this issue, “Newsbits” discusses a report that uncovers dissatisfaction among millionaires who donate to charities; findings of an annual compensation survey showing that executives of large not-for-profit's and foundations are starting to see bigger raises; and a new tool that assigns dollar values to social projects.
