Peeling Back the Covers on Nonprofit Financials - Leigh Tucker


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Peeling Back the Covers on Nonprofit Financials (Finance 201) was presented at the Third Annual Essex County Institute for Trustees.

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  • Patrick
  • Every aspect of your organization is somehow linked to money, without money, you do not have mission, yet it is the area we tend to know the least about and the first place we cut resources, because we do not understand value. Possible question to the audience: Who believes they are strong in the financial management area?
  • Questions to ask and the reports to look to for the information
  • This calculation only uses unrestricted operating income In this example, it indicates that the organization relies on temporarily restricted revenues such as restricted grants or donor pledges Management and the board should ensure that the restricted contributions can be used in support of current activities, not new programs that need to be established and potentially utilizing limited resources
  • Why metrics are important?
  • Note: You don’t want to create an environment of distrust but it’s important to think about these common situations that can open the door to fraud. Think about all of the fraud stories we’ve been hearing about in the news lately.
  • Examples of improper staffing (i.e. org. needs a CFO)
  • Explain QuickBooks example
  • Finance dept and management want your input. The key is deciding how to present info to solicit feedback and help
  • Peeling Back the Covers on Nonprofit Financials - Leigh Tucker

    1. 1. Peeling Back the Covers of Your Finance Department Leigh J. Tucker, CPAManaging Director, Nonprofit Client Practice
    2. 2. Agenda• Overview/Introduction• What You Should Know about Finance• Internal Controls• How to Address Gaps
    3. 3. Leigh Tucker, CPA• Managing Director, Nonprofit Solutions Practice• CPA• PWC & KPMG Alum• A-133 Federal Funds Audit Expert• Senior executive in private industry• Founder of Nonprofit Executives, a successful nonprofit networking group 3
    4. 4. About Us • For more than a decade, Accounting Management Solutions, (AMS) has provided accounting support and financial management leadership at the consulting CFO, controller and accounting manager level to dynamic companies throughout the Northeast. 4
    5. 5. Financial Oversight Responsibilities• Review Financial Reports and Budget to ensure the financial health of the organization• Make Budget and Policy recommendations• Safeguard the assets of the organization through internal controls• Provide oversight of short and long-range strategic planning 5 5
    6. 6. Why Should You Care About Finance?• Finance impacts every aspect an organization• Finance is the foundation for success• You need financial information in order to make key decisions• Money and mission are directly linked 6
    7. 7. Determine the Financial Viability/ Effectiveness of Programs
    8. 8. What Should You Know About Finance?• Does the organization have enough resources to effectively deliver the programs we have committed to?• Do we have the right team in place?• What are our outstanding liabilities and restricted obligations?• What will our future resources look like?• Are we effectively managing our financial processes?8 8
    9. 9. Characteristics of Effective FinancialReporting• No surprises for management – paralyzed by indecision• Link to strategic plan• Plan linked to budget• Measures: Key Performance Indicators (KPI) based on strategy• Easy to understand• Meaningful information
    10. 10. Financial ReportingQuestion ReportsWhere do we want to go? Strategic planHow are we going to get there? BudgetDo we have enough resources Balance Sheet and Cash Flowto get there?Are we on track? Income Statement vs. BudgetIf not, what are we going to do Board Discussionabout it? 10
    11. 11. Financial Ratios Overview• Ratios use financial data to summarize organizational performance• Financial ratio analysis is one tool used to improve financial decision making and alert leadership & the Board of “issues” 11
    12. 12. RatiosRatios can give a quick, clear picture of the organization 2009 2010 Goal Do We Have Enough Resources? Days Cash on Hand 35 30 35 days Liquid Funds Ratio 158 144 160 days Endowment Ratio 56 49 55 days How are we going to get there? Contributions & Grants Ratio 86% 92% 85% Expendable Financial Resources $ 3,314,000 $ 3,069,000 $ 3,350,000 Fundraising Expense Ratio 5% 5% 5% Fundraising Efficiency Ratio 5.05 6.20 5.00 times Program Expense Ratio 85% 86% 85% Total Return on Investments 6.12% 2.40% 8.00% Are we on track? Operating Margin -3% -23% 0% Debt Service to Operations 1% 0% 2% Debt Service Coverage Ratio 6.02 4.30 6.00 times 12 12
    13. 13. RatiosDays Cash on Hand - How many days an organization can rely on its cash and liquid assets to fund operationsTotal Cash on Hand $650,000Avg. Daily Expenses $21,707Days Cash on Hand 30 days 13 13
    14. 14. Ratios Contributions and Grants Ratio - Measures the portion of total revenue that is received from third party support Total RevenueTotal Misc Revenue $1,178,000Total Contributions & Grants $6,957,000RevenueTotal Revenue $8,135,000Contributions and Grants Ratio 86% 14 14
    15. 15. RatiosFundraising Expense Ratio - Measures the relationship between fundraising expenses and total expenses TotalTotal Misc Expenses $7,547,000 ExpensesTotal Fundraising Expenses $376,000Total Expenses $7,923,000Fundraising Expense Ratio 5% 15 15
    16. 16. RatiosProgram Expense Ratio - The relationship between resources spent on the mission of the organization and total expenses Total Total Misc Expenses $1,199,000 Expenses Total Program Expenses $6,724,000 Total Expenses $7,923,000 Program Expense Ratio 85% $6,724,000 $1,199,000 16 16
    17. 17. Ratios Operating Margin Ratio - Indicates the excess margin by which annual unrestricted revenues cover operating expenses OperationsOperating Income $(1,472,000)Total Operating Expenses $6,451,000Operating Margin -23% 17
    18. 18. Ratios Total Return on Investments - Total investment income (interest, dividend, realized, unrealized gains) as a percent of funds investedInvestment Return $81,000Average Investments $1,323,000Total Return on Investments 6.12% 18 18
    19. 19. Ratios Expendable Financial Resources - Measure of financial resources that are ultimately expendable Expendable Financial ResourcesTemp Restricted Net $2,424,000AssetsUnrestricted Net Assets $1,840,000Less Fixed Assets ($950,000)Expendable Financial $3,314,000Resources 19 19
    20. 20. Metrics – Link Money to Mission• Ability to predict the future• Convey value of organization to funders• Help the Board (which often includes non- financial people) understand financial information• Shows the relationship between program outcomes and money 20
    21. 21. Fraud Prevention & Internal Controls
    22. 22. Financial Pitfalls to Avoid• Large degree of control by anyone (Founder, CEO/ED, substantial donor, etc..) • Important to always have checks & balances• Failure to include individuals with financial oversight expertise on the Board• Not reading or sharing financial information• Failing to monitor key indicators, allowing the organization to drift into financial trouble • Not monitoring financial data and budget overspending• Being too trusting of staff who handle money • Not monitoring, updating or verifying internal controls• Lacking strong external checks on financial reporting • Not having a CPA firm conduct an audit on time or at all 22
    23. 23. Policies, Procedures, Checklists• Policies -- set the standard for what is expected• Create procedure for exceptions• Cash flow/forecasting/payment processes• Procedures, especially where there are flowcharts and brief descriptions are useful, especially at turnover• Checklists – monthly closing tasks and HR – ensure all necessary tasks are completed 23
    24. 24. Objectives: Internal Controls• Provide Reliable Financial Data• Safeguard Assets• Promote Operational Efficiency• Encourage Adherence to Policy 24
    25. 25. Elements of Effective Internal Controls• Budget/Actual Comparisons• Definitions of Responsibility• Segregation of Duties• Reconciliation of Records• Documented Policies & Procedures - which are actually followed• Periodic Outside Review by Independent Auditors 25
    26. 26. Sample Internal Controls Questions• Check Signing: • Is there a policy against signing blank or incomplete checks? • Is a second signature for amounts over a predetermined amount? • Are checks returned to preparer after signing?• Document Controls• Processing Controls• Reconciliation Controls
    27. 27. Financial Operations Review• Financial risks can result from insufficient internal controls or practices that invite fraud, or from fundraising activities that go awry• An outside firm can perform a financial operations review which: • Assesses financial operations • Identifies issues and areas for improvement • Prioritizes best practices and next steps • Frequently used during organizational changes• Brief the Board on current financial “best practices” 27
    28. 28. Create Action Plan Current State Gap Analysis Best PracticesDay 1 Day 5 Assessment Review Output Operations Policies/Procedures Recommendations Systems Financial Health ROI/ Profitability Process Best Practices Implementation Plan
    29. 29. What We Find Most Often• Inadequate reporting• Improper staffing• Inadequate oversight of fiscal area by management and the Board• Lack of strategic measures to help detect early warning signs 29
    30. 30. How to Address Gaps in Your Organization
    31. 31. Most Common Challenges for Nonprofits• Budget • Reduced funding • Pressure to improve operational efficiencies and reduce costs• Technology • Greater requirements for transparency• People • Fewer staff • Greater need 31
    32. 32. Nonprofits: Need to Evolve to Survive• Manage operations more efficiently in order to fulfill the mission• Connect money to mission• Reduce costs• Raise level of operational effectiveness 32
    34. 34. Best Practices: Accounting Outsourcing • Today, many nonprofits are moving toward outsourcing some or most of their accounting services • Can cost less due to flexibility of outsourcing (part- time and as-needed) • Can provide a higher level of expertise and access to best practices 34
    35. 35. Best Practices: Shared Services• Define benchmarks for processes and business operations against best in class• Define processes• Merge standard functions• Centralize and consolidate• Specialize and standardize 35
    36. 36. Best Practices: Systems• Look at remote services and going virtual• Implement new technologies• Capacity building• Reduce cost• Address internal staff workload issues• Example: QuickBooks 36
    37. 37. Being an Engaged Board Member• Board input is critical to effective management• Effective Board reporting should include: • A summary of key issues (good and bad) • The likely unknowns critical to financial health • A summary of critical decisions to be made• Make sure you understand the information• Ask the hard questions
    38. 38. Questions?
    39. 39. Contact InformationLeigh J. Tucker, CPA Managing Director, Nonprofit Client Practice Accounting Management Solutions, Inc Phone: 781-419-9220 E-mail: @NonprofitCFOs 39