Making The Most Of Your Financial Statements

Making the Most of Your Financial Statements Jennifer Ahern Lammers Use Twitter Hashtag #npweb Special Thanks To Our Sponsors

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Nov. 3, 2010 Prepared By: Jennifer Ahern Lammers, MPA, CNAP Prepared For: Nonprofit Webinars – Wednesday Webinar Series Making the Most of Your Financial Statements

A Simple Truth
Financial statements are increasingly being used by funders, reporters, and other stakeholders to make decisions about nonprofit organizations

Complete Financial Statements
Statement of Financial Position (Balance Sheet)
Statement of Activities (Statement of support, revenues, expenses, and changes in fund balance)
Statement of Cash Flows
Statement of Functional Expenses , if required, for Voluntary Health and Welfare organizations
Accompanying Notes to the financial statements

Every Audit Opinion States . . .
that the financial statements attached
are the responsibility and product of
MANAGEMENT

Own Your Statements
Understand what the documents say and how they say it
Work with your auditor on presentation
You know your organization best
Clarity and transparency matter, even to financially stable “good” charities

Audit Opinions

Other Statement Options

Statement of Financial Position
A picture of the organization’s financial health at the close of the fiscal year or other specified time period

Also Known as the Balance Sheet
Assets - Liabilities = Net Asset
What you OWN – What you OWE = Anything LEFT OVER

Balance Sheet

Content and Presentation
Must report on organization as a whole
Instead of reporting on separate functions of the organization
Organizes accounts into asset and liability classifications such as:
Current assets, fixed assets, current and long term liabilities, as of a specific moment in time (last day of the fiscal year)
Focuses on liquidity
Assets are presented in their proximity to cash
Liabilities are presented according to the nearness of their maturity and resulting use of cash

Net Assets
Unrestricted
Excludes assets that have donor-imposed restrictions
Somewhat similar to the Retained Earnings account of commercial financial statements
Temporarily Restricted
Includes assets for which the use has been restricted by donor
Permanently Restricted
Sometimes called an “endowment account”
Asset must be kept in perpetuity by the not-for-profit organization, per donor instructions
Earnings from Permanently Restricted Net Assets can either be unrestricted or temporarily restricted, per donor instructions

Unrestricted Net Asset
Unrestricted Net Assets can take many forms, many of which are less accessible for general use
Consider breaking out the following Unrestricted Net Assets in the Balance Sheet:
Board Designated Reserves
Facilities and Equipment

ABC Organization Statement of Financial Postion December 31, 2010 and 2009 Assets 2010 2009 Cash $50,000 $82,768 Accounts Receivable $256,164 $314,709 Unconditional Promises to Give $229,382 $204,269 Grants Receivable $54,691 $215,875 Prepaid Expenses $28,463 $40,636 Property & Equipment (net of dep) $1,942,736 $1,993,281 Other Assets $19,054 $26,817 Total Assets $2,580,490 $2,878,355 Liabilities and Net Assets 2010 2009 Liabilities Line of Credit $117,319 $136,400 Accounts Payable $126,394 $151,759 Accrued Expenses $74,000 $91,080 Accrued Payroll and Taxes $48,461 $120,238 Long-term Debt $673,714 $686,150 Total Liabilities $1,039,888 $1,185,627 Net Assets Unrestricted 1,076,134 1,050,277 Temporarily Restricted 258003 435923 Permanently Restricted 206465 206465 Total Net Assets 1,540,602 1,692,665 Total Liabilities & Net Assets $2,580,490 $2,878,292

Can the organization cover its current liabilities?
Quick Ratio

Cash + Accounts Receivable
____________________________
Current Liabilities
For most nonprofits, you would want to see a ratio of 1 or more
A ratio of less than one may mean that the organization is facing or may face cash flow issues

How much does the organization rely on borrowed money?
Debt to Net Asset Ratio:
Loans and Notes Payable
______________________________
Net Assets
For some organizations, a debt management allows them to leverage their available assets to provide the greatest amount of services in a given year
For others, an over reliance on borrowed money main indicate that the organization is having a hard time meeting its obligations

Statement of Activities
A record of an organization’s financial activities
for 12 month period

Statement of Activities
Where money came from and what it was spent on over a particular period of time
Most analyzed statement included in an audit packet

Presentation
Revenues are presented according to donor restriction:
Unrestricted
Temporarily Restricted
Permanently Restricted
Although both are accepted by GAAP the column format – not the stacked – is best as it is much easier to understand

Revenues
Sources of revenue are broken down and often include:
Individual support
Foundation and corporate support
Special events revenue
Earned income
Interest
Assets released from restriction

Functional Reporting of Expenses
Audited statements are required to allocate expenses in three classes:
Program Services: activities that result in services being distributed to beneficiaries
Management and General: oversight, business & general financial management
Fundraising: activities that induce donors to contribute
May appear in the Statement of Activities or the Notes

Only donors can make restrictions!
However, we often shape the nature of the restriction by the language of the “ask”
Make sure your revenues are appropriately categorized
Make sure you have back up to substantiate nature of the restriction
Donor Restrictions

ABC Organization Statement of Activities For the Year Ended December 31, 2009 Temporarily Restricted Permanently Restricted Revenue and Other Support Unrestricted Total Service revenues $4,982,631 $4,982,631 Grants $238,000 $151,790 $10,000 $399,790 Contributions $109,058 $77,201 $186,259 Special Events (less of direct costs of $19,399) $1,976 $1,976 Interest & Dividends $38,032 $38,032 Unrealized Gain $117,425 $117,425 Misc. $21,382 $21,382 Net Assets released from restriction $406,911 $(406,911) $- Total Revenue $5,915,415 $(177,920) $10,000 $5,747,495 Operating Expenses Program Services Association Services $2,842,480 $2,842,480 Children & Teen Services $675,153 $675,153 Family Supoort $822,531 $822,531 Therapy $1,038,814 $1,038,814 Total Program Expenses $5,378,978 $5,378,978 Supporting Services Management and general $188,896 $188,896 Fundraising $166,403 $166,403 Total Supporting Expenses $355,299 $355,299 Total Expenses $5,734,277 $- $- $5,734,277 Change In Net Assets $181,138 $(177,920) $10,000 $13,218 Net Assets Beginning of Year $2,348,570 $435,923 $206,465 $2,990,958 Net Assets End of Year $2,529,708 $258,003 $216,465 $3,004,176

Statement of Activities: Program Expense
Present program expenses in a manner consistent with the organization’s other materials

Examples
If the organization says it has 5 program areas, the financial statement should present expense for each of those areas
If the organization’s materials say it provides “Low cost or free legal, financial, and real estate services ”, the financial statement should not say “ Professional Services ”
“ Other program expenses” is never a descriptive or appropriate expense item

How reliant is this organization on contributions?
Ideally, organizations have a diversity of revenue sources:
Contributed Funds
Program Revenue/Government Contracts
Interest earnings
Contributions can be the least stable source of funds

How much revenue remains temporarily restricted?
Reasons for Temporarily Restricted Funds:
Saving for a future program or specific purchase
Not appropriately allocating expenses for specific programs or grants
Having difficulty with a specific program
Successful in raising temporarily restricted (program or project specific) but lack unrestricted revenue

How does this organization spend its money? Classification Description Industry Benchmarks Program , separated by major program Activities that result in services being distributed to beneficiaries 70% Support Services: Management & General Activities such as oversight, business and general financial mgmt 20% Support Services: Fundraising Incurred in inducing donors to contribute 10%

How effective is the organization’s fundraising?
Contributions & Special Events Revenue
______________________________
Total Fundraising Costs
Some forms of fundraising are more expensive than others
Galas
Telemarketing
Direct mail
Some forms of fundraising are less expensive
Grants
Legacies and bequests
By combining expensive money with less expensive money, an organization should maintain a reasonable cost of fundraising

What is reasonable?
An return of .70 cents or more on each dollar spent on fundraising is the best practice
Some watchdogs will fault an organization if the return for the year is below .65 cents, others .75, while still others do a comparison of yearly averages in a particular field/location and will rank you against your “peers” which makes this a moving target
An organization primarily supported by contributions MUST have fundraising expenses

Does the organization have sufficient unrestricted net assets?

Available Unrestricted Net Assets
________________________________
Average Monthly Operating Costs
Number of Months covered without new revenue?
Significantly less than 3 months is problematic
6 months or more is above average

Reports the cash generated and used during the year

The Cash Flow Statement looks at:
Where an entity obtained its cash and
Where it spent cash during a certain time period
Activity reported regarding:
Operations
Investing
Financing
Must disclose any non-cash activity such as acquisitions of equipment on finance

Where the Cash Came or Went

Misc. Organization for Good Statement of Cash Flow Fiscal Year Ended September 31, 2010 2010 Cash Flow from Operating System Increase (decrease) in net assets $XXXX Adjustments to reconcile decrease in net assets to cash Depreciation $XXXX Net realized gain on the sale of investments ($XXXX) Net unrealized gain on sale of investments ($XXXX) Change in opertating assets and liabilities Reimbursable expenditures under contracts ($XXXX) Contributions receivable $XXXX Prepaid expenses and other assets $XXXX Grants payable ($XXXX) Accounts payable and accrued expenses $XXXX Net cash (used in) provided by operating activities Cash flows from investing activities Purchase of investments ($XXXX) Proceeds from the sale of investments $XXXX Purchase of fixed assets ($XXXX) Sale of fixed assets $XXXX Use of restricted cash ($XXXX) Net cash provided by investing activities $XXXX Cash flows from financing activities Payment of note payable ($XXXX) Net cash used in financing activities ($XXXX) Net increase in cash and cash equivalents $XXXX Cash and cash equivalents Beginning of year $XXXX End of year $XXXX

Statement of Functional Activities
Detailed accounting of expenses by major expense area, broken down by common expense type

Statement of Functional Activities
Required by GAAP for all voluntary health and welfare organizations
Required by some watch dogs for all charities soliciting public support
An important document for demonstrating priorities and clarifying necessary expenses

ABC Organization Statement of Functional Expense For the Fiscal Year Ended December 31, 2009 Program Support 2009 Soup Kitchen Night Shelter Homeless Intervention Total Program Administration Development Total Support Total Expenses Compensation and related expenses Salaries and Wages 62,000 45,000 36500 143,500 75,000 58,000 133,000 276,500 Payroll Taxes 11000 3000 2000 16000 13,000 6000 19,000 35,000 Fringe Benefits 17360 12600 10220 40180 21000 16240 37240 77,420 Total 90,360 60,600 48720 199,680 109,000 80,240 189,240 388,920 OTP Outside services 12000 9000 12000 33000 0 36000 36000 69,000 Rent 22000 22000 0 44000 11000 11000 22000 66,000 Depreciation and amortization 20000 14000 0 34000 2000 3000 5000 39,000 Telephone 1000 1000 5000 7000 3000 4000 7000 14,000 Utilities 975 975 1950 400 400 800 2,750 Travel - - 1500 1500 1000 400 1400 2,900 Insurances 6500 8000 2300 16800 1200 7000 8200 25,000 Printing 900 250 1100 2250 11250 18000 29250 31,500 Equiptment rental 4500 0 0 4500 0 6500 6500 11,000 Postage 0 0 0 0 2400 3500 5900 5,900 Event Space Rental 0 0 0 0 0 22000 22000 22,000 Misc. 222 457 354 1033 354 555 909 1,942 Total 68097 55682 22254 146033 32604 112355 144959 290,992 Total Expenses 158,457 116,282 70,974 345,713 141,604 192,595 334,199 679,912

Statement of Functional Expenses: Clear Labels
Look to the IRS 990 Statement of Functional Expenses for sample wording and break down of expenses
When an organization has a unique expense, make sure it is called something that explains it
“ Misc.” should be used for truly immaterial expenses and not include normal, expected expenses like salaries, rent, interest, etc.

The Notes: Significant Disclosure Guidelines
Description of the organization
Basis of Accounting (cash, accrual and modified accrual)
Fixed Assets
Debt
Temporarily and Permanently Restricted Net Assets
Related Party Transactions
Subsequent Events
Commitment and Contingencies

The Notes: Not Extra Credit but Essential
Note 1 is the first and only opportunity in the financial statement an organization has to present its mission and program in narrative form
Make sure this note is up-to-date and includes not just the organization’s original programs but its current roster
Make sure that this statement is more than the perfunctory acknowledgement of 501(c)(3) status and incorporation
This statement should be given the same care the organization gives its annual report or website

The Notes: More than a Template
Note 2 is typically the explanation of accounting practices and methodology and comes straight from the audit firm
If the organization does not have temporary or permanently restricted contributions or net assets, consider adding a statement after the standard explanation

The Notes: More is Better
If the organization has a unique situation, such as a significant and non-repeating revenue source, include an explanation in the notes
When describing related party transactions, provide enough information for the reader to understand whether or not this related transaction presents a conflict

Limit the use of acronyms or cryptic abbreviations
DCD, DHPD, DCF, etc. may be obvious government funders to you or your client but not to most readers
BASP, APE, etc. may be what the organization calls the Boys After School Program , or the AIDS Prevention and Education program, but not every one will understand

How does this year compare to last year?
Note any significant deviation between years
Look for a variance of greater than 20%
On Balance Sheet
More cash and less capital assets?
On Statement of Activities
Revenues by source
Admin or Fundraising way up?
Program spending down?
On Statement of Functional Expenses?
Salaries down?

Going Beyond Compliance
Financial Statements are used by funders, reporters, and other stakeholders to make decisions
As such, Financial Statements should do more than conform with GAAP
Financial Statements should help the reader understand a charity’s mission, priorities and unique circumstances

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Making The Most Of Your Financial Statements

by NonprofitWebinars.com on Nov 03, 2010

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Making The Most Of Your Financial Statements — Presentation Transcript