Nonprofit Finances - Its Mysteries Revealed

Nonprofit Finances: Its Mysteries Revealed A Primer for Board Members Alfonso PerilloA Service Of: Sponsored by:

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Nonprofit Finances: Its Mysteries Revealed A primer for Board Members Alfonso Perillo, CPA, CFE Partner, Nonprofit Division Edelstein & Company LLP

Board Oversight is Critical The nonprofit is responsible for its internal controls The outside accountant’s responsibility is limited to ensuring that the financial statements are fairly stated There is no substitute for good governance © Edelstein & Company LLP, Boston, Massachusetts

Typical Financial Documents Received by Board Member Audited financial statements Budgets Budget–to-actual reports Form 990 © Edelstein & Company LLP, Boston, Massachusetts

Numbers Are Important and They Tell a Story Numbers can be manipulated Watch for discrepancies  Budget to actual – accrual and cash  Compare reports (audited financial statements to internally prepared statements)  Are answers to questions asked plausible?  Have the auditors present to the board or a subgroup of the board (audit or finance committee) © Edelstein & Company LLP, Boston, Massachusetts

The Balance Sheet (Statement of Financial Position)Assets = Asset = provides a future benefitLiabilities + Liability = represents a future obligationNet Assets (Equity) Net assets = cumulative earnings © Edelstein & Company LLP, Boston, Massachusetts

The Financial Statements Statement of financial position: Represents the organization’s assets and liabilities at a point in time.  Usually at the end of the nonprofit’s year end, but can be quarterly or monthly Statement of Activities: Represents financial activity for a period.  Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this can be presented on a quarterly or monthly basis.  Inflows are revenues, outflows are expenses  Changes in net assets (net income) represent the difference between revenues and expenses. Statement of Cash Flows: Represents cash inflows and outflows for a period.  Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this can be presented on a quarterly or monthly basis. © Edelstein & Company LLP, Boston, Massachusetts

Accrual v. Cash Basis of Accounting Cash Accrual Revenue recorded when  Revenue recorded when received earned and is realized or realizable Expense recorded when  Expense recorded when paid the obligation is incurred and in the same period in which related revenue is recognized (matching principle) Not GAAP  GAAP © Edelstein & Company LLP, Boston, Massachusetts

Strange Timing Differences Accrued revenue: before cash is received [Accounts receivable; pledges receivable; grants receivable] Accrued expenses: before cash is paid Deferred revenue: cash is received before earnings process is complete [Deferred tuition, advances] Deferred expense: cash is paid before the obligation is incurred [Prepaid expenses,] © Edelstein & Company LLP, Boston, Massachusetts

Funky Things You Need to Know About Nonprofit Accounting 2010 2011 Revenue or Expense Recorded in:Accounts receivable; Service provided or Cash received 2010pledges receivable; commitment fromgrants payable donorAccrued expenses; Service provided by Cash paid 2010accounts payable vendor; obligation incurredDeferred revenue; Cash received Service provided by 2011deferred tuition before the earnings the nonprofit process is complete; before the term startsPrepaid expenses Payment made for Service received by 2011(deferred expenses) future year expense the vendor © Edelstein & Company LLP, Boston, Massachusetts

Funky Things You Need to Know About Nonprofit Accounting Contributions are recorded when a promise to make a donation is made by a donor In-kind gifts of specialized services are recorded in the period the service is received Gifts can be for restricted purposes Natural versus functional classification © Edelstein & Company LLP, Boston, Massachusetts

Statement of Financial Position: Example GOOD WORKS, Inc. Statement of Financial Position December 31, 2010 Assets Cash $ 120,775 Unconditional promises to give 25,000 Prepaid expenses 3,600 Furniture and equipment 3,225 Security deposit 1,500 Total assets 154,100 Liabilities and net assets Liabilities Accounts payable 7,500 Accrued expenses and other liabilities 5,800 13,300 Net assets: Unrestricted 40,800 Temporarily restricted 95,000 Permanently restricted 5,000 Total net assets 140,800 Total liabilities and net assets $ 154,100 © Edelstein & Company LLP, Boston, Massachusetts

Statement of Activities: An Example GOOD WORKS, Inc. Statement of Activities For the Year Ended December 31, 2010 Temporarily Permanently Unrestricted Restricted Restricted Total Support and revenue: Contributions $ 200,000 $ 150,000 $ 5,000 $ 355,000 Program service 50,000 - - 50,000 In-kind contributions 12,000 - 12,000 Membership dues 13,500 - - 13,500 Interest income 1,300 - - 1,300 Net assets released from restrictions 95,000 (95,000) - - Total support and revenue 371,800 55,000 5,000 431,800 Expenses: Program services: Education services 240,000 - - 240,000 Support services 79,000 - - 79,000 Advocacy 66,000 - - 66,000 Total program services 385,000 - - 385,000 Management and general 39,000 - - 39,000 Fundraising 50,000 - - 50,000 Total expenses 474,000 - - 474,000 Change in net assets (102,200) 55,000 5,000 (42,200) Net assets - beginning of year 143,000 40,000 - 183,000 Net assets - end of year $ 40,800 $ 95,000 $ 5,000 $ 140,800 © Edelstein & Company LLP, Boston, Massachusetts

Quick RatioCash + Unconditional promises (accounts receivable) / Current liabilities Cash 120,775 Unconditional promises to give 25,000 145,775 Accounts payable 7,500 Accrued expenses and other liabilities 5,800 13,300 145,775 Divided by 13,300 Equals 11 :1 © Edelstein & Company LLP, Boston, Massachusetts

Months of Cash ReservesCash / Average Monthly Expenses Total expenses 474,000 Less: in-kind (12,000) 462,000 Divide by 12 Average monthly expenses 38,500 Cash 120,775 Cash divided by average monthly expenses 3:1 © Edelstein & Company LLP, Boston, Massachusetts

Efficiency RatioProgram expenses / Total expenses Program services 385,000 Divided by Total expenses 474,000 81% © Edelstein & Company LLP, Boston, Massachusetts

Being Properly Registered To Fundraise Certificate of Solicitation Gaming Activities  Raffles  Gaming and Bingo  Poker Tournaments © Edelstein & Company LLP, Boston, Massachusetts

Watch the Language You Use to Solicit Funds Don’t inadvertently create a restriction by the language used It is hard enough getting unrestricted support Language like “Funds raised will be used to support Good Works Inc.’s programs” can create a restriction © Edelstein & Company LLP, Boston, Massachusetts

Internal ControlsThe process by which information and authority flows across an organization so that it canaccomplish its goals Tone at the Top Internal Control Policies and Procedures Policies and Procedures are Followed Nonprofit Achieves Its Mission © Edelstein & Company LLP, Boston, Massachusetts

Segregation of DutiesThose having responsibility for handling assets are not responsible for recording the assets in the accounting system There is a wall between the receiving of asset function and the task of recording the transaction in the accounting system © Edelstein & Company LLP, Boston, Massachusetts

Fraud is Concealed Most common fraud schemes  Fictitious vendor: a billing scheme  Check tampering: process of altering checks  Skimming: taking money before it is recorded The myth of the trusted employeeSource: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse © Edelstein & Company LLP, Boston, Massachusetts

Simple Fraud Prevention TechniquesThe appearance of oversight is a deterrentOther simple techniques Someone independent of the accounting process (like the treasurer) receives duplicate copies of the bank statements Limit access to the accounting software by providing read only rights Have two check signers for checks deposited over a certain amount © Edelstein & Company LLP, Boston, Massachusetts

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Nonprofit Finances - Its Mysteries Revealed

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