Board and Staff Roles in Financial Management


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Board and Staff Roles in Financial Management

  1. 1. Board and Staff Roles in Financial Management Neighborhood Partnership Fund April 19, 2007 Kay Sohl Technical Assistance for Community Services
  2. 2. Board Financial Oversight <ul><li>What are you looking for? </li></ul><ul><li>What are signs of financial health and effective financial management? </li></ul>
  3. 3. Key Financial Goals <ul><li>Use resources to fulfill mission </li></ul><ul><li>Liquidity: cash when you need it </li></ul><ul><li>Solvency: positive net worth </li></ul><ul><li>Compliance with restrictions </li></ul>
  4. 4. Board and Management Financial Oversight Challenges????
  5. 5. Financial Challenges <ul><li>Complex budgeting </li></ul><ul><li>Accounting challenges </li></ul><ul><li>Financial reporting </li></ul><ul><li>Risks and opportunities </li></ul>
  6. 6. Multiple Lines of Business <ul><li>Real estate development </li></ul><ul><li>Property management </li></ul><ul><li>Asset management </li></ul><ul><li>Tenant services </li></ul><ul><li>Community economic development </li></ul><ul><li>Other </li></ul>
  7. 7. Financial Planning <ul><li>Multi-function annual budget </li></ul><ul><li>Real estate development budgets </li></ul><ul><li>Property management projections </li></ul><ul><li>Grant and contract budgets </li></ul>
  8. 8. Planning for Multiple Entities <ul><li>Operations and development within primary nonprofit </li></ul><ul><li>Single asset entities </li></ul><ul><li>Low Income Housing Tax Credit (LIHTC) projects </li></ul>
  9. 9. Accounting Challenges <ul><li>Cost center structure </li></ul><ul><li>Tracking restrictions </li></ul><ul><li>Multiple entities </li></ul><ul><li>Dependence on work of outside entities </li></ul>
  10. 10. More Accounting Challenges <ul><li>GAAP accounting </li></ul><ul><li>Accrual accounting in a cash focused world </li></ul>
  11. 11. Financial Reporting <ul><li>Internal users : </li></ul><ul><li>Executive Director, construction, program, and asset managers </li></ul><ul><li>Board of Directors </li></ul><ul><li>External users : </li></ul><ul><li>Lenders, investors, funders, IRS </li></ul>
  12. 12. Controls and Compliance <ul><li>Preventing fraud and error </li></ul><ul><li>Identifying compliance requirements </li></ul><ul><li>Internal and external audit </li></ul>
  13. 13. Risks and Opportunities???
  14. 14. Risks <ul><li>Not enough cash </li></ul><ul><li>Cost overruns in development </li></ul><ul><li>Development and lease-up delays </li></ul><ul><li>Ineffective asset management </li></ul><ul><li>Non-compliance </li></ul><ul><li>Poor accounting </li></ul><ul><li>Poor quality construction </li></ul>
  15. 15. Opportunities <ul><li>Real estate development </li></ul><ul><li>Programs and partnerships </li></ul><ul><li>Recruit/retain great staff </li></ul><ul><li>Funders, donors, community trust </li></ul>
  16. 16. Financial Management Goals <ul><li>Manage risks </li></ul><ul><li>Identify and maximize opportunities </li></ul><ul><li>Enhance sustainability and resiliency </li></ul>
  17. 17. Financial Management Tools <ul><li>Budgets </li></ul><ul><li>Cash flow projections </li></ul><ul><li>Accounting </li></ul><ul><li>Reporting </li></ul><ul><li>Fiscal controls </li></ul>
  18. 18. Operating Budget <ul><li>All sources and uses of cash during the fiscal year </li></ul><ul><li>Deals with non-cash items including depreciation and in-kind contributions </li></ul><ul><li>Reflects impact of borrowing and investment in assets </li></ul>
  19. 19. Operating Budget- continued <ul><li>Cost centers for management, fund raising, and program functions </li></ul><ul><li>Sub-cost centers for each project in development, operating property </li></ul><ul><li>Revenues associated with cost centers </li></ul>
  20. 22. Development Budget <ul><li>All costs of acquisition, rehab or new construction </li></ul><ul><li>All sources of funds- including debt, investments, contributions </li></ul>
  21. 23. Cash Flow Projection <ul><li>Monthly or weekly </li></ul><ul><li>Separate operations from development </li></ul><ul><li>Impact of multiple entities on cash position </li></ul><ul><li>Distinguish restricted/unrestricted cash </li></ul>
  22. 24. Accounting Policies <ul><li>Generally Accepted Accounting Principles </li></ul><ul><li>Accrual accounting </li></ul><ul><li>Treatment of restricted contributions </li></ul><ul><li>In-kind contributions </li></ul>
  23. 25. Multi-entity Accounting Policies <ul><li>Relationship of sponsor nonprofit to projects owned by separate entities </li></ul><ul><li>Disclosure versus consolidation </li></ul><ul><li>Equity method for investment in for-profit entities </li></ul>
  24. 26. Required Financial Statements <ul><li>Balance Sheet: </li></ul><ul><li>Assets, Liabilities, and Net Assets </li></ul><ul><li>Unrestricted, Temporarily Restricted, and Permanently Restricted Net Assets </li></ul><ul><li>Comparative: two points in time </li></ul>
  25. 28. Required Financial Statements <ul><li>Statement of Activities : </li></ul><ul><li>Revenues and Expenses for specified time period </li></ul><ul><li>Distinguish program, management, and fund raising expenses </li></ul><ul><li>Distinguish unrestricted, temporarily restricted, and permanently restricted income </li></ul>
  26. 30. Statement of Activities <ul><li>Compares Revenues and Expenses to budget </li></ul><ul><li>Presents current month and year-to-date </li></ul><ul><li>Presents release from Temporarily Restricted to Unrestricted when restrictions are met </li></ul>
  27. 36. Required Financial Statements <ul><li>Statement of Cash Flows: </li></ul><ul><li>Explains increase or decrease in cash over time </li></ul><ul><li>Distinguishes cash from operating activities, investing, and financing activities </li></ul>
  28. 37. Required for Voluntary Health and Welfare Nonprofits <ul><li>Statement of Functional Expenses: </li></ul><ul><li>Matrix format </li></ul><ul><li>Rows are line items – salaries, rent, etc. </li></ul><ul><li>Columns are functions – management, fund raising, programs </li></ul>
  29. 38. Property Cash Flow Statements <ul><li>Cash received: </li></ul><ul><ul><li>Rents </li></ul></ul><ul><ul><li>Fees and other income </li></ul></ul><ul><li>Cash expended—operating expenses </li></ul><ul><li>Cash used for debt service </li></ul>
  30. 39. Property Profit and Loss Statement <ul><li>Accrual basis revenues and expenses </li></ul><ul><li>Includes depreciation </li></ul><ul><li>Does not include borrowing or asset acquisition or improvement </li></ul><ul><li>Reflected in audited financial statements </li></ul>
  31. 40. Impact of Profits and Losses <ul><li>Directly owned properties </li></ul><ul><li>Homeownership programs </li></ul><ul><li>Nonprofit single asset entities- 202 and 811 projects, LIHPRA properties </li></ul><ul><li>LIHTC partnerships or Llc </li></ul>
  32. 41. Directly owned rentals <ul><li>Revenues and expenses are included in organizational revenues and expenses </li></ul><ul><li>Profit or loss directly impacts net income and net assets </li></ul>
  33. 42. Homeownership Sales <ul><li>Grant funding creates apparent profit in year received unless sale completed in same fiscal year </li></ul><ul><li>Home sale may create apparent loss if sold below full amount invested in acquisition/construction </li></ul>
  34. 43. Single Asset Entities <ul><li>Consolidation of financial statements of sponsor nonprofit and sponsored project required if sponsor has control and economic relationship </li></ul><ul><li>In consolidated statements, profits or losses of sponsored project impact net income and net assets of sponsor entity </li></ul>
  35. 44. LIHTC Projects <ul><li>Nonprofit has 1% or less ownership but functions as general partner </li></ul><ul><li>Portion of Developer’s Fee may be Deferred- resulting in a receivable on nonprofit’s books </li></ul><ul><li>Nonprofits may also advance cash to project, resulting in Note Receivable on nonprofit’s books </li></ul>
  36. 45. LIHTC Projects - Continued <ul><li>Equity method of accounting results in profits or losses of LIHTC project impacting sponsor nonprofit net income and net assets – generally low $$ </li></ul><ul><li>Nonprofit may be required to contribute cash if project has insufficient cash to service debt or meet operating expenses </li></ul>
  37. 46. LIHTC Projects - continued <ul><li>Nonprofit general partner responsible for compliance </li></ul><ul><li>For profit partners are at risk for losing tax credits if project not managed properly </li></ul>
  38. 47. Property Performance Indicators <ul><li>Occupancy/vacancy rates </li></ul><ul><li>Turn over time </li></ul><ul><li>Aged receivables </li></ul><ul><li>Cash flow </li></ul><ul><li>Revenue and expense compared to budget </li></ul>
  39. 48. Board Role in Financial Oversight?
  40. 49. Board Role <ul><li>Approve comprehensive annual budget </li></ul><ul><li>Review monthly financial statements </li></ul><ul><li>Establish finance committee for in-depth analysis of financial issues and selection of auditor </li></ul><ul><li>Board or finance committee meet with auditors </li></ul>
  41. 50. Executive Director Role <ul><li>Hire and retain qualified financial management staff </li></ul><ul><li>Require timely preparation of useful monthly financial statements </li></ul><ul><li>Review financial statements for reasonableness </li></ul><ul><li>Investigate unexpected results </li></ul><ul><li>Recommend strategies to Board </li></ul>
  42. 51. Executive Director - continued <ul><li>Insist upon adequate financial information from outsourced property management firms </li></ul><ul><li>Review development pro formas carefully </li></ul><ul><li>Ensure effective asset management </li></ul><ul><li>Understand all funding and loan agreements and ensure compliance </li></ul><ul><li>Work closely with the auditor </li></ul>
  43. 52. Your Next Steps?