Introduction to Financial Decision Making for Non-Profit Leaders

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Introduction to Financial Decision Making for Non-Profit Leaders

  1. 1. Introduction toFinancial Decision Makingfor Non-Profits San Fernando Valley Community Leadership Development Program Saturday, October 8, 2011
  2. 2. Agenda  Commence 10:00a | Wendy Saunders  Session Five (NFP Laws and Ethics) Review 10:05a | Wendy Saunders  Financial Decision Making for Non-Profits; Emerging Leader’s Perspective 10:30a | Alan Lewis  Break 11:00a  Financial Decision Making for Non-Profits; Established Leader’s Perspective 11:15a | Roberto Barragan  Closing Remarks 12:45p | Wendy Saunders  Adjourn 1:00p | Wendy Saunders CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 2
  3. 3. NFP Financial Decision Making;Emerging Leader’s PerspectiveAlan Lewis | 2011 SFV CLDP Vice-Chair
  4. 4. Presentation Objectives  Provide an introduction to the key concepts, terms, and considerations related to financial decision making for non-profit board leaders.  Establish an understanding of the importance of responsible and sustainable accounting and financial practices for non-profits of all sizes.  Instill financial responsibility and stewardship in CLDP participants.  Provide an array of resources to assist in decision making. CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 4
  5. 5. Overview  Basic Principles  Financial Issues for Board Members  Key Terms  Key Points for Consideration  Avoiding Trouble  Real Life: Mid Valley Family Y  NFP Financial Decision Making Goals  References CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 5
  6. 6. Basic Principles  Who here has taken Accounting I and II?  Responsibilities of Board and Committee Members  Recap from Law and Ethics: Duty of Loyalty, Care, and Obedience  FUNDRAISING: Fiduciary Responsibility  Financial integrity, solvency, safeguard, and procedures to protect the organization  Reading and Interpreting Financial Statements  Audited vs. Unaudited Financials  Accounting Standards (e.g. GAAP, FASB, GASB)  Financial Stewardship / Governance  Risk Management  Diversification  Good faith  Implementation of Sarbanes-Oxley Section 404 (Audit of Internal Controls) CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 6
  7. 7. Financial Issues for Board Members  Fundraising  Planning and Budgeting  Monitoring Revenue and Expenditures  Available Cash and Reserves  Ensuring Appropriate Actions o Purpose restricted grants or contributions o Federal or State funding o Program funding CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 7
  8. 8. Key Terms• Generally Accepted Accounting Principles (US-GAAP): A widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board.• Financial Accounting Standards Board (FASB): Independent board responsible for establishing and interpreting US-GAAP. Financial Accounting Standards 116 and 117 govern the nonprofit sector. FAS 116 deals with contributions made and received while FAS 117 deals with financial statement format.• Revenue: Payments for services, donations from individuals, foundations and corporations, support and contract payments from government agencies, income from fundraising activities, and investments.• Expenses: Represent the total cost of operating the organization, including payments made to employees and other parties, including operating expenses, debt, principal payments, capital expenditures, non-cash expenses, fixed assets, and funds set aside each year for future use.• Assets: An item of current or future economic benefit to an organization. Examples include: cash, short-term investments, accounts receivable, grants receivable, inventories, prepaid expenses, buildings, furniture, equipment, vehicles, and long-term investments.• Liabilities: Items owed by an organization or claims against its assets. Examples: accounts payable, accrued salaries and benefits, accrued payroll taxes, deferred revenue, lines of credit, construction loans, current portion of long-term debt, short-term notes payable, and long-term debt.• Financial Statements: Written reports that quantitatively describe the financial health of an organization. A complete financial statement includes a balance sheet, an income statement, a statement of cash flows, and often a statement of functional expenses. Financial statements are usually compiled on a monthly, quarterly and annual basis. CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 8
  9. 9. Key Terms (cont.)  International Financial Reporting Standards  Due Diligence (IFRS)  Conflict of Interest  Government Accounting Standards Board  Internal Controls (GASB)  Budget  Form 990  Capital Campaign  Grants  Case Statement  Membership  Collateral  Audit  Compound Annual Growth Rate  Income Statement  Contributions  Statement of Cash Flows  Etl.  Balance Sheet CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 9
  10. 10. Key Points for Consideration  For Profit and Not-for Profit Accounting is Not Very Different  Not for Profit Organizations must report Fundraising expense  Financial Reports are prepared by Management  A Healthy Non-profit organization makes money  A Non-profit might budget a deficit  There are three categories of endowment funds: Permanently restricted, Temporarily restricted, and Quasi-endowment funds as designated by the Board  Financially oriented committees within non-profits generally include: Finance, Audit, and/or Compensation. CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 10
  11. 11. Avoiding Trouble  Attend board meetings  Follow the procedures as outlined in the Articles of Incorporation and Bylaws  Review meeting minutes and committee reports  Promptly Disclose any conflicts of interest  Ask that experts be retained when the board needs to take action when outside its experience  Review financial statements  Review IRS Form 990  Insist on annual budgets, internal accounting controls, and frequent financial reports  Review audit reports and management letters  Foster an atmosphere that encourages staff to come forward with problems  Insist on compliance with all applicable law  Be leery of a one man show CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 11
  12. 12. Real Life: Mid Valley Family Y  Former Mid Valley Board and current Tri-Y Finance Committee member ( >5 Years )  Mid Valley Branch operating deficits went from $400k to $200k per year ( > trending towards $0 )   Accrued liability with LA Metro over $2m  Agreed to debt plan, wherein debt is “frozen”, until an asset sale, and no more direct financial support from Metro  Completed (first of its kind) three way merger between West, Mid, and East Valley Y’s  Cash flow positive collectively with current and projected increasing cash surpluses  Trending towards ability to qualify for capital campaign  Aging facility with need for short and long-term renovations with possibility of an extensive capital campaign for redevelopment  Memberships are subsidized, which means with the addition of each new member there is a greater need to raise money for membership scholarship fund  Growing need within the community (urban branch) CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 12
  13. 13. Financial Decision Making Goals  What is stewardship versus profitability?  What is the importance of financial record keeping?  What are financial statements?  What is the difference between a for-profit and not-for-profit financial statement?  What are state and federal reporting requirements (e.g. Form-990) for non-profits?  What are a non-profits financial disclosure requirements to its stakeholders?  How does financial decision making and legal compliance work together?  What is a budget and how is it best prepared and followed?  What can an NFP invest in versus a for-profit?  What are the types of donations an NFP can accept (e.g. endowment, restricted)  What financial indicators are important when determining a non-profits financial health?  What is the role of a Treasurer versus a CFO in a non-profit? CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 13
  14. 14. References Nonprofit Finance Fund | Glossary of Financial Terms http://nonprofitfinancefund.org/financial-terms Financial and Accounting Guide for Not-for-profit Organizations http://books.google.com/books?id=I1iQByG15r0C&dq=non- profit+financial+decision+making&printsec=frontcover&source=in&hl=en&ei=f4d1TPHNHJCisAP2joyhDQ&sa=X&oi=book_result&ct=result&resnum =12&ved=0CD0Q6AEwCw#v=onepage&q&f=false Financial Responsibilities of Nonprofit Boards http://books.google.com/books?id=USS8Bsl_g-wC&printsec=frontcover&dq=governance+non- profit&hl=en&ei=qGuuTOTVF43QsAOg36D6Cw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CD4Q6AEwAzge#v=onepage&q&f=false A Desktop Guide for Nonprofit Directors, Officers, and Advisors http://books.google.com/books?id=_vEMnYkV9yoC&pg=PA206&dq=governance+non- profit&hl=en&ei=xWuuTLbeKIrEsAOwodS0DA&sa=X&oi=book_result&ct=result&resnum=6&ved=0CE8Q6AEwBTgy#v=onepage&q=governance%20 non-profit&f=false Financial Basics for Nonprofit Managers http://books.google.com/books?id=-6TOB0oa7jsC&pg=PA151&dq=non- profit+finance+terms&hl=en&ei=vHCuTLGfAo64sQOLzf3bDA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEUQ6AEwBA#v=onepage&q&f=f alse Financial Management for Nonprofit Organizations http://books.google.com/books?id=ywEEoO_CRvcC&pg=PA331&dq=non- profit+finance+terms&hl=en&ei=vHCuTLGfAo64sQOLzf3bDA&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGEQ6AEwCQ#v=onepage&q=n on-profit%20finance%20terms&f=false CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 14
  15. 15. NFP Financial Decision Making;Established Leader’s PerspectiveRoberto Barragan | President, Valley Economic Development Center San Fernando Valley Community Leadership Development Program Saturday, October 8, 2011
  16. 16. What is Stewardship v. Profitability?  Stewardship: managing to breakeven i.e., Maintenance, meeting payroll, keeping the doors open.  Profitability: generating an annual surplus of revenues minus expenses i.e., surpluses, reserves, employee retention through merit increases and bonuses. CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 16
  17. 17. What is the importance of Financial Record Keeping?  Difference between existence and shutdown  Financial recordkeeping is not just about recordkeeping, but about: o Getting paid by government entities and surviving their audits o Keeping track of cash flow needs and staying ahead of it o Being able to report accurately to Boards o Staying in compliance with state and federal tax authorities o Being able to raise money from foundations and corporations in an increasing watchful environment CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 17
  18. 18. What are Financial Statements? • Statement of Financial Position • Statement of Financial Activities • Statement of Cash flows • Comparative Profit and Loss Statement • Summary of Cash Balances, Accounts Receivables, Accounts Payables CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 18
  19. 19. What is the difference between for-profit and non-profit financials statements?  Unrestricted, Temporarily Restricted and Permanently Restricted Assets  Unrestricted: Donations, Fees for Service, Interest Income, Dues  Temporarily Restricted: Grants for specific activities and programs that become unrestricted as activities/programs are implemented  Permanently Restricted: Buildings, endowments, non- operating revenue activities: DON’T TOUCH! CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 19
  20. 20. What are a non-profits financial disclosure requirements toits stakeholders? • AUDITS: annual review performed by CPA of financial statements with sufficient testing such that the CPA can certify their accuracy and integrity • Distribution to all funders and posting on the website • Not discretionary, best practice period • No asking for money if you have no audit • Cost of doing business CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 20
  21. 21. How does Financial Decision Making and Compliance worktogether?  Make financial decisions so as to comply with the law and stay out of jail  Tax returns are required  Payroll taxes are a must  HR can kill an organization faster than cash flow o Wrongful termination o Sexual Harassment o Non payment of wages CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 21
  22. 22. What is a budget and how is it best prepared and followed?  Annual exercise in forecasting revenues and expenses.  Should be based on committed and/or expected revenues, not on optimistic fundraising goals; PROJECTED can be a bad word  Should be balanced without reserves, reserves are for cash flow problems and surprises  We’re not the feds, we can’t print money; we’re not the state, we can’t issue IOUs; and we’re not the city, so we can’t raise taxes CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 22
  23. 23. What is a budget and how is it best prepared and followed?(cont.)  On a monthly basis, statements should be prepared with variances to budget  Variances should be analyzed to determine if they are timing issues or real differences in revenues and expenses  On a quarterly basis, take action to deal with those variances, don’t wait until the end of the year with some fundraising appeal  Make the hard decisions early, or someone else will make them for you CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 23
  24. 24. What can an NFP invest in v. a For-Profit? • Anything!!! (However, if its not related to mission, you may have to pay taxes: other businesses, real estate (not for the non-profit) • Good: Securities, like business activities, your own building • Bad: Businesses with reputational risk, whole portfolios in individual stocks • Remember liquidity and risk CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 24
  25. 25. What are the types of Donations an NFP can accept?  Anything!!  Again mission is the issue  As well as reputational risk  Real estate, bequests, endowments, vehicles, cash, jewelry  As long as it doesn’t cost you money to maintain, i.e. animals, farms, land with no commercial value CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 25
  26. 26. What Financial Indicators are Important when determininga Non-profits Health?  Operating Results, Year to Year Monthly Net Income  Unrestricted Profit and Loss, Revenue by Source o Reimbursements o Business Revenue o Donations  Liquidity Dashboard o Cash days on Hand: cost/cash needed per day o Unrestricted Cash balances o Accounts Payable and Receivable (AR / AP)  Sources and Uses of Funds w/ corresponding cash flows, LOCs, reserves CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 26
  27. 27. What is the role of a Treasurer v. a CFO in a NFP? • TREASURER: Board member with responsibility to report financial results to Board of Directors • CHIEF FINANCIAL OFFICER: Employee responsible for accurate and responsible financial reporting and cash flow management CLDP | Session 5 | NFP Financial Decision Making Saturday, October 8, 2011 Slide 27
  28. 28. NFP Financial Decision Making;Questions and AnswersRoberto Barragan | President, Valley Economic Development Center San Fernando Valley Community Leadership Development Program Saturday, October 8, 2011

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