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Financial Management by Dr Rovel Shackleford

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Budgets and financial management explained by Dr Rovel Shackleford - more of these management presentations to come.

Budgets and financial management explained by Dr Rovel Shackleford - more of these management presentations to come.

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  • Don't need to take notes on this. Good explanations in texts (public in Rapp & Poertner; private in Dropkin & Latouche). Public process 12-15 months Private process around 3-6 months [Program-planning & budgeting cycle handout]
  • Fiscal year is not the only record keeping period in an agency but it is the central one which governs annual financial operations such as annual reports, audits, etc. When organizations are lucky, the fiscal year corresponds to the agency's or programs' funding cycles. The governemental fiscal year in October 1- September 30. Agency fiscal years may be the same, although many follow the calendar year. Academic fiscal years are usually July 1-June 30.
  • Personnel expenses = salaries & fringe benefits Fringe benefits are either statutory: Social security (6.2%) Medicare (1.45%) FUTA (0.2% credit varies by state & has a salary cap of approx $7000) SUTA (0.4% salary cap same as fed) Workers comp or voluntary: Medical, dental insurance Pension, retirement plan Life insurance Accidental death & dismemberment Average fringe benefits rate 20-30%
  • Functional budgets are similar to line-item budgets. In functional budgets, line items are summarized by functional expense categories such as personnel, office space, supplies, travel, etc. In line item budgets, expense data for an entire agency or budget entity is summarized in a single line item.
  • This discussion of the budgeting process assumes 1) that board & management have agreed on the organization/program basics for the upcoming year (e.g., will all programs be continued; what guidelines will be given to staff to guide budgeting process, etc.) 2) that roles, responsibilities & timelines have been established for program & financial staff, as well as the board.
  • Provides better control over program revenues & expenses. Most likely necessary to receive funding. Consolidating program budgets builds organization-wide budget. Sometimes used interchangeably by really difference: Function: sets of activities (e.g., fundraising, training) Program: interrelated functions pertain to a designated set of objectives
  • Zero-based budgeting necessary for new programs for which no historical data is available. Also used to objectively assesses priorities & relevant costs for programs & allow for reallocation of resources in more effective & efficient ways. In ZBB all activities, costs, & benefits are analyzed in context of possible alternatives. (p. 25-27 in text) Incremental budgeting begins with previous year's budget or actual expenses & adjusts for inflation or other known items (previous year x Z%). Alternative activities, costs, & benefits are not considered. Previous year's activities & programs are assumed to be essential and continued.
  • Income often lags behind expenditures. Positive cash flow = cash surplus (invest) Negative cash flow = cash deficit (possible program interruption) [USE EXAMPLE IN CHPT 20 (DROPKIN & LATOUCHE) & BRAINSTORM HOW TO ADDRESS CASH SHORTFALLS]
  • Transcript

    • 1. Budgeting & Finance Explained Rovel Shackleford
    • 2. Financial Management Basics
      • Identify needed resources and appropriate resource levels
      • Acquire needed resources
      • Allocate resources based on organizational priorities
      • Monitor resource usage
      • Adapt to maintain organizational viability
    • 3. Program Management
      • Planning
        • Identifying needs; defining goals and objectives; acquiring resources
      • Programming
        • Implementing and managing activities
      • Evaluating
        • Assessing achievement; identifying successes and challenges
    • 4. Financial Management
      • Budgeting
        • Planning and allocating resources for activities
      • Financing
        • Securing resources to implement plans
      • Controlling
        • Assuring activities are implemented according to plans
    • 5. Integrating Program & Financial Management
      • Planning
        • What resources do we need? Budgeting
        • What funding do we need? Financing
      • Programming
        • How are we using our resources? Controlling
      • Evaluating
        • How did our plans compare with Controlling
        • our results?
    • 6. Managing for Performance
      • Client Outcomes
      • Resource Acquisition
      • Productivity
      • Efficiency
      • Staff Morale
    • 7. Performance Management: Client Outcomes
      • Focus on effectiveness
      • Service efforts and results
      • Degree to which services met client needs and expectations, and wants
      • Level of improvement in client’s situation or stabilization of deteriorating condition
    • 8. Financial Management: Client Outcomes
      • Accountability instruments
        • Budgets and controls target programs, clients, and constituents over a specific time
        • Performance indicators assumed in budgets help determine whether promised services and goods have been delivered as specified
    • 9. Performance Management: Resource Acquisition
      • Ability to obtain and manage resource needed to achieve outcomes for clients
      • Resources include money, people, time, goodwill, technology, legitimacy
    • 10. Financial Management: Resource Acquisition
      • Resource allocation plans
        • Budgets provide detailed plans of how limited resources are to be distributed
        • Allocation assumptions provided in budgets offer basis for analyzing what resources were acquired and how they were used
    • 11. Performance Management: Productivity
      • Measurement of units of service provided
      • Measures include client counts, service episodes, service events, and elapsed time
    • 12. Financial Management: Productivity
      • Performance expectation standards
        • Budgets establish contracts between resource providers and deliverers of goods and services
        • Service delivery assumptions used in budges provide measurement standards for units of service delivered
    • 13. Performance Management: Efficiency
      • Ratio of outcomes to resources
      • Common measures
        • Dollar cost of a unit of service
        • Ratio of clients served to total target population
        • Percent direct time relative to total time available
    • 14. Financial Management: Efficiency
      • Service monitoring instruments
        • Budgets detail amounts authorized for goods and services
        • Budgets and controls provide data useful in calculating dollar cost per unit of service
        • Authorized costs included in budgets facilitate management comparison to ascertain performance of various departments or service units
    • 15. Performance Management: Staff Morale
      • Employee job satisfaction
      • Contribution of work to overall life satisfaction
    • 16.
      • Motivational instruments
        • Budgets set policy for personnel & other agency/program expenditures
        • Distribution of funds through budgets implicitly communicates agency priorities regarding value of staff
      Financial Management: Staff Morale
    • 17. Diversity & Financial Management
      • Impact on revenues & expenses
        • No profit motive
        • Stewardship/service mission
        • Emphasis on social justice & diversity
    • 18. Budgeting
      • Financial plan of action
        • Expresses agency programs & operations in monetary terms
        • Details agency goals, objectives & priorities
        • Represents a specific period of time
        • Results from board decisions about future
    • 19.
      • Tool for monitoring financial activities
        • Provides comparison point for managers & board to monitor agency/program financial health & make refinements as necessary
        • Guides acquisition & use of resources
        • Assists in controlling spending
      Budgeting
    • 20. Budget Building Basics
      • Effective budgets are
        • Well planned & prepared
        • Integrate multiple perspectives & sources of information
        • Approved by board of directors
        • Aligned with specified time periods consistent with financial statements
        • Monitored regularly & revised as needed
    • 21. Budget Processes: Public & Private
      • Public
        • Governor submits guidelines to agencies
        • Agencies create budgets & submit to governor; they negotiate
        • Governor submits budget plan to legislature
        • Legislature holds hearings, revises & approves
        • Governor approves or vetoes
      • Private
        • Board develops program & budget guidelines
        • Administrators create program plans & budgets; submit to finance department; they negotiate
        • Executive director submits budget plan to board
        • Board revises & approves
    • 22. Basic Budget Terms
      • Fiscal year
        • Primary financial record keeping period
        • Specified in articles of incorporation
      • Revenue (income)
        • Money (or goods) received
      • Expenses (expenditures/disbursements)
        • Money (or resources) spent
    • 23. Revenue Sources
      • Private grants & contracts (foundations, businesses, service organizations)
      • Public funding (governments)
      • Income-producing activities (fees for service, training, consultation, sales)
      • Contributions (UW, churches, other)
      • Individual donations/events (gifts, memberships, direct mail)
    • 24. Expense Classifications
      • Personnel
        • Expenses associated with employee compensation
      • Non-personnel
        • All expenses other than those associated with employee compensation
    • 25. Expense Types
      • Direct
        • All costs directly associated with the operation of the program
      • Indirect
        • All costs associated with agency supportive activities and those not directly identifiable to the operation of a particular program
    • 26. Types of budgets
      • Line-item
      • Functional
      • Program
      • Incremental (approach)
      • Zero-based (approach)
      • Capital
      • Cash Flow
    • 27. Line-Item Budgets
      • Most basic budget format
      • Summarize revenue & expense projections
        • By expense category (line item)
        • By single organization unit
    • 28. Building a Line-Item Budget
      • Identify anticipated revenue sources & amounts
      • Create goals & work plan (review/revise)
      • Identify all resources needed
      • Identify personnel & fringe benefit costs
      • Identify non-personnel categories & costs
      • Develop budget justification
    • 29. Functional Budgets
      • Emphasis is on functions (sets of related activities) not organizational unit
      • Allocation of resources is based specific activity clusters (programmatic or supportive)
    • 30. Program Budgets
      • Emphasis is on program not organizational unit or function
      • Allocation of resources is based on achieving a related set of objectives
      • Program expenses = Direct program costs + Indirect (supportive services) allocation
    • 31. 2 Budgeting Approaches
      • Incremental
        • Calculations begin with existing base
        • Line items increased by percent increments or based on known changes
      • Zero-based
        • Line items begin at zero
        • Line-items reexamined/costed using no historical data for comparison
    • 32. Capital Budgets
      • Focus on large, nonrecurring expenditures & means of financing them
        • Capital improvement: Buying, constructing, or renovating physical facilities
        • Capital equipment: Acquiring or designing major equipment or systems for long-term use
    • 33. Cash Flow Budgets
      • Focus on management of cash to assure availability for program resource needs
      • Details flow of cash monthly over fiscal year (or other specified period)
        • Cash flow = Cash received (revenue & support) - Cash disbursed (expenses)
    • 34. Values and Ethics in Finance
      • Money raises many questions in budgeting and finance
        • What programs are considered for funding?
        • Where are the programs held?
        • Which clients have the greatest need?
        • Who makes these decisions?
        • How do we reward staff?
        • What resources do we commit to a program or population group?
    • 35. Activity-Based Costing
      • Presents a method of allocating overhead (indirect costs) to programs or projects
      • Provides a more accurate way to measure costs
      • Provides a more effective means of control by managing activities rather than costs
    • 36. Activity-Based Costing
      • Creates costs pools by grouping like costs (e.g., computer costs includes personnel hardware, software, supplies, etc.)
      • Identifies activities (cost drivers) as measures by which to calculate allocation of costs (e.g., hours of computer time)
      • Develops a rate (cost per activity)
      • Allocates costs to programs or projects based on units of activity used
    • 37. Financial Analysis
      • Examines what has happened in the agency financially
      • Identifies relationships existing in financial data
      • Incorporates operational data to explain these relationships
    • 38. Financial Analysis
      • Gives feedback through financial reports
      • Permits agency to communicate results to external stakeholders
      • Provides a means to monitor performance
      • Informs decisions & actions
        • Planning & forecasting
        • Investing & financing
        • Coordination & control
    • 39. Financial Analysis Techniques: Comparisons
      • Month actual to month budget
      • YTD actual to YTD budget
        • Necessitates creation of monthly budget
        • Compares actual & budget amounts for same periods
        • Calculates budget variance in $ & %
        • Requires explanation of significant variances
      • Same period comparisons also done with current & prior year actuals
    • 40. Financial Analysis Techniques: Comparisons
      • YTD Actual to Annual Budget
        • Calculates YTD actual expense as % of budget
        • Assumes expenses incurred consistently throughout year
        • Requires explanations for items not incurred consistently month to month & those with significant variances
    • 41. Financial Analysis Techniques: Comparisons
      • Annualized YTD actual to annual budget
        • Annualizes YTD actual by multiplying by 12 & dividing by actual number of months YTD
        • Compares the annualized budget to annual budget
        • Calculates projected variances in $ & %
        • Requires explanation of projected revenue shortfalls & overspending
    • 42. Financial Analysis Techniques: Break Even
      • Definition
        • Point where total revenues equals total expenses
      • Purpose
        • To determine volume of activity where level of revenue covers all expenses
    • 43. Financial Analysis Techniques: Break Even
      • Two types of expenses
        • Fixed: Expenses remain constant regardless of activity level &/or units of service delivered
        • Variable: Expenses fluctuate in accordance with activity level &/or units of service delivered
      • Total revenue = Fixed expenses + Variable expenses
    • 44. Financial Analysis Techniques: Cost Benefit
      • Integrated financial & programmatic data to assess whether the costs of the program are worth the benefits (may be considered a program analysis not financial analysis technique)
      • Evaluates the relationship among program objectives, program outcomes & total program costs
    • 45. Financial Analysis Techniques: Cash Projections
      • Review & update cash flow projections at least monthly
        • Negative cash flow (liquidity problem)
          • Temporary issue
          • Money coming in will cover expenses but not received yet
        • Deficit (insolvency)
          • Larger issue
          • Money coming in is not enough to cover expenses
    • 46. Financial Analysis: Options to Improve Cash Flow
      • Delay large purchases, new hires
      • Negotiate payment schedules for large items
      • Accelerate or generate new revenues
      • Transfer funds from reserves (if allowed)
      • Secure cash advances or loans
      • Cut expenses
    • 47. Financial Analysis Concept: Time Value of Money
      • Premise: A dollar today is worth more than a dollar tomorrow
      • Assumptions: Value of interest & effect of inflation over long-term
        • $100 today with interest rate of 5% = $105 one year from now
        • Without interest that same $100 is worth only $95 one year from now
    • 48. Potential Impact of Financial Analysis: Budget Revisions
      • Possible reasons
        • Budgeted funding not received or non-budgeted funding received
        • Unanticipated changes in personnel or other line items
      • Policies & procedures should be in place
        • within agency & with funding sources
        • including when, why, how & by whom budgets can be revised
    • 49. Accounting Fundamentals
      • Accounting question 1
        • What revenues are coming in & what expenses are going out over a period of time ?
      • Accounting question 2
        • What does the agency own (assets) & owe (liabilities) at any point in time ?
      • Accounting equation
        • Assets = liabilities + net assets (fund balance)
    • 50. Accounting
      • System by which agency records, collects & sorts financial information
        • Categorizes financial activity in accounts
          • Accounts are groupings of like activities
          • Chart of accounts lists agency accounts
        • Tracks revenues & expenses
        • Identifies assets & liabilities
        • Includes forms, records & procedures to process & document data about operations
    • 51. Accounting Standards
      • Accounting is self-regulated profession
      • Rules set by private, authoritative bodies
        • Financial Accounting Standards Board (private & nonprofit agencies)
        • Governmental Accounting Standards Board (state & local government entities)
      • Accounting rules known as Generally Accepted Accounting Principles (GAAP)
    • 52. Accounting Standards Change
      • Major change in accounting rules governing nonprofit agencies in 1995 (FASB 116 & 117)
        • Fund accounting (reporting financial data by separate funds) is discouraged in favor of reporting for agency as whole
        • Recommended method reports net assets as permanently restricted, temporarily restricted & unrestricted
    • 53. Accounting Methods
      • Cash-basis accounting
        • Records transactions in accounts when they physically happen
      • Accrual-basis accounting
        • Records activities when they economically happen (i.e., they have been obligated but may not have physically happened)
    • 54. Accounting Systems
      • Single entry accounting
        • Process in which you track transactions by following the cash (like keeping a checkbook)
      • Double entry accounting
        • Process in which you track transactions as increases or decreases to assets or liabilities at the same time it is an increase or decrease to a revenue or expense
    • 55. Debits & Credits
      • Increase & decrease account balances in double entry accounting
        • Debit Credit
        • Assets increase decrease
        • Liabilities decrease increase
        • Revenues decrease increase
        • Expenses increase decrease
        • Fund balance decrease increase
      • Total debits = total credits for each entry
    • 56. Financial Reporting
      • Presents timely & accurate financial information in required format for internal & external use
      • Groups all accounts on financial statements
      • Shows changes between years on comparative reports
    • 57. Primary Financial Statements
      • Statement of Financial Position (Balance Sheet)
      • Statement of Activities (Income Statement)
      • Statement of Cash Flows
    • 58. Statement of Financial Position
      • Shows assets, liabilities & net assets (fund balance) at a point in time
        • Presents assets in order of nearness to cash (liquidity)
        • Presents liabilities in order of nearness to maturity
          • Current & non-current cut-off typically 1 year
    • 59. Statement of Financial Position
      • Assets
        • Amounts available to support agency services
        • Cash, Grants Receivable, Inventory, Investments, Fixed Assets, etc.
      • Liabilities
        • Amounts owed to others
        • Accounts payable, accrued expenses, loans payable, etc.
    • 60. Statement of Financial Position
      • Fixed Assets: A special kind of asset
        • Tangible property with life greater than 1 year (usually over $500)
        • Trade one kind of asset (cash) for another kind of asset (building, equipment, furniture, computers, etc.)
        • Becomes an expense through depreciation
          • Depreciation expense = Total cost/useful life
    • 61. Statement of Financial Position Ratios
      • Liquidity Measures
        • Working Capital
          • Current Assets - Current Liabilities
        • Current Ratio
          • Current Assets/Current Liabilities
        • Assumption: Higher working capital means better liquidity because more assets are currently available to pay existing short-term liabilities
    • 62. Statement of Financial Position Ratios
      • Days to Collect on Receivables (Collection Period)
        • Accounts Receivable/Average Daily Revenue
          • Average Daily Revenue = Total revenue for period/number of days in period
          • Note: Total revenue comes from statement of financial activities
        • Assumption: Lower number of days means agency is receiving revenues faster
    • 63. Statement of Financial Position Ratios
      • Debt Ratio
        • Total Liabilities (Debt)/Total Assets
        • Percentage of funds provided by creditors
        • Assumption: Lower debt ratio means greater protection against bankruptcy because more assets are available to pay liabilities (debt)
    • 64. Statement of Activities
      • Details revenues & expenses for a period of time
      • Net difference = operating surplus (deficit) which is added to net assets (fund balance)
      • Used as basis for comparison between periods & to budget
    • 65. Statement of Activity Ratios
      • Trend Analysis
        • Examines % change in account over time
        • Requires explanation of changes through exploration of operational data
      • Comparative Expense to Revenue Percent
        • Expense item/Revenue in one year compared with same percent in another year
        • Assumption: Declining percents over time mean more efficient operation
    • 66. Forecasts
      • Presents YTD actual revenue & expense results
      • Projects revenues & expenses for remainder of year
      • Compares YTD actual + remainder of year projected results to annual budget
      • Used for internal reporting only
    • 67. Annual Report
      • Presents two types of information
        • Narrative
          • Describes agency’s programs & services, annual operating results & developments affecting future activities
        • Financial
          • Includes financial statements & accompanying explanatory footnotes
      • Markets program to community
    • 68. Audits
      • Series of procedures followed by professional accountants to test selected financial transactions & internal controls
        • Allows for opinion on fairness of presentation of financial statements for the period
        • Gives accountant a basis for judging how effectively records were kept & degree of reliance that can be placed on internal controls
        • Results in opinion on financial statements
    • 69. Types of Audits
      • Financial & compliance
        • Proper conduct in financial operations
        • Most common
      • Program results/effectiveness
        • Similar to program evaluation
      • Economy & efficiency
        • Management & utilization of resources
    • 70. Financial & Compliance Audits
      • Auditors must be independent of the agency they are auditing. There must be no financial connection other than the audit fee.
      • Auditors must be certified by the state in which they practice (exam & CEUs)
      • To certify financial statements they must use generally accepted auditing standards (GAAS)
    • 71. Financial & Compliance Audits
      • Step Approach for Nonprofit Agencies
        • Always uses GAAS (developed for for-profits)
        • Often requires standards by U. S. General Accounting Office (GAO) called Generally Accepted Governmental Auditing Standards (GAGAS) (AKA the Yellow Book)
        • Could require adherence to OMB Circular A-133 (from Single Audit Act of 1984) if agency receives federal grants of $100,000 or more
    • 72. Financial & Compliance Audits
      • Results
        • Represent an opinion of fairness of financial statements--This does not mean financial statements are certified to be exact or precise, but they fairly represent the financial status of the agency
          • Note wording of “presents fairly”
        • Present a list of internal control weaknesses in letter to management
    • 73. Types of Audit Opinions
      • Unqualified (clean)
        • No material misstatement
      • Qualified
        • Takes exception to some aspect
      • Adverse Opinion
        • Information not presented fairly
      • Disclaimer
        • Unable to form opinion
    • 74. Risk Management
      • Provides protection for assets
      • Provides protection against unplanned liabilities
    • 75. Risk Management
      • Tasks in managing risks
        • Identify the risks or areas of risk
        • Evaluate their importance to the organization
        • Control what can be controlled
        • Develop funds for managing risk
        • Develop and consistently administer policies
    • 76. Risk Management
      • Insurance
      • Governing Board
      • Human resource management
      • Internal control
      • Workplace Hazards
      • Volunteer liability
      • Records management
    • 77. Management Control
      • Managers attempt to assure that desired results are obtained
      • Managers can’t be all places at all times, so systems of checks & balances must be introduced to monitor financial & programmatic performance
    • 78. Financial Control
      • Management is responsible to implement a set of controls that
        • Monitor financial policies & procedures
        • Maintain adequate & effective system of accounts
        • Safeguard assets
        • Devise other systems & procedures that allow production of accurate financial statements & management reports
    • 79. Internal Control
      • System of procedures & cross checking that in absence of collusion minimizes likelihood of theft of assets or misstatement of accounts & increases likelihood of detection if this occurs
      • Necessary to safeguard assets & check reliability & accuracy of accounting data
        • Promotes operational efficiency
        • Encourages adherence to managerial policies
    • 80. Internal Control
      • No predefined system of internal control can be created to fit needs of all agencies
      • Features of effective control systems
        • Honest, capable employees
        • Clearly defined, formal plan of organization
        • Separation of duties
        • System of authorizations
        • Adequate physical control over assets and records
        • Independent checks on performance
    • 81. Strategies to Manage Risk
      • Purchase insurance
      • Create cash reserves
      • Create, document & test policies & procedures
        • Disaster recovery for computerized data
        • Safe practices & design (ergonomics) for people
      • Register trademarks