Track 1 Finance: The Financial Basics of Grant Review

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Track 1 Finance: The Financial Basics of Grant Review

  1. 1. THE FINANCIAL BASICS OF GRANT REVIEW Joe McCarthy and Tina Kasmarzik September 26, 2005
  2. 2. AGENDA <ul><li>FINANCIAL BASICS </li></ul><ul><li>- FINANCIAL STATEMENTS </li></ul><ul><li>AND DETERMINING FINANCIAL </li></ul><ul><li>HEALTH </li></ul><ul><li>UNDERSTANDING BUDGETS </li></ul><ul><li>REVISING PROJECT BUDGETS </li></ul><ul><li>WAR STORIES </li></ul>
  3. 3. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>CHART OF ACCOUNTS </li></ul><ul><li>INCOME STATEMENT/ </li></ul><ul><li>STATEMENT OF ACTIVITIES </li></ul><ul><li>BALANCE SHEET/ </li></ul><ul><li>STATEMENT OF FINANCIAL POSITION </li></ul><ul><li>CASH FLOW STATEMENT </li></ul><ul><li>AUDIT REPORT </li></ul><ul><li>ANALYSIS </li></ul>
  4. 4. UNDERSTANDING BUDGETS <ul><li>WHAT IS A BUDGET? </li></ul><ul><li>WHAT DO YOU WANT TO SEE IN A PROJECT BUDGET? </li></ul><ul><li>BUDGET FORMAT </li></ul><ul><li>HOW DO YOU ANALYZE THE BUDGET USING THE FINANCIAL STATEMENTS? </li></ul>
  5. 5. REVISING PROJECT BUDGETS <ul><li>WHEN WILL GRANTEES TRY AND REVISE THEIR BUDGETS? </li></ul><ul><li>WHEN SHOULD YOU LET A GRANTEE REVISE THEIR BUDGET? </li></ul><ul><li>HOW MUCH DOES IT COST TO REVISE A BUDGET? </li></ul>
  6. 6. WAR STORIES <ul><li>CONFERENCE ATTENDEE QUESTION AND ANSWER SESSION </li></ul><ul><li>FREE CONSULTING </li></ul><ul><li>(for whatever that is worth) </li></ul>
  7. 7. CONFERENCE ATTENDEES <ul><li>WHO IS IN THE AUDIENCE? </li></ul><ul><li>WHAT IS THE LEVEL OF FINANCIAL EXPERTISE? </li></ul>
  8. 8. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>CHART OF ACCOUNTS </li></ul><ul><li>INCOME STATEMENT/ </li></ul><ul><li>STATEMENT OF ACTIVITIES </li></ul><ul><li>BALANCE SHEET/ </li></ul><ul><li>STATEMENT OF FINANCIAL POSITION </li></ul><ul><li>CASH FLOW STATEMENT </li></ul><ul><li>AUDIT REPORT </li></ul><ul><li>ANALYSIS </li></ul>
  9. 9. ACCOUNTING EXPERIENCE <ul><li>WHO IN THE AUDIENCE HAS EVER PERFORMED AN ACCOUNTING ENTRY? </li></ul>CASH EXPENSE
  10. 10. CASH EXPENSE (DEPOSIT) (WITHDRAWAL)
  11. 11. TAKE SOMETHING WITH YOU <ul><li>AS WE MOVE THROUGH THE PRESENTATION, IF YOU HAVE LITTLE OR NO KNOWLEDGE OF FINANCIAL MANAGEMENT, JUST RELATE THE INFORMATION TO YOUR PERSONAL FINANCES, AND YOU’LL LEARN SOMETHING. </li></ul>
  12. 12. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>CHART OF ACCOUNTS </li></ul><ul><li>A LISTING OF THE ACCOUNT TITLES AND ACCOUNT NUMBERS BEING USED BY AN ORGANIZATION FOR RECORDING FINANCIAL TRANSACTIONS. </li></ul>
  13. 13. CHART OF ACCOUNTS <ul><li>1xxx ASSETS </li></ul><ul><li>2xxx LIABILITIES </li></ul><ul><li>3xxx EQUITY </li></ul><ul><li>4xxx REVENUE </li></ul><ul><li>5xxx EXPENSE </li></ul>
  14. 14. TYPES OF ACCOUNTING CASH / ACCRUAL <ul><li>CASH BASIS ACCOUNTING </li></ul><ul><li>ACCOUNTING FOR CASH WHEN RECEIVED AND CASH DISBURSEMENTS WHEN MADE </li></ul><ul><li>ACCRUAL ACCOUNTING </li></ul><ul><li>ACCOUNTING THAT RECOGNIZES REVENUE WHEN EARNED AND EXPENSES WHEN THEY ARE INCURRED </li></ul>
  15. 15. CASH / ACCRUAL ACCOUNTING <ul><li>CASH BASIS – DR. OFFICE </li></ul><ul><li>ACCRUAL – 95% OF ALL BUSINESSES </li></ul><ul><li>EXAMPLE – ORDER $10,000 OF FURNITURE WITH 2 MONTH LEAD TIME </li></ul>
  16. 16. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>INCOME STATEMENT / </li></ul><ul><li>STATEMENT OF ACTIVITIES </li></ul><ul><li>THE PURPOSE OF AN INCOME STATEMENT IS TO SHOW THE REVENUE AND EXPENSES OF A BUSINESS OVER A PERIOD OF TIME (MONTH OR YEAR) </li></ul>
  17. 17. STATEMENT OF ACTIVITIES <ul><li>THE DIFFERENCE BETWEEN REVENUE AND EXPENSE IS </li></ul><ul><li>- NET INCOME </li></ul><ul><li>(FOR PROFIT WORLD) </li></ul><ul><li>- CHANGE IN NET ASSETS </li></ul><ul><li>(NON-PROFIT) </li></ul>
  18. 18. STATEMENT OF ACTIVITIES <ul><li>REVENUE </li></ul><ul><li> PROGRAM FEES </li></ul><ul><li> SERVICE FEES </li></ul><ul><li> GRANTS </li></ul><ul><li> INTEREST EARNINGS </li></ul><ul><li>EXPENSE </li></ul><ul><li> SALARY </li></ul><ul><li> BENEFITS </li></ul><ul><li> RENT </li></ul><ul><li> SUPPLIES </li></ul><ul><li>EACH ACCOUNTING PERIOD THESE ACCOUNTS ARE CLOSED (ZEROED OUT) AND BALANCES REVERT TO THE EQUITY SECTION OF THE BALANCE SHEET (AS EITHER PROFIT OR LOSS) </li></ul>
  19. 19. STATEMENT OF ACTIVITIES <ul><li>IN-KIND REVENUE AND EXPENSE </li></ul><ul><li>(GAAP ACKNOWLEDGES IN-KIND) </li></ul><ul><li>WAR STORY – ADP GROCERY STORE WITH $1 MILLION BUDGET AND BASIC SUPPORT APPLICANT WITH $200,000 BUDGET </li></ul>
  20. 20. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>BALANCE SHEET/STATEMENT </li></ul><ul><li>OF FINANCIAL POSITION </li></ul><ul><li>PURPOSE OF A BALANCE SHEET IS TO SHOW THE FINANCIAL POSITION OF A BUSINESS ON A PARTICULAR DATE (SEPTEMBER 30, 2005) </li></ul>
  21. 21. BALANCE SHEET <ul><li>A BALANCE SHEET CONSISTS OF A LISTING OF THE ASSETS AND LIABILITIES OF A BUSINESS AND THE EQUITY (ALSO REFERRED TO AS NET ASSETS) </li></ul>
  22. 22. BALANCE SHEET ASSETS ARE RESOURCES OWNED BY A BUSINESS CASH AND INVESTMENTS EQUIPMENT BUILDING LIABILITIES ARE DEBTS ACCOUNTS PAYABLE ACCRUED SALARY LOAN BALANCE EQUITY/NET ASSETS – RESIDUAL BALANCE IN ASSETS AFTER DEDUCTING LIABILITIES
  23. 23. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>STATEMENT OF CASH FLOW </li></ul><ul><ul><li>CASH IS THE MOST USEFUL LIQUID ASSET </li></ul></ul><ul><ul><li>THE EFFICIENT USE OF CASH IS ONE OF THE MOST IMPORTANT TASKS OF MANAGEMENT </li></ul></ul>
  24. 24. STATEMENT OF CASH FLOW <ul><li>A CASH FLOW STATEMENT IS PREPARED TO PROVIDE INFORMATION ON CASH RECEIPTS AND CASH DISBURSEMENTS THAT OCCURRED DURING AN ACCOUNTING PERIOD (MONTH OR YEAR) </li></ul>
  25. 25. STATEMENT OF CASH FLOW <ul><li>SOURCES OF CASH COLLECTIONS FROM CUSTOMERS </li></ul><ul><li>GRANT FUNDS RCV’D </li></ul><ul><li>LESS USES OF CASH </li></ul><ul><li>EQUIPMENT PURCHASE </li></ul>
  26. 26. STATEMENT OF CASH FLOW <ul><li>EQUALS EITHER AN INCREASE OR </li></ul><ul><li>DECREASE IN CASH </li></ul><ul><li>ADD CHANGE TO CASH AT THE BEGINNING OF THE PERIOD </li></ul><ul><li>TO EQUAL CASH AT THE END OF THE PERIOD </li></ul><ul><li>(ENDING CASH TIES TO THE CASH ACCOUNT ON THE BALANCE SHEET) </li></ul>
  27. 27. FINANCIAL STATEMENTS AND DETERMINING FINANCIAL HEALTH <ul><li>AUDIT REPORT </li></ul><ul><li>INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REVIEW ACCOUNTING PROCESSES, TRANSACTIONS, RECORDS AND FINANCIAL STATEMENTS </li></ul><ul><li>(IN MOST CASES ANNUALLY) </li></ul>
  28. 28. AUDIT REPORT <ul><li>AUDIT FIRM EXPRESSES AN OPINION (ALSO REFERRED TO AS AN AUDIT REPORT) </li></ul><ul><li>AUDIT REPORTS FREQUENTLY INCLUDE A ‘MANAGEMENT LETTER’ THAT CONTAINS RECOMMENDATIONS </li></ul>
  29. 29. ANALYSIS OF FINANCIAL STATEMENTS <ul><li>RATIO ANALYSIS </li></ul><ul><li>A RATIO IS A SIMPLE MATHMATECIAL EXPRESSION OF THE RELATIONSHIP OF ONE ITEM TO ANOTHER ITEM </li></ul><ul><li>MOST RATIOS ARE APPLICABLE IN A FOR-PROFIT ENVIRONMENT BUT SOME ARE APPLICABLE IN THE NON-PROFIT WORLD ALSO </li></ul>
  30. 30. <ul><li>OPERATING EXPENSE RATIO </li></ul><ul><li>TOTAL EXPENSE/REVENUE </li></ul><ul><li>PROGRAM EXPENSE OR OVERHEAD EXPENSE RATIO </li></ul><ul><li>EXPENSE /TOTAL EXPENSE </li></ul><ul><li>(BOTH RATIOS MEASURE ABILITY TO CONTROL EXPENSES) </li></ul>RATIO ANALYSIS – STATEMENT OF ACTIVITIES
  31. 31. <ul><li>PROFITABILITY RATIO </li></ul><ul><li>NET INCOME/REVENUE </li></ul><ul><li>(MEASURES LEVEL OF PROFITABILITY) </li></ul>RATIO ANALYSIS – STATEMENT OF ACTIVITIES
  32. 32. <ul><li>CURRENT RATIO </li></ul><ul><li>CURRENT ASSETS/CURRENT LIABILITIES </li></ul><ul><li>(MEASURES SHORT-TERM ABILITY TO PAY DEBTS </li></ul><ul><li>DEBT RATIO </li></ul><ul><li>TOTAL LIABILITIES/TOTAL ASSETS </li></ul><ul><li>(MEASURES BURDEN OF DEBT) </li></ul><ul><li>DAYS CASH ON HAND </li></ul><ul><li>TOTAL EXPENSE/360 = DAILY ‘BURN’ RATE </li></ul><ul><li>CASH/’BURN’ RATE = DAYS OF CASH </li></ul><ul><li>(MEASURES ABILITY TO PAY BILLS) </li></ul>RATIO ANALYSIS – STATEMENT OF FINANCIAL POSITION
  33. 33. ANALYSIS OF FINANCIAL STATEMENTS <ul><li>COMPARATIVE FINANCIAL ANALYSIS </li></ul><ul><li>OCCURS WHEN YOU PLACE FINANCIAL STATEMENTS SIDE BY SIDE OVER A PERIOD OF TIME (USUALLY YEARS) TO ANALYZE CHANGES </li></ul>
  34. 34. BUDGETS
  35. 35. UNDERSTANDING BUDGETS <ul><li>WHAT IS A BUDGET? </li></ul><ul><li>WHAT DO YOU WANT TO SEE IN A PROJECT BUDGET? </li></ul><ul><li>BUDGET FORMAT </li></ul><ul><li>HOW DO YOU ANALYZE THE BUDGET USING THE FINANCIAL STATEMENTS? </li></ul>
  36. 36. UNDERSTANDING BUDGETS <ul><li>WHAT IS A BUDGET? </li></ul><ul><li>A BUDGET IS A FINANCIAL PLAN LISTING ALL REVENUES AND EXPENSES FOR A PERIOD OF TIME FOR AN ORGANIZATION OR FOR A SPECIFIC PROJECT </li></ul><ul><li>(YES, REVENUES ) </li></ul>
  37. 37. UNDERSTANDING BUDGETS <ul><li>IF YOU DON’T RECOGNIZE NEW REVENUE THAT IS GENERATED AS A DIRECT RESULT OF A GRANT AWARD, YOU ARE OVERFUNDING A PROJECT </li></ul><ul><li>EXAMPLE: MENTAL HEALTH CONSULTING SERVICES WITH A CO-PAY </li></ul><ul><li>WAR STORY – McC COUNSELING </li></ul>
  38. 38. UNDERSTANDING BUDGETS <ul><li>WHAT DO YOU WANT TO SEE IN A PROJECT BUDGET? </li></ul>
  39. 39. <ul><li>ANSWER </li></ul><ul><li>REALITY </li></ul>
  40. 40. UNDERSTANDING BUDGETS <ul><li>BUDGET FORMAT </li></ul><ul><li>(THE SIMPLER…THE BETTER) </li></ul>
  41. 41. MFH BUDGET FORMAT <ul><li>MFH STARTED OFF REQUESTING TOO MUCH DETAIL </li></ul><ul><li>- LISTING FRINGE BENEFITS </li></ul><ul><li>(FICA, MEDICAL,PENSION, ETC.) </li></ul><ul><li>- LISTING OVERHEAD EXPENSES </li></ul><ul><li>(PHONE, RENT, ETC.) </li></ul><ul><li>- APPLICATIONS GOT TOO </li></ul><ul><li>COMPLEX AND CONTAINED TOO </li></ul><ul><li>MANY ERRORS </li></ul>
  42. 42. <ul><li>HOW MANY APPLICANT BUDGETS FAILED THE FIRST TIME THROUGH THE INTERNAL REVIEW PROCESS? </li></ul>MFH BUDGET FORMAT
  43. 43. <ul><li>95% </li></ul>
  44. 44. <ul><li>MFH BUDGET FORMAT HAS BEEN GREATLY SIMPLIFIED TO REDUCE RE-WORK AND ANALYSIS </li></ul><ul><li>- ESTABLISHED MAXIMUM </li></ul><ul><li>FRINGE RATE BY SALARY </li></ul><ul><li>- ESTABLISHED OVERHEAD </li></ul><ul><li>RATE (15% OF SALARY) </li></ul><ul><li>WAR STORY - UNIVERSITIES </li></ul>MFH BUDGET FORMAT
  45. 45. ANALYZING BUDGETS <ul><li>HOW DO YOU ANALYZE THE BUDGET USING THE FINANCIAL STATEMENTS? </li></ul>
  46. 46. ANALYZING BUDGETS <ul><li>YOU’RE ALL FINANCIAL MANAGERS NOW, YOU SHOULD KNOW HOW TO DO THIS </li></ul><ul><li>(RATIO ANALYSIS, COMPARATIVE ANALYSIS) </li></ul>
  47. 47. ANALYZING BUDGETS <ul><li>ANALYZE BUDGETS USING COMMON SENSE </li></ul><ul><li>- ANNUAL SALARIES </li></ul><ul><li>- FRINGE RATES </li></ul><ul><li>- COST FOR EQUIPMENT </li></ul><ul><li>- TOTAL COST ON A PER </li></ul><ul><li>PERSON SERVED BASIS </li></ul>
  48. 48. REVISING PROJECT BUDGETS <ul><li>WHEN WILL GRANTEES TRY AND REVISE THEIR PROJECT BUDGETS? </li></ul><ul><li>WHEN SHOULD YOU LET A GRANTEE REVISE THEIR PROJECT BUDGET? </li></ul><ul><li>HOW MUCH DOES IT COST TO REVISE A BUDGET? </li></ul>
  49. 49. REVISING PROJECT BUDGETS <ul><li>WHEN WILL GRANTEES TRY AND REVISE THEIR PROJECT BUDGETS? </li></ul><ul><li>ANSWER : JUST ABOUT ANY TIME THAT THEY THINK THEY CAN GET AWAY WITH IT </li></ul>
  50. 50. REVISING PROJECT BUDGETS <ul><li>WHEN SHOULD YOU LET A GRANTEE REVISE THEIR PROJECT BUDGET? </li></ul><ul><li>ANSWER : AS SELDOM AS POSSIBLE </li></ul><ul><li>MFH HAS A 25% BUDGET REVISION RATE – TOO HIGH </li></ul>
  51. 51. <ul><li>MFH HAS BEEN FORCED TO ESTABLISH A POLICY TO NOT ACCEPT BUDGET REVISIONS WITHIN 1 ST YEAR OF A PROJECT </li></ul><ul><li>AND ONLY ONCE A PROJECT YEAR THEREAFTER </li></ul>REVISING PROJECT BUDGETS
  52. 52. REVISING PROJECT BUDGETS <ul><li>HOW MUCH DOES IT COST TO REVISE A BUDGET? </li></ul><ul><li>ANSWER : TOO MUCH FOUNDATION STAFF TIME </li></ul><ul><li>- PROGRAM OFFICER TIME </li></ul><ul><li>- GRANTS MANAGER TIME </li></ul><ul><li>- BUDGET REVISION </li></ul><ul><li>- CONTRACT AMENDMENT </li></ul>
  53. 53. REVISING PROJECT BUDGETS <ul><li>BUDGET REVISIONS MUST BE TIGHTLY CONTROLLED </li></ul><ul><li>MFH ENFORCES BUDGETS THROUGH GRANT AWARD AGREEMENT </li></ul>
  54. 54. REVISING PROJECT BUDGETS <ul><li>INTERIM FINANCIAL REPORTS MUST TIE OUT TO THE APPROVED BUDGET (OR NEXT CHECK HELD) </li></ul><ul><li>FINAL REPORT MUST ALSO TIE OUT (5% WITHHOLD) </li></ul>
  55. 55. BUDGET ISSUES <ul><li>MFH HAS A LATE PAYMENT REPORT (WATCH LIST) </li></ul><ul><li>WAR STORIES– </li></ul><ul><ul><ul><li>BOOTHEEL </li></ul></ul></ul><ul><ul><ul><li>THE CLINIC </li></ul></ul></ul><ul><ul><ul><li>ST. CHAS DENTAL </li></ul></ul></ul>
  56. 56. CONTROL BUDGET ISSUES <ul><li>SET A CAP ON GRANT AWARDS AS A % OF OPERATING EXPENSE </li></ul><ul><li>CONDUCT GRANTEE ORIENTATIONS </li></ul><ul><li>ANALYZE FINANCIAL REPORTS – INVITE GRANTEES TO VISIT CFO IF OUT OF TOLERANCE </li></ul>
  57. 57. WAR STORIES <ul><li>NOW IS THE TIME TO SHARE YOUR WAR STORIES </li></ul><ul><li>QUESTIONS, CONCERNS OR ISSUES RELATING TO GRANT APPLICANT FINANCIAL STATEMENTS OR PROJECT BUDGETS </li></ul>

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