Financial Oversight by Nonprofit Boards; a Conversational Approach

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Ideas and tools to improve oversight as a board member, executive, or other constituent.

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Financial Oversight by Nonprofit Boards; a Conversational Approach

  1. 1. AConversationalApproach<br />Financial Oversightby NonprofitBoards <br />By: Robert P. Seestadt, CPA<br />copyright 2011, Robert P. Seestadt CPA<br />
  2. 2. What is the conversationalapproach?<br />Emphasizes the value of inquiry and curiosity<br />Technical and informal aspects both critical <br />Financial information should drive discussion<br />Peer-to-peer sharing of information improves oversight<br />copyright 2011, Robert P. Seestadt CPA<br />
  3. 3. Current Stateof Nonprofit Finance <br />Nonprofit finance fund 2010 survey:<br />30% of nonprofits have 0-1 month operating cash on hand<br />39% looking for tools to communicate with their board<br />76% of organizations recently prepared budget scenarios / projections <br />Source: www.nonprofitfinancefund.org 2010 survey <br />copyright 2011, Robert P. Seestadt CPA<br />
  4. 4. Finding the right oversight balance<br />“What happened to the meeting cookies?<br />The Goldilocks Challenge…how much is just right?<br />“how much did we spend on pencils?”<br />Not engaged<br />Micromanager<br />copyright 2011, Robert P. Seestadt CPA<br />Discussion: How to get the board “on board” <br />
  5. 5. Let’s start with a quick self-assessment…<br />Consider your responses to the following regarding your nonprofit with “yes”, “no”, or “not sure”:<br /><ul><li> Cash reserves are adequate
  6. 6. Most recent financial results are better than plan
  7. 7. We have “significant deficiencies” in our internal controls
  8. 8. Our financial model is adjustable to the amount of revenue we have
  9. 9. We consider reasonable “worst case scenarios” in the budget process</li></ul>copyright 2011, Robert P. Seestadt CPA<br />
  10. 10. Oversight Tip<br />Understand basic <br />financial terminology<br />copyright 2011, Robert P. Seestadt CPA<br />
  11. 11. Financial communication styles vary <br />copyright 2011, Robert P. Seestadt CPA<br />“As you can see by the attached statement of financial position, unrestricted net assets after subtracting equity in fixed assets remains a negative number” <br />“We’re broke” <br />Executive Director <br />Accountant <br />“Liquidity continues to be a concern”<br />CFO<br />
  12. 12. Some terms worth knowing<br />Assets<br />Liabilities <br />Net assets<br />Capital <br />Revenue (‘income”)<br />Temporarily restricted revenues<br />Endowment <br />Board designations <br />copyright 2011, Robert P. Seestadt CPA<br />
  13. 13. The difference between Capitaland Income<br />To understand the financial picture, you need to appreciate the difference between <br />Capital <br /> and <br />Income<br />copyright 2011, Robert P. Seestadt CPA<br />
  14. 14. What is Capital? <br /> definition: Cash or goods used to generate revenue through investment<br />“Assets”Cash, invest. Pledges (Liquid assets) <br />copyright 2011, Robert P. Seestadt CPA<br />Fixed Assets, Building, property, equipment collections <br />
  15. 15. Income: Financial performance over time <br /> Income (“revenues”) <br />Unrestricted, <br /> temporarily restricted, <br /> permanently restricted<br />During a period of time<br />PERFORMANCE<br />copyright 2011, Robert P. Seestadt CPA<br />
  16. 16. Oversight Tip<br />Create the right <br />“Tone at the Top”<br />copyright 2011, Robert P. Seestadt CPA<br />
  17. 17. What is Toneat the Top?<br />Control Environment<br />copyright 2011, Robert P. Seestadt CPA<br />
  18. 18. Ways to create Toneat the Top?<br />Take board role seriously <br />Be engaged during and between meetings<br />Require accountability <br />Understand internal control structure<br />Ask questions…be skeptical<br />Be supportive! <br />copyright 2011, Robert P. Seestadt CPA<br />
  19. 19. Oversight Tip<br />Ask open-ended questions<br />Listen <br />Show curiosity <br />copyright 2011, Robert P. Seestadt CPA<br />discussion<br />
  20. 20. From the Existential CFO <br />If a financial report falls in the woods...<br />..and no one is there to read it..<br />copyright 2011, Robert P. Seestadt CPA<br />
  21. 21. The art of asking questions<br /><ul><li> What surprised you?
  22. 22. What risks are in our budget projections?
  23. 23. Others???</li></ul>copyright 2011, Robert P. Seestadt CPA<br />Discussion: What are some good questions to ask? <br />Go to www.cfoshare.com for <br />“25 questions to ask at board meetings” <br />
  24. 24. Oversight Tip<br />Use a “conversational” <br />reporting system<br />copyright 2011, Robert P. Seestadt CPA<br />
  25. 25. Creating a “conversational”financial stmt<br />RESERVES<br />PERFORMANCE<br />copyright 2011, Robert P. Seestadt CPA<br />
  26. 26. Nonprofit ABC: CFO ReportFor the quarter ended December 31, 2010 <br />copyright 2011, Robert P. Seestadt CPA<br />
  27. 27. Oversight Tip<br />Plan and budget realistically,<br /> consider scenarios <br />copyright 2011, Robert P. Seestadt CPA<br />
  28. 28. The same budget…or different?<br />copyright 2011, Robert P. Seestadt CPA<br />Net surplus budget for two organizations, one with more “risk” than the other<br />Budgeted surplus for both nonprofits<br />Discussion: What issues are the same and different for these nonprofits?<br />Worst case, nonprofit A<br />
  29. 29. The same budget…or different?<br />copyright 2011, Robert P. Seestadt CPA<br />Net cumulative surplus budget for two organizations, one more volatile than the other <br />Same final net surplus for the year<br />Discussion: What issues are the same and different for these nonprofits?<br />
  30. 30. Net assets ok, but what about liquidity?<br />copyright 2011, Robert P. Seestadt CPA<br />
  31. 31. The value of financial stress-tests <br />What risks are in our budget?<br />Re-run the budget under “reasonably <br /> possible” worst-case<br />What is our safety net? Sufficient??<br />Consider:<br />Past history <br />Revenue assumptions<br />Contingencies<br />Economic conditions<br />Key funders <br />Our Budget<br />(as proposed)<br />Adverse Scenario<br />Inflows $105,000 $85,000<br />Outflows $100,000 $125,000<br />Net Inflows (out) $5,000 $(40,000)<br />Cash: Beginning $25,000 $25,000<br />Cash: After $30,000 $(15,000)<br />copyright 2011, Robert P. Seestadt CPA<br />Go to www.cfoshare.com for a simple stress-testing template <br />
  32. 32. Oversight Tip<br />Establish (or at least plan for) <br />“board designated <br />operating reserves”<br />copyright 2011, Robert P. Seestadt CPA<br />
  33. 33. Planning for Operating Reserves<br /> Briefly, the term “operating reserves” refers to the portion of “unrestricted net assets” that nonprofit boards maintain and/or formally designate or “reserve” for use in emergencies to sustain financial operations in the unanticipated event of significant unbudgeted increases in operating expenses and/or losses in operating revenues. “Unrestricted net assets” is a required line item in the balance sheets of financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) and IRS Forms 990 of nonprofit organizations. <br /> Excerpted with permission from Operating Reserve Policy Toolkit for Nonprofit Organizations, Sponsored by the National Center for Charitable Statistics, Center on Nonprofits and Philanthropy at the Urban Institute, and United Way Worldwide. <br /> http://www.nccs2.org/wiki/images/b/b4/Operating_Reserves_Policy_Toolkit_1st_Ed_2010-09-16.pdf<br />copyright 2011, Robert P. Seestadt CPA<br />discussion<br />
  34. 34. In closing…<br />copyright 2011, Robert P. Seestadt CPA<br />
  35. 35. Our financial model<br />Are we ”Built to Last”…or<br />Built to Bust? <br />Discussion point<br />True cost of Structural Budget Deficiencies<br />copyright 2011, Robert P. Seestadt CPA<br />
  36. 36. Our financial model<br /> ”Built to Last” <br />Built to Bust?*<br /><ul><li> Realistic assumptions
  37. 37. Consider scenarios
  38. 38. Plan for reserves
  39. 39. Long-term planning
  40. 40. Predictable (not necessarily guaranteed) revenue stream
  41. 41. UPPER RIGHT QUADRANT
  42. 42. Unrealistic assumptions
  43. 43. Blind to adverse scenarios
  44. 44. No cash reserves
  45. 45. Cycle of shortfalls
  46. 46. Short-term planning
  47. 47. Structural budget gap
  48. 48. LOWER LEFT QUADRANT </li></ul>copyright 2011, Robert P. Seestadt CPA<br />
  49. 49. Guide to poor oversight<br />Keep policies strategically vague<br />Minutes and meetings are best discussed, not documented<br />Avoid auditor communication at all costs<br />Have a weak, unsupported whistleblower policy<br />Audit committees are only for the big guys<br />Ignore the management letter<br />copyright 2011, Robert P. Seestadt CPA<br />
  50. 50. Five take-aways…<br />Engage in discussion (peer, staff) <br />Understand financial situation (and actions needed…”what quadrant are we in?”)<br />Create an effective control environment (Tone at the Top)<br />Consider risks and scenarios (stress-test)<br />Get help when needed (resources, websites, toolkits, discussion groups). Any questions? Feel free to send me an email at rseestadt@cfoshare.com<br />copyright 2011, Robert P. Seestadt CPA<br />Go to www.cfoshare.com for a copy of this presentation along with ideas, resources and regular discussions about nonprofit finance matters <br />

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