Nonprofit Finances - Its Mysteries Revealed

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Nonprofit Finances: Its Mysteries Revealed

A Primer for Board Members

Alfonso Perillo


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Nonprofit Finances: Its Mysteries Revealed

A primer for Board Members

Alfonso Perillo, CPA, CFE

Partner, Nonprofit Division

Edelstein & Company LLP

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Board Oversight is Critical

The nonprofit is responsible for its internal

controls

The outside accountant’s responsibility is

limited to ensuring that the financial

statements are fairly stated

There is no substitute for good governance

© Edelstein & Company LLP,

Boston, Massachusetts

Typical Financial Documents

Received by Board Member

Audited financial statements

Budgets

Budget–to-actual reports

Form 990



Numbers Are Important and They Tell a

Story

Numbers can be manipulated

Watch for discrepancies

Budget to actual – accrual and cash

Compare reports (audited financial statements

to internally prepared statements)

Are answers to questions asked plausible?

Have the auditors present to the board or a

subgroup of the board (audit or finance

committee)



The Balance Sheet (Statement

of Financial Position)Assets =

Liabilities +

Net Assets (Equity)

Asset = provides a future benefit

Liability = represents a future obligation

Net assets = cumulative earnings



The Financial Statements

Statement of financial position: Represents the organization’s assets and liabilities at a point in time. Usually at the end of the nonprofit’s year end, but can be quarterly or monthly

Statement of Activities: Represents financial activity for a period. Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this

can be presented on a quarterly or monthly basis.

Inflows are revenues, outflows are expenses

Changes in net assets (net income) represent the difference between revenues and expenses.

Statement of Cash Flows: Represents cash inflows and outflows for a period. Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this

can be presented on a quarterly or monthly basis.



Accrual v. Cash Basis of

AccountingCash

Revenue recorded when received

Expense recorded when paid

Not GAAP

Accrual

Revenue recorded when earned and is realized or realizable

Expense recorded when the obligation is incurred and in the same period in which related revenue is recognized (matching principle)

GAAP



Strange Timing Differences

Accrued revenue: before cash is received [Accounts receivable; pledges receivable; grants receivable]

Accrued expenses: before cash is paid

Deferred revenue: cash is received before earnings process is complete [Deferred tuition, advances]

Deferred expense: cash is paid before the obligation is incurred [Prepaid expenses,]



Funky Things You Need to Know

About Nonprofit Accounting

2010 2011 Revenue or Expense Recorded

in:

Accounts receivable; pledges receivable; grants payable

Service provided or commitment from donor

Cash received 2010

Accrued expenses; accounts payable

Service provided by vendor; obligation incurred

Cash paid 2010

Deferred revenue; deferred tuition

Cash received before the earnings process is complete; before the term starts

Service provided by the nonprofit

2011

Prepaid expenses (deferred expenses)

Payment made for future year expense

Service received by the vendor

2011



Funky Things You Need to Know

About Nonprofit Accounting

Contributions are recorded when a promise to

make a donation is made by a donor

In-kind gifts of specialized services are recorded

in the period the service is received

Gifts can be for restricted purposes

Natural versus functional classification



Statement of Financial Position:

ExampleGOOD WORKS, Inc.

Statement of Financial Position

December 31, 2010

Assets

Cash $ 120,775

Unconditional promises to give 25,000

Prepaid expenses 3,600

Furniture and equipment 3,225

Security deposit 1,500

Total assets 154,100

Liabilities and net assets

Liabilities

Accounts payable 7,500

Accrued expenses and other liabilities 5,800

13,300

Net assets:

Unrestricted 40,800

Temporarily restricted 95,000

Permanently restricted 5,000

Total net assets 140,800

Total liabilities and net assets $ 154,100



Statement of Activities: An ExampleGOOD WORKS, Inc.

Statement of Activities

For the Year Ended December 31, 2010

Temporarily Permanently

Unrestricted Restricted Restricted Total

Support and revenue:

Contributions $ 200,000 $ 150,000 $ 5,000 $ 355,000

Program service 50,000 - - 50,000

In-kind contributions 12,000 - 12,000

Membership dues 13,500 - - 13,500

Interest income 1,300 - - 1,300

Net assets released from restrictions 95,000 (95,000) - -

Total support and revenue 371,800 55,000 5,000 431,800

Expenses:

Program services:

Education services 240,000 - - 240,000

Support services 79,000 - - 79,000

Advocacy 66,000 - - 66,000

Total program services 385,000 - - 385,000

Management and general 39,000 - - 39,000

Fundraising 50,000 - - 50,000

Total expenses 474,000 - - 474,000

Change in net assets (102,200) 55,000 5,000 (42,200)

Net assets - beginning of year 143,000 40,000 - 183,000

Net assets - end of year $ 40,800 $ 95,000 $ 5,000 $ 140,800



Quick RatioCash + Unconditional promises (accounts receivable) /

Current liabilities

Cash 120,775

Unconditional promises to give 25,000

145,775

Accounts payable 7,500

Accrued expenses and other liabilities 5,800

13,300

145,775

Divided by

13,300

Equals

11 :1



Months of Cash Reserves

Cash / Average Monthly Expenses

Total expenses 474,000

Less: in-kind (12,000)

462,000

Divide by 12

Average monthly expenses 38,500

Cash 120,775

Cash divided by average monthly expenses 3:1



Efficiency Ratio

Program expenses / Total expenses

Program services 385,000

Divided by

Total expenses 474,000

81%



Being Properly Registered To

Fundraise

Certificate of Solicitation

Gaming Activities

Raffles

Gaming and Bingo

Poker Tournaments



Watch the Language You Use to

Solicit Funds

Don’t inadvertently create a restriction by

the language used

It is hard enough getting unrestricted

support

Language like “Funds raised will be used

to support Good Works Inc.’s programs”

can create a restriction



Internal Controls

Tone at the

Top

Internal Control Policies

and Procedures

Policies and Procedures

are Followed

Nonprofit Achieves

Its Mission

The process by which information and authority flows across an organization so that it can

accomplish its goals



Segregation of Duties

There is a wall between the receiving of asset function and the task of

recording the transaction in the accounting system

Those having responsibility for handling assets are not responsible for

recording the assets in the accounting system



Fraud is Concealed

Most common fraud schemes

Fictitious vendor: a billing scheme

Check tampering: process of altering checks

Skimming: taking money before it is recorded

The myth of the trusted employee

Source: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse



The Fraud Triangle

RATIONALIZATION

OPPORTUNITY

PRESSURE



Simple Fraud Prevention

Techniques

The appearance of oversight is a deterrent

Other simple techniques Someone independent of the accounting process (like

the treasurer) receives duplicate copies of the bank

statements

Limit access to the accounting software by providing

read only rights

Have two check signers for checks deposited over a

certain amount



Contact Information

Alfonso Perillo, CPA, CFE

[email protected]




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Nonprofit Finances - Its Mysteries Revealed