Business Ventures for Nonprofits FINAL 10.29.13.ppt...Business Ventures for Nonprofits 4 © Wipfli LLP 20 Questions Before Starting a Business Before getting into starting a business,

Madison Nonprofit Day

October 29, 2013 | Madison, WI | Monona Terrace & Convention Center

NONPROFIT AND GOVERNMENT PRACTICE

www.wipfli.com/ngp | 888.876.4992

Reproduction or use of any training materials in this manual, except within a participant’s agency without express written permission is prohibited by copyright law. © Wipfli LLP

Business Ventures

for Nonprofits

Tuesday, October 29, 2013 9:30 am – 10:45 am

Presented by:

Karl Eck, CPA, Senior Partner

Business Ventures for Nonprofits 1

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Business Ventures for Nonprofits

Trainer: Karl Eck, CPA, Senior Manager

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Overarching Principle

In order to have continued success in executing your organization’s mission, you have to manage your organization like a business.

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Keys to Success

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Involved and Knowledgeable Board

Effective Executive Director/CEO

• Excellence in operating your programs/services

• Strong finance department

• Ability to adapt to change

• Financial reserves

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Areas we will cover to get there• 20 questions before starting a business

• Unrestricted net assets

• How to generate unrestricted net assets

• Cost reimbursement vs. fee for service grants

• Unrelated Business Income Tax (UBIT)

• Assessing financial health

• Warning signs

• Management letters and findings

• Audit committees

• Getting an effective audit4


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Ability to Adapt to Change

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Adapting to Change

To adapt to reduced and uncertain donor contributions and grant funding, many organizations are looking into creating for-profit activities

• This can present many opportunities for organizations

• This also can present risk to an organization

• In this section, we will discuss items to consider to help you do it right

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20 Questions Before Starting a Business

Before getting into starting a business, there are some questions you should be asking yourself as an organization, the following are from SBA.gov

1. Are you prepared to spend the time, money and resources to get the business started?

2. What kind of business do you want?

3. What products/services will the business provide?

4. Why am I starting a business?

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5. What is my target market?

6. Who is my competition?

7. What is unique about my business idea and the products/services I will provide?

8. When will my products/services be available?

9. How much money do I need to get my business setup?

10.How long can I have to finance the company before I start making a profit?

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11. Will I need to get a loan?

12. How will I price my product compared to the competition?

13. How will I market my business?

14. How will I setup the legal structure of my business?

15. How will I manage my business?

16. Where will I house my business?

17. How many employees will I need to startup?

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18. What types of suppliers do I need to contact?

19. What kind of insurance do I need to invest in?

20. What do I need to do to ensure I am paying my taxes correctly?

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Unrelated Business Income Tax

Unrelated business income – income from a trade or business regularly carried on by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function

Trade or business – Any activity carried on for the production of income from selling goods or services (profit motive)

Regularly carried on• Activities show a frequency and continuity

• Activities are pursued in a manner similar to comparable commercial activities of nonexempt businesses

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Not substantially related• A business activity is not substantially related to

an organization’s exempt purpose if it does not contribute importantly to accomplishing that purpose

• How the income is earned and not the destination of the income is what matters

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Fragmentation Rule – An activity does not lose its identity or character because it is carried on within a larger group of similar activities which may or not be related to the organization’s exempt purpose.

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• Reported to the IRS by filing IRS Form 990-T

• Required for unrelated gross income of $1,000 or more

• If a 990-T is filed, a number of states require a state tax return to be filed as well

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• IRS Form 990-T is due 5 ½ months after year-end for exempt organizations (4 ½ months for IRA, MSA, SEP, etc.) and extensions are available

• Must make estimated payments if tax is expected to be greater than $500

• Tax rate is based on the corporate tax schedule, 15% on the 1st $50,000 of taxable income

• Subject to public inspection

• Late filing penalties for 990-T’s are significantly less than for the 990

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Common UBIT activities:• Rental of debt financed property

• Consulting services

• Parking lot rentals

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UBIT Considerations:• May be competing with other for-profit

businesses in the community which could generate animosity

• If large enough, could jeopardize nonprofit status

• Current and potential donors could be turned off by the activity

• Draws additional attention to audits/monitoring as there is a risk these activities could be improperly funded with grant funds

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UBIT Considerations: (cont.)

• An organization should not shy away from an activity just because it is subject to UBIT

• Too much unrelated activity could jeopardize your nonprofit status

• Also allows for Net Operating Loss (NOL) carryforward and carryback

• Be careful when performing UBIT activities in agency owned facilities, could jeopardize property tax exemption

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Limiting UBIT• Is your exempt purpose broad enough

• Is it possible to have volunteers carry out substantially all of the activity

• Is debt necessary

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Partnerships and LLC’s• No tax advantage

• Would allow for additional investors (outside capital)

• Could be necessary if the unrelated activity jeopardizes the tax exempt status

• Returns are not open to public inspection

• With an LLC, you also can file as a disregarded entity and include on your 990 when 100% owned by your organization

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Grant Funded Regulations

For organizations that receive federal and/or state funding, keep in mind the following regulations:

• OMB Circular A-110 - Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations

• OMB Circular A-122 - Cost Principles for Non-Profit Organizations

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Informed and Knowledgeable Board & Effective Executive Director/CEO

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Assessing Financial Health

How do I do it?• Not everyone is a “numbers” person. That is

okay. The key is to get educated by asking the right questions of individuals that are “numbers” people and requesting the right information.

• Who should I be asking?– CFO, Director of Finance, accounting personnel

– Independent auditors

– Bankers

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What questions do I ask?• Since no two organizations are exactly the

same, the questions vary. However, the overall concept from a financial standpoint is the same for all organizations.

• Identify significant financial areas, understand the key components related to those areas, and develop reports to effectively manage those areas.

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What tools should I use?• Internally – These will vary by Agency

– Budget vs. actual reports – Agency wide– Budget vs. actual reports – by Program– Daily cash flow analysis

• Externally – These can be applied to every Agency– Reading financial statements– Ratio analysis– Agency scorecard

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Reading Nonprofit Financial Statements

Financial statements are prepared in accordance with Generally Accepted Accounting Standards (GAAP) in the United States.

GAAP is not perfect and sometimes financial statements, in reality, are worse than they appear. Conversely, financial statements may not always be as bad as they appear.

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Reading Nonprofit Financial Statements (cont.)It is important to understand the audit process and what the audited financial statements represent.

• The auditors express an opinion on the fairness of the financial statements in conformity with GAAP.

• The financial statements are the responsibility of management. The audit firm’s responsibility is to express an opinion on the financial statements.

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Reading Nonprofit Financial Statements (cont.)• Management and Board members should

always inquire of the auditors what type of independent auditor’s report is being issued.

• An unqualified opinion is good. It means that the financial statements are accurate and in accordance with GAAP.

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Reading Nonprofit Financial Statement (cont.)GAAP imperfections:

• Equipment purchased with grant funds often is an unrestricted net asset. However, it does nothing to contribute to the financial health of the organization.

• Buildings purchased many years ago are depreciated and may have little book value. However, the market value could be significantly higher.

• Financial statements contain estimates and its possible the actual value is materially different.

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2008 2009 2010CASH 1,450,916 1,360,150 899,073INVESTMENTS 500,512 496,323 818,931ACCOUNTS RECEIVABLE-GRANTS AND OTHER 551,578 882,524 878,834CURRENT PORTION OF REVOLVING LOANS 2,000 1,990 2,113PREPAID EXPENSE 92,819 125,334 147,677CURRENT ASSETS 2,597,825 2,866,321 2,746,628

PROPERTY & EQUIPMENT 1,371,593 2,021,218 2,748,108

OTHER LONG TERM ASSETS 45,516 140,767 165,650TOTAL ASSETS 4,014,934 5,028,306 5,660,386

CURRENT PORTION OF L/T DEBT 41,156 28,956 0ACCOUNTS PAYABLE 215,949 216,910 383,130ACCRUED PERSONNEL EXPENSE 538,808 677,864 719,541GRANT FUNDS RECEIVED IN ADVANCE 157,576 638,324 658,395CURRENT LIABILITIES 953,489 1,562,054 1,761,066

LONG-TERM DEBT 738,021 296,259 0

TOTAL LIABILITIES 1,691,510 1,858,313 1,761,066

PROPERTY & EQUIP - GRANT FUNDED 145,678 836,156 1,419,598UNRESTRICTED NET ASSETS 1,982,104 2,135,828 2,284,583UNRESTRICTED NET ASSETS 2,127,782 2,971,984 3,704,181

TEMPORARILY RESTRICTED NET ASSETS 195,642 198,009 195,139

TOTAL NET ASSETS 2,323,424 3,169,993 3,899,320

FISCAL YEAR ENDING STATEMENT OF FINANCIAL POSITION


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2008 2009 2010GOVERNMENT GRANTS AND CONTRACTS 11,435,182 13,822,494 15,381,245PROGRAM FEES 1,069,536 943,148 794,000CONTRIBUTIONS 89,754 117,694 150,667OTHER REVENUE 249,939 136,501 123,397IN-KIND REVENUE 308,818 287,290 411,790TOTAL SUPPORT / REVENUE 13,153,229 15,307,127 16,861,099

EMPLOYMENT AND TRAINING 948,230 1,436,599 847,959ENERGY AND HOUSING SERVICES 3,462,039 4,357,812 5,140,971COMMUNITY SERVICES 0 1,186,661 1,929,820HEALTH SERVICES 2,800,734 1,844,568 2,237,423CHILD AND FAMILY SERVICES 4,539,218 5,219,965 5,403,294MANAGEMENT AND GENERAL 1,163,907 1,105,431 1,146,539GRANT FUNDED EQUIPMENT ACTIVITY 51,040 (690,478) (574,234)TOTAL EXPENDITURES 12,965,168 14,460,558 16,131,772

TOTAL INCREASE/DECREASE IN NET ASSETS 188,061 846,569 729,327

STATEMENT OF ACTIVITIESFISCAL YEAR ENDING

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RATIOS COMMENTS2008 2009 2010

CURRENT RATIO 272.45% 183.50% 155.96% This ratio computes CAP's ability to pay off current obligations with currentcurrent assets assets. The benchmark for this ratio is 100%. CAP has consistently been

current liabilities above the 100% benchmark which means the day to day operations are current assets as a % of current liabilities being managed well.

PAY-OFF RATIO 9.3 10.3 4.6 This ratio computes the number of times CAP's existing cash balance can (cash + a/r) can pay off CAP's existing accounts payable balance. The benchmark for

accts payable this ratio is 3. CAP has consistently been above this benchmark which number of times cash + a/r can pay-off a/p overall is good but also may be an indicator that payables are being paid too

quickly. Positive trend from 2009 to 2010 with the ratio being closer to 3.

AVERAGE DAYS CASH ON HAND 29.8 25.0 14.9 This ratio computes the number of days CAP has cash on hand to pay their cash & equivalents average daily expenses. In other words for 2010 assuming no cash collections,avg exp's per day CAP would run out of cash after approx. 15 days. The benchmark for this ratio is

avg number of days expenses in a cash 15-20 days. CAP has consistently averaged over 15-25 days which is positive.

FISCAL YEAR ENDING


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AVERAGE DAYS IN ACCOUNTS RECEIVABLE 11.2 15.3 13.9 This ratio computes the number of days cash is tied up in accounts receivable.accounts receivable In other words for 2010, we have 13.9 days of revenue tied up in accounts receivableavg revenue per day The benchmark for this varies for most CAP agencies. Some states are better at

avg number of days revenue in account receivable funding grant reimbursement requests in a timely manner. CAP varying between10-16 days is better than average. Most of the time we see agencies in the 20-30day average.

AVERAGE DAYS IN ACCOUNTS PAYABLE 4.4 4.0 6.3 This ratio computes the average number of days it takes CAP to pay itsaccts payable vendors. The average benchmarks for this is 20-30 days. CAP's ratio is extremely

avg exp's per day low which indicates strong cash flow. However, CAP may be missing out onavg number of days exp's in accts payable opportunities by paying vendors too fast. Trend is better for current year but still low.

DEBT TO NET ASSETS RATIO 72.80% 58.62% 45.16% This ratio determines how leveraged the organization is. Anything over 100% total liabilities would be considered leveraged. Anything over 200% would start to be considered

total net assets highly leveraged. CAP has this ratio trending downward which is a positive sign.liabilities as a % of net assets Current year trend downward is due to paying off of long-term debt.

FISCAL YEAR ENDING

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UNRESTRICTED NET ASSETS RESERVE 1.8 1.8 1.7 This ratio measures the long-term sustainability of the organization. CAP hasunrestricted net assets accumulated unrestricted reserves that is approaching 2 months worth of average

avg total expenses per month monthly expenses. This is a very respectable ratio. Most CAP agencies struggleavg number of months exp's in unrest net assets to obtain even a 1 month reserve. However looking at the 3 year trend, it is very

difficult to build up this reserve when your primary funding comes from cost re-imbursement grants. CAP should continue to look for ways to diversify funding.

REVENUE TO EXPENSE 101.45% 105.85% 104.52% This ratio measures if the organization was profitable or not. The benchmark fortotal revenue this ratio is 100%. CAP has had revenues exceed expenses for the last threetotal expense years. In these economic times, this is a very positive trend.

total revenue as a % of total exp's

FISCAL YEAR ENDING


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AVERAGE REVENUE PER DAY $49,402 $57,769 $63,267 This ratio computes on average the amount of revenue generated on any given daytotal revenue - in kind within the organization. In-kind is disregarded as this revenue does not involve cash

260 working days transactions. Average revenues vary among CAP agencies.

AVERAGE EXPENSES PER DAY $48,678 $54,513 $60,461 This ratio computes on average the amount of expenses generated on any given daytotal expenses - in kind within the organization. In-kind is disregarded as this revenue does not involve cash

260 working days transactions. Average expenses vary among CAP agencies.

ADMINISTRATIVE EXP'S TO TOTAL EXP'S 8.98% 7.64% 7.11% This ratio computes the percentage of expenses that are paid for management andadministrative + general exp's general activities versus program activities. The benchmark for this ratio is 10%

total expenses or less. CAP has consistently been below 10% and is trending downward. Allministrative + general exp's as a % of total expenses good signs.

FISCAL YEAR ENDING

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Evaluating Your Agency

Great Shape OK Problems Serious Trouble Beyond Help Cash Balance 60 days One payroll Zero or holding checks Overdrawn Seized

Bank Account Reconciled

5 days after receipt 30 days after receipt 3-6 months not done One year not done Disappeared or subpoenaed

Payroll Taxes Paid on pay day Paid by due date Sometimes late Always late/unable to pay

IRS investigation

Fund Balance 5-10% annual funding Positive balance Deficit balance 5% or more deficit Unknown but big deficit

Program Spending Fully spending grants Unspent funds Some grants overspent Most grants overspent Unable to determine

Cost Allocation Written plan Written/needs updating Unwritten/lacks support Based on budget Disallowed by funders

Audit Report No findings/no QC's Completed in 6 months

Findings but no QC's Completed by due date

Major disallowances Late audit

Audit rejected No audit for 2 years

Board Reports-Financial Monthly-summary Monthly-detailed One or more months behind

None False reports

Staff Anticipate problems Can solve problems Make mistakes Don't care Create Problems

Regulations Knows & follows Knows & tries to follow Doesn't know Doesn't care Intentionally ignores or violates

Vendors Paid & discounts taken Paid when due Paid 30-60 days late Collection letters Sued by vendors

Financial Procedures Written & current Written/needs updating Unwritten/changes constantly

Staff ignore None

Personnel Policies Written & current Written/needs updating Unwritten/changes constantly

Staff ignore None

Funding Source Relationship

Working together Formal Monitoring findings Major findings/ disallowances

Terminating grants

Funding Source Reports Agree to books Submitted early

Reconcile to books Submitted on time

Difficult to reconcile to books/Late reports

Not done Falsified numbers/perjury

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Split Balance Sheet

Grant Funded/Restricted Unrestricted Total

Assets

Current assets:Cash 126,470$ 90,130$ 216,600$

Grants receivable 728,720 0 728,720

Accounts receivable, net 131,040 44,806 175,846

Inventories 257,300 79,720 337,020

House for sale 0 75,400 75,400

Prepaid expenses 23,903 0 23,903

Total current assets 1,267,433 290,056 1,557,489

Land, building, and equipment, net 143,715 1,823,511 1,967,226

Land held for development 0 372,000 372,000

Total assets 1,411,148 2,485,567 3,896,715

Liabilities and Net Assets

Current liabilities:Line of credit 0$ 344,979$ 344,979$

Current maturities of long-term debt 0 109,131 109,131

Accounts payable 442,295 144,876 587,171

Accrued payroll and related expenses 282,292 30,764 313,056

Grant funds received in advance 361,237 0 361,237

Total current liabilities 1,085,824 629,750 1,715,574

Long-term debt 0 1,189,623 1,189,623

Total liabilities 1,085,824 1,819,373 2,905,197

Net assets:Unrestricted 0 666,194 666,194

Temporarily restricted 325,324 0 325,324

Total net assets 325,324 666,194 991,518

Total liabilities and net assets 1,411,148 2,485,567 3,896,715

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NonLiquid Liquid Total

AssetsCurrent assets:

Cash 0$ 90,130$ 90,130$

Accounts receivable, net 0 44,806 44,806

Inventories 0 79,720 79,720

House for sale 0 75,400 75,400

Total current assets 0 290,056 290,056

Land, building, and equipment 3,003,322 0 3,003,322

Accumulated depreciation 1,204,862)( 0 1,204,862)(

Land, building, and equipment, net 1,823,511 0 1,823,511

Land held for development 372,000 0 372,000

Total assets 2,195,511$ 290,056$ 2,485,567$

Liabilities and Net Assets

Current liabilities:Line of credit 344,979$ 0$ 344,979$

Current maturities of long-term debt 109,131 0 109,131

Accounts payable 0 144,876 144,876

Accrued payroll and related expenses 0 30,764 30,764

Total current liabilities 454,110 175,640 629,750

Long-term debt 1,189,623 0 1,189,623

Total liabilities 1,643,733 175,640 1,819,373

Net assets:Unrestricted 551,778 114,416 666,194

Total net assets 551,778 114,416 666,194

Total liabilities and net assets 2,195,511$ 290,056$ 2,485,567$

UNRESTRICTED FUNDS


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Warning Signs

Warning signs of poor financial health:• Cash balance is consistently overdrawn

• Checks are being held

• Vendors not paid timely

• Use of a line-of-credit for operations

• Borrowing against buildings to obtain cash for operations

• Not paying the entire credit card balance every billing cycle

• Advance billing of grants before the expenses are incurred

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Warning Signs

Warning signs of poor financial health: (cont.)• Unrestricted net assets is in a deficit situation

• Significant overspending of grants

• Payroll not paid timely

• Accounts are not reconciled on a regular basis

• Board and management do not receive financial information on a timely basis

• Disallowed costs are identified

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Warning Signs

Warning signs of poor financial management and internal controls:

• Financial policies and procedures are not updated

• Deficiencies in internal controls are identified by the auditors or funding monitors

• Consistent major findings during funding source monitoring visits

• Accounting staff does not receive an annual review

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Warning Signs

Warning signs of poor financial management and internal controls (cont.):

• There is an absence of a culture that fraud and lack of adherence to internal controls will not be tolerated

• Audit fieldwork occurs significantly after year-end

• Reports issued to the board are significantly different than the final audit

• Information is not provided timely to auditors during the audit process

• Board of Directors meets less than four times a year

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Management Letters and Findings

Management response and corrective action• Management can choose to respond to items

identified in a management letter

• Are required to provide management letters to funding sources – keep in mind if you are thinking of writing for grants

• Response is required for audit findings

• Nobody likes findings, however, they are not uncommon, and a lack of findings can also be an indication that auditors are not following standards

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Writing corrective action• An auditee must respond to findings with a

corrective action plan

• An auditee can disagree with the findings if they choose and must explain why

• Auditors are required to review the corrective action to determine if it will resolve the findings

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Internal control related findings• Unlike compliance findings, internal control

findings involve an element of judgment

• If a control deficiency is identified:– Discuss with your auditor to make sure you

understand their point of view.– If you have mitigating controls, indicate those as

well. You may be able to reduce the severity of the control deficiency.

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Getting an Effective Audit

• Like most other professions, no auditor has in-depth experience in every industry; auditors also are specialized

• Some audit firms audit grant funded nonprofits at discounted rates to stay busy

• Given the state of the economy, some CPA firms also are discounting grant funded nonprofit work

• Sometimes you get what you pay for

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Audit Quality:In 2007, the Audit Committee of the President’s Council on Integrity and Efficiency (PCIE) performed a National Single Audit Sampling Project (the Project) in which 208 of over 38,000 single audits were sampled to determine audit quality. Results were as follows:

• 115 were acceptable and thus could be relied upon

• 30 had significant deficiencies and thus were of limited reliability

• 63 were unacceptable and could not be relied upon

• Of the 63, 9 had material reporting errors that resulted in the audits being considered unacceptable

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Audit Quality: (cont.)

• Audits were broken down between Stratum I (expenses of $50 million or more) and Stratum II ($500,000 - $50 million). There was a notable difference between Stratum I and Stratum II as follows:

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Category Acceptable Limited Reliability

Unacceptable Total

Stratum I – Large 61 12 23 96

Stratum II 54 18 40 112

Total 115 30 63 208


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First, do research to see if your auditors are experienced in your types of organizations and your programs

http://harvester.census.gov/sac/dissem/advsearch2.html

• Allows you to search by audit firm to see how many single audits are done

• Can also search to see what CFDA #’s the CPA firm audits

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Signs that your audit may not be effective• Standards and regulations are always changing

(may not be effective if you are not alerted to major changes)

• Receiving numerous letters from funding sources indicating the audits are deficient

• Provide minimal recommendations

• Auditors don’t have good answers for your questions

• Monitors are finding issues that should have been identified during audit

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Signs that your audit may not be effective (cont.)• Spending excessively large quantities of time

on site

• Lack of findings and management letter comments

• Inappropriate findings – not based on regulations or sound business practices

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How to make sure you get an effective audit• Being prepared is the absolute #1 key

• Minimize other meetings and activities in order to devote attention to the audit

• Ask questions – this is your time to learn face to face

• Involve board members in the exit conference

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Audit Committees

What is the role of an audit committee?• Can play whatever role the organization would

like it to play

• In most grant funded nonprofits we see the following roles:– Select the auditor– Review and approve the audit report – sometimes– Meet privately with the auditors – sometimes

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Audit Committees

Evaluation of your audit committee• Membership size

– Should have a minimum of 3 but not so large that:• It does not operate efficiently and effectively

• The ability to raise issues is hampered

• It is difficult to get a quorum when a time-sensitive issue arises

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Audit Committees

Evaluation of your audit committee (cont.)• Do all members continue to be independent, as

defined by policies applicable to the organization

• Are differences of opinion on issues resolved to the satisfaction of the committee

• Do committee members participate in some form of continuing education

• Does the committee engage outside experts as appropriate

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Audit Committees

Evaluation of your audit committee (cont.)Are the members financially literate?Does the committee:

– Have a full understanding of the composition of the statement of financial position, including the degree of management judgment inherent in accounts

– Commit sufficient time to review, discuss, and consider the financial statements

– Discuss significant, complex or unusual transactions with management and external auditors

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Audit Committees

Financial expertise:• Experience preparing, auditing, analyzing, or

evaluating financial statements that present a breadth and level of complexity of accounting issues that can reasonably be expected to be raised by the organization’s financial statements

• An understanding of internal controls and procedures for financial reporting

• A general understanding of nonprofit financial issues and specific knowledge of the not-for-profit sector (for example, health care or education) in which the organization participates

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Audit Committees

Financial expertise (cont.)• Have one or more individuals completed a program of

learning in accounting or auditing

• Do one or more individuals have experience as a chief or principal financial officer (for example, finance director or business manager), principal accounting officer, controller, public accountant, or auditor

• Do one or more individuals have other relevant financial experience (for example, service on boards of banking or investment institutions or experience as a banker, investment adviser)

• Do one or more individuals have experience serving on audit committees of other not-for-profit organizations

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Audit Committees

Financial expertise alternatives• Establish a relationship with a peer or otherwise

comparable organization to have the chief financial officer for one organization provide financial expertise to the other. Such arrangements can be reciprocal or involve multiple organizations

• Establish an outsource relationship in which a financial professional is engaged and compensated to provide financial expertise as a consultant to the audit committee

• Pursue a training program for audit committee members to develop the financial expertise. Such training can include participation in professional development programs offered by the AICPA, associations serving the not-for-profit industry

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Audit Committees

Other roles audit committees could play• Be alerted to fraud or suspected fraud - perhaps

based on dollar amount or individuals involved

• Meet with auditors to discuss areas of risk in order for auditors to determine the audit approach

• Monitor to ensure recommendations from independent auditors are implemented

• Work with internal auditors (if applicable) to address organizational risks

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Audit Committees

Questions to ask management• Are you satisfied that an appropriate audit was

performed by the independent auditors?

• Are you aware of any kind of fraud in the organization; and do you know of any situations in which fraud could occur?

• Is there any activity at the executive level that you consider to be a violation of laws, regulations or GAAP?

• Do you feel comfortable raising issues without fear of retribution?

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Audit Committees

Questions to ask management (cont.)• Have there been any situations in which the

organization failed to demonstrate its commitment to the highest ethical standards?

• Is there any activity in the organization that you are uncomfortable with or consider unusual, or that warrants further investigation?

• Are you aware of any disagreements between management and the independent auditors?

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Audit Committees

Questions to ask auditors • Has management, legal counsel, or others

made you aware of anything that could be considered a violation of laws, regulations, GAAP or ethics?

• Are there any areas of the financial statements and the notes that you believe could be more explicit or transparent?

• Have you expressed any concerns or comments to management with respect to how our financial statement presentation could be improved?

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Audit Committees

Questions to ask auditors (cont.)• Are there any areas in which you and

management have disagreed?

• Describe the ideas you have discussed with management for improving internal controls?

• Is there anything going on in the organization that you are uncomfortable with or consider unusual or that warrants further investigation?

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Strong Finance Department

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Finance Department

An ineffective finance department can result in:• Audit findings and/or questioned costs• Making decisions based on inaccurate data• Failure to maximize cost recovery from your

programs and services

In addition to providing the information to keep the board and others informed, the finance department needs to be aware of Generally Accepted Accounting Principles and applicable regulations

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Financial Reserves

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Unrestricted Net Assets

Why are unrestricted net assets important• Provides a reserve for any

questioned/unallowable costs

• Allows programs to operate in cases where the funding source is slow paying

• Facilitates the undertaking of new initiatives

• Provides a positive light (to an extent) to current and prospective funding sources and donors

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Unrestricted Net Assets (reserves)• Funds which can be spent according to

management/board of directors directives

• Difficult to generate because most grants are cost reimbursement and program service revenue often is not sufficient

• Easy to lose

• Do not represent cash but are a good indicator of an organizations financial health

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What is a sufficient level of unrestricted net assets

• It depends…– What are the organizations future goals– How likely are losses– What are the organizations current activities

• As a general rule, for grant funded nonprofit organizations we recommend a minimum unrestricted net asset balance of 5-10% of an organizations annual budget with at least half consisting of liquid cash

• Is there a such thing as too much of a reserve70


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How to Generate Unrestricted Funds

Activities to generate unrestricted funds:• Fundraising events

• Investment earnings on unrestricted funds

• Fee for service contracts (with proper cost allocation if you are grant funded)

• Donations

• For-profit ventures such as:– Restaurant– Daycare– Home repairs

– Any business

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Activities to generate unrestricted funds: (cont.)• Tax credit housing partnerships

• Renting buildings, apartments or homes

• Providing consulting services to other organizations or businesses

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Cost allocation note (grant funded organizations):

• Unrestricted activities must share in the allocation of organizational expenses just like grant funded activities

• Review your cost allocation methodology to ensure costs are being allocated according to representative criteria– Perhaps the unrestricted activity takes little time and

activities but is being charged a significant portion of expenses

– May be under-allocating which could result in a questioned cost

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Cost Reimbursement vs. Fee for Service

Cost reimbursement grants• Must spend money in order to earn it

• No profit allowed

• Sometimes advances are given, however, typically reimbursement is made in the month subsequent to the actual expenditure

• Over-expenditure must be covered with unrestricted dollars or another program which allows for those expenses

• No reward for under-spending – have to return the grant funds

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Fee for Service Grants• Pay for a specified dollar amount for specific

activities or units of service

• Generally allow for a profit

• Some are unit based up to actual costs (no profit, sorry)

• If your contract is not clear, clarify in writing to ensure that you can make a profit (or loss)

• If the reimbursement rate is not sufficient, an unrestricted net asset loss is possible

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Fee for Service Grants (cont.)• Some allow for profits, but profits must be used

to enhance the program (restricted)

• Costs must be allocated to fee for service contracts in accordance with the organizations cost allocation plan

• Do not show $0 expenses on a fee for service contract; this is a red flag to auditors

• Showing large profits could result in your unit rate being lowered

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Excellence in Operating Your Programs

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Program Operations

• For grant funded organizations, your programs are the products and services you are “selling”

• Donors and grant funding sources have increased the level of accountability in programs as demonstrated by:– Donor scrutiny of 990’s

– Head Start re-competition

– CSBG performance standards

– Increased monitoring

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Program Operations

• There are many consequences to not running programs effectively:– Risk of loosing the program

– Risk of questioned costs

– Risk of not getting new funding

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Program Operations

• What to do:– Implement tools to effectively monitor programs

– Make your organization has an appropriate evaluation process to ensure individuals are doing their job and doing it well (in the face of increased competition for high performing individuals)

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How We Can Help Finance, Accounting and Tax

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Software Sage 100 Fund

Accounting

Sage Fundraising 50

Sage Fundraising Online

Sage Grant Management

Consulting Financial Checkup

Products Financial Policy and

Procedures Template (FinPro)

Training Board Governance Training

DVD Series

On-Site Training

Webinars

Audit and Tax Financial statement audits

Single audits (A-133)

Program-specific audits

Financial statement reviews and compilations

Employee benefit plan audits

Agreed-upon procedures

Tax

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For More Information on How We Can Help

Visit the Wipfli Booth for more details or email [email protected]

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Thank You!

Presenter Info:

Karl Eck, CPA, Senior [email protected]

608.274.1980

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www.wipfli.com

Documents

Business Ventures for Nonprofits FINAL 10.29.13.ppt...Business Ventures for Nonprofits 4 © Wipfli LLP 20 Questions Before Starting a Business Before getting into starting a business,