Introduction to Financial Decision Making for Non-Profits

San Fernando ValleyCommunity Leadership Development Program

Saturday, October 8, 2011

Agenda Commence

10:00a | Wendy Saunders

Session Five (NFP Laws and Ethics) Review10:05a | Wendy Saunders

Financial Decision Making for Non-Profits; Emerging Leader’s Perspective 10:30a | Alan Lewis

Break 11:00a

Financial Decision Making for Non-Profits; Established Leader’s Perspective11:15a | Roberto Barragan

Closing Remarks 12:45p | Wendy Saunders

Adjourn 1:00p | Wendy Saunders

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 2

NFP Financial Decision Making; Emerging Leader’s PerspectiveAlan Lewis | 2011 SFV CLDP Vice-Chair

Provide an introduction to the key concepts, terms, and considerations related to financial decision making for non-profit board leaders.

Establish an understanding of the importance of responsible and sustainable accounting and financial practices for non-profits of all sizes.

Instill financial responsibility and stewardship in CLDP participants.

Provide an array of resources to assist in decision making.

Presentation Objectives

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 4

Basic Principles

Financial Issues for Board Members

Key Terms

Key Points for Consideration

Avoiding Trouble

Real Life: Mid Valley Family Y

NFP Financial Decision Making Goals

References

Overview

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 5

Who here has taken Accounting I and II? Responsibilities of Board and Committee Members

Recap from Law and Ethics: Duty of Loyalty, Care, and Obedience

FUNDRAISING: Fiduciary Responsibility

Financial integrity, solvency, safeguard, and procedures to protect the organization

Reading and Interpreting Financial Statements Audited vs. Unaudited Financials

Accounting Standards (e.g. GAAP, FASB, GASB)

Financial Stewardship / Governance Risk Management

Diversification

Good faith

Implementation of Sarbanes-Oxley Section 404 (Audit of Internal Controls)

Basic Principles

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 6

Financial Issues for Board Members

Fundraising Planning and Budgeting Monitoring Revenue and Expenditures Available Cash and Reserves Ensuring Appropriate Actions

o Purpose restricted grants or contributions

o Federal or State funding

o Program funding

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 7

Key Terms• Generally Accepted Accounting Principles (US-GAAP): A widely accepted set of rules, conventions, standards, and procedures for

reporting financial information, as established by the Financial Accounting Standards Board.

• Financial Accounting Standards Board (FASB): Independent board responsible for establishing and interpreting US-GAAP. Financial Accounting Standards 116 and 117 govern the nonprofit sector. FAS 116 deals with contributions made and received while FAS 117 deals with financial statement format.

• Revenue: Payments for services, donations from individuals, foundations and corporations, support and contract payments from government agencies, income from fundraising activities, and investments.

• Expenses: Represent the total cost of operating the organization, including payments made to employees and other parties, including operating expenses, debt, principal payments, capital expenditures, non-cash expenses, fixed assets, and funds set aside each year for future use.

• Assets: An item of current or future economic benefit to an organization. Examples include: cash, short-term investments, accounts receivable, grants receivable, inventories, prepaid expenses, buildings, furniture, equipment, vehicles, and long-term investments.

• Liabilities: Items owed by an organization or claims against its assets. Examples: accounts payable, accrued salaries and benefits, accrued payroll taxes, deferred revenue, lines of credit, construction loans, current portion of long-term debt, short-term notes payable, and long-term debt.

• Financial Statements: Written reports that quantitatively describe the financial health of an organization. A complete financial statement includes a balance sheet, an income statement, a statement of cash flows, and often a statement of functional expenses. Financial statements are usually compiled on a monthly, quarterly and annual basis.

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 8

Key Terms (cont.)

International Financial Reporting Standards (IFRS)

Government Accounting Standards Board (GASB)

Form 990

Grants

Membership

Audit

Income Statement

Statement of Cash Flows

Balance Sheet

Due Diligence

Conflict of Interest

Internal Controls

Budget

Capital Campaign

Case Statement

Collateral

Compound Annual Growth Rate

Contributions

Etl.

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 9

Key Points for Consideration For Profit and Not-for Profit Accounting is Not Very Different

Not for Profit Organizations must report Fundraising expense

Financial Reports are prepared by Management

A Healthy Non-profit organization makes money

A Non-profit might budget a deficit

There are three categories of endowment funds: Permanently restricted, Temporarily restricted, and Quasi-endowment funds as designated by the Board

Financially oriented committees within non-profits generally include: Finance, Audit, and/or Compensation.

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 10

Avoiding Trouble Attend board meetings

Follow the procedures as outlined in the Articles of Incorporation and Bylaws

Review meeting minutes and committee reports

Promptly Disclose any conflicts of interest

Ask that experts be retained when the board needs to take action when outside its experience

Review financial statements

Review IRS Form 990

Insist on annual budgets, internal accounting controls, and frequent financial reports

Review audit reports and management letters

Foster an atmosphere that encourages staff to come forward with problems

Insist on compliance with all applicable law

Be leery of a one man show

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 11

Real Life: Mid Valley Family Y Former Mid Valley Board and current Tri-Y Finance Committee member ( >5 Years )

Mid Valley Branch operating deficits went from $400k to $200k per year ( > trending towards $0 )

Accrued liability with LA Metro over $2m Agreed to debt plan, wherein debt is “frozen”, until an asset sale, and no more direct financial support from

Metro

Completed (first of its kind) three way merger between West, Mid, and East Valley Y’s Cash flow positive collectively with current and projected increasing cash surpluses Trending towards ability to qualify for capital campaign

Aging facility with need for short and long-term renovations with possibility of an extensive capital campaign for redevelopment

Memberships are subsidized, which means with the addition of each new member there is a greater need to raise money for membership scholarship fund

Growing need within the community (urban branch)

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 12

Financial Decision Making Goals What is stewardship versus profitability?

What is the importance of financial record keeping?

What are financial statements?

What is the difference between a for-profit and not-for-profit financial statement?

What are state and federal reporting requirements (e.g. Form-990) for non-profits?

What are a non-profits financial disclosure requirements to its stakeholders?

How does financial decision making and legal compliance work together?

What is a budget and how is it best prepared and followed?

What can an NFP invest in versus a for-profit?

What are the types of donations an NFP can accept (e.g. endowment, restricted)

What financial indicators are important when determining a non-profits financial health?

What is the role of a Treasurer versus a CFO in a non-profit?

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 13

References Nonprofit Finance Fund | Glossary of Financial Terms

http://nonprofitfinancefund.org/financial-terms

Financial and Accounting Guide for Not-for-profit Organizationshttp://books.google.com/books?id=I1iQByG15r0C&dq=non-profit+financial+decision+making&printsec=frontcover&source=in&hl=en&ei=f4d1TPHNHJCisAP2joyhDQ&sa=X&oi=book_result&ct=result&resnum=12&ved=0CD0Q6AEwCw#v=onepage&q&f=false

Financial Responsibilities of Nonprofit Boardshttp://books.google.com/books?id=USS8Bsl_g-wC&printsec=frontcover&dq=governance+non-profit&hl=en&ei=qGuuTOTVF43QsAOg36D6Cw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CD4Q6AEwAzge#v=onepage&q&f=false

A Desktop Guide for Nonprofit Directors, Officers, and Advisorshttp://books.google.com/books?id=_vEMnYkV9yoC&pg=PA206&dq=governance+non-profit&hl=en&ei=xWuuTLbeKIrEsAOwodS0DA&sa=X&oi=book_result&ct=result&resnum=6&ved=0CE8Q6AEwBTgy#v=onepage&q=governance%20non-profit&f=false

Financial Basics for Nonprofit Managershttp://books.google.com/books?id=-6TOB0oa7jsC&pg=PA151&dq=non-profit+finance+terms&hl=en&ei=vHCuTLGfAo64sQOLzf3bDA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEUQ6AEwBA#v=onepage&q&f=false

Financial Management for Nonprofit Organizationshttp://books.google.com/books?id=ywEEoO_CRvcC&pg=PA331&dq=non-profit+finance+terms&hl=en&ei=vHCuTLGfAo64sQOLzf3bDA&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGEQ6AEwCQ#v=onepage&q=non-profit%20finance%20terms&f=false

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 14

NFP Financial Decision Making; Established Leader’s PerspectiveRoberto Barragan | President, Valley Economic Development Center

San Fernando ValleyCommunity Leadership Development Program

Saturday, October 8, 2011

What is Stewardship v. Profitability?

Stewardship: managing to breakeveni.e., Maintenance, meeting payroll, keeping the doors open.

Profitability: generating an annual surplus of revenues minus expensesi.e., surpluses, reserves, employee retention through merit increases and bonuses.

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 16

What is the importance of Financial Record Keeping?

Difference between existence and shutdown

Financial recordkeeping is not just about recordkeeping, but about:

o Getting paid by government entities and surviving their audits

o Keeping track of cash flow needs and staying ahead of it

o Being able to report accurately to Boards

o Staying in compliance with state and federal tax authorities

o Being able to raise money from foundations and corporations in an increasing watchful environment

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 17

What are Financial Statements?

• Statement of Financial Position

• Statement of Financial Activities

• Statement of Cash flows

• Comparative Profit and Loss Statement

• Summary of Cash Balances, Accounts Receivables, Accounts Payables

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 18

What is the difference between for-profit and non-profit financials statements?

Unrestricted, Temporarily Restricted and Permanently Restricted Assets

Unrestricted: Donations, Fees for Service, Interest Income, Dues

Temporarily Restricted: Grants for specific activities and programs that become unrestricted as activities/programs are implemented

Permanently Restricted: Buildings, endowments, non-operating revenue activities: DON’T TOUCH!

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 19

What are a non-profits financial disclosure requirements to its stakeholders?

• AUDITS: annual review performed by CPA of financial statements with sufficient testing such that the CPA can certify their accuracy and integrity

• Distribution to all funders and posting on the website• Not discretionary, best practice period • No asking for money if you have no audit• Cost of doing business

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 20

How does Financial Decision Making and Compliance work together?

Make financial decisions so as to comply with the law and stay out of jail

Tax returns are required

Payroll taxes are a must

HR can kill an organization faster than cash flow

o Wrongful termination

o Sexual Harassment

o Non payment of wages

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 21

What is a budget and how is it best prepared and followed?

Annual exercise in forecasting revenues and expenses.

Should be based on committed and/or expected revenues, not on optimistic fundraising goals; PROJECTED can be a bad word

Should be balanced without reserves, reserves are for cash flow problems and surprises

We’re not the feds, we can’t print money; we’re not the state, we can’t issue IOUs; and we’re not the city, so we can’t raise taxes

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 22

What is a budget and how is it best prepared and followed? (cont.)

On a monthly basis, statements should be prepared with variances to budget

Variances should be analyzed to determine if they are timing issues or real differences in revenues and expenses

On a quarterly basis, take action to deal with those variances, don’t wait until the end of the year with some fundraising appeal

Make the hard decisions early, or someone else will make them for you

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 23

What can an NFP invest in v. a For-Profit?

• Anything!!!(However, if its not related to mission, you may have to pay taxes: other businesses, real estate (not for the non-profit)

• Good: Securities, like business activities, your own building

• Bad: Businesses with reputational risk, whole portfolios in individual stocks

• Remember liquidity and risk

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 24

What are the types of Donations an NFP can accept?

Anything!! Again mission is the issue As well as reputational risk Real estate, bequests, endowments, vehicles, cash,

jewelry As long as it doesn’t cost you money to maintain, i.e.

animals, farms, land with no commercial value

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 25

What Financial Indicators are Important when determining a Non-profits Health?

Operating Results, Year to Year Monthly Net Income Unrestricted Profit and Loss, Revenue by Source

o Reimbursementso Business Revenueo Donations

Liquidity Dashboardo Cash days on Hand: cost/cash needed per dayo Unrestricted Cash balanceso Accounts Payable and Receivable (AR / AP)

Sources and Uses of Funds w/ corresponding cash flows, LOCs, reserves

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 26

What is the role of a Treasurer v. a CFO in a NFP?

• TREASURER: Board member with responsibility to report financial results to Board of Directors

• CHIEF FINANCIAL OFFICER: Employee responsible for accurate and responsible financial reporting and cash flow management

CLDP | Session 5 | NFP Financial Decision MakingSaturday, October 8, 2011

Slide 27

NFP Financial Decision Making; Questions and AnswersRoberto Barragan | President, Valley Economic Development Center

San Fernando ValleyCommunity Leadership Development Program

Saturday, October 8, 2011