Financing And Accounting For Non Profits

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501c3

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Non-profit, tax-exempt, public charities with broad public support. Organized for charitable, cultural, or educational purposes.

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Hedgehog Concept

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Staying true to your core values.

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Capital Budget

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Budget for "Capital" (buildings or endowments)

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Long-Range Plan

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Fiscal planning beyond current year. 3-5 years. Programmatic Planning.

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Operating Budget

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Annual budget. Income and Expenses.

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Zero-Based Budgeting V. Historical Approach

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a) Zero-based, deconstruct, start from scratch, build from zero. b) Historic last years + Increase Percentage (Increments).

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"Rolling Up" the Annual Budget

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Lowest level in Natural Classes. From Program to Department (Functional Expenses) to the Organization.

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Expenses "Natural Class'

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Lowest level of expense, just the description/name of the expense category.

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Functional Expenses

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a) Program, b) Management & General, and c) Fundraising

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Gross v. Net

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a) Gross is total money earned; b) Net is after expenses are reduced (taxes, cost of sales, etc). Examples: "At Net" Fundraising sales from events, Concessions, Museum stores sales.

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Earned Revenue

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Anything you sell, an economic exchange for the goods/services you offer.

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Contributed Revenue

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Donated money from individuals, corporations, government. No economic exchange. Tax-deductible to donor.

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Donated Services and Materials

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Not a cash transaction, but either a service or material you would normally buy in the course of doing business (Pro-Bono for Services; In-Kind for tangible)

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Non-Cash Transactions (3 Examples)

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Accounts Payable, Capital Lease, Pledge Receivable

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Cash-Basis Accounting

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Accounting where only cash is transacted.

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Accrual Basis Accounting

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Accounting only with non-cash income and expense transactions. a) Accounts Payable = "accruing expenses when incurred"; b) Accounts Receivable = "accruing income when earned"

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Cash Flow

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Cash-in, Cash-out. Timing of Inflow and Outflow of cash transactions in a monthly basis.

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Executive Summary

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Brief 2-pages summary with core content. Lots of air. Aimed for a busy reader to get the essence of something.

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SWOT Analysis

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Strengths, Weaknesses, Opportunities, and Threats. Internal and External overview of organization's health.

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Net Asset Classes

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The 3 buckets: a) Unrestricted, b) Temporarily Restricted; and c) Permanently Restricted. Donor-imposed restrictions. Assets - Liabilities = Net Assets.

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Complete Books and Records

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Financial systems to monitor and keep track of any documentation that substantiates any transaction: Journals and General Ledger, Financial Statements, Records, etc.

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Chart of Accounts

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Listing of the accounting codes based on their natural class, programmatic activity. Order: Assets, Liabilities, Net Asset Classes, Income and Expense. "Backbone."

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Journals

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Chronological Listing of all Transactions (Cash and Non-Cash): a) Cash Disbursements, Cash Receipts, Payroll; b) Accounts Payable, Accounts Receivable, General Ledger

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General Ledger

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Consolidates information from the journals in account-code order.

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Working Trial Balance

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Picks up final balances in General Ledger to create Financial Statements

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Statement of Financial Position

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Balance Sheet. Assets, Liabilities, and Net Assets. A snapshot in time.

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Statement of Activity

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Income Statement. Income-Expense+Net Income for a period of time.

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Statement of Changes in Financial Position

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Comparison of two moments in time. a) Beginning of a Period and an End of a Period; b) Net Assets (Beginning of Period); c) Ad or Subtract Net Income or Loss; d) Equals Net Assets (Ending of Period)

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Statement of Changes in Cash Flows

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Comparison of two moments in time. a) Cash (Beginning); b) +/- Net Income; c) Adjust Non-Cash items; d) Cash (Ending)

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Faith's Five+1 Formatting Conventions

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a) $ sign First and Last line; b) Commas for Thousands; c) Single Underscore (when an operation is about to happen like a subtraction or addition); d) No pennies, round it up; e)Proper Headings: Name of Org, Statement Name, Period/Date

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Assets

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Those things you own to create income. a) Balance Sheet; b) Order of Liquidity (Greatest to Least); c) Use of Resources

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Liabilities

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Obligation of the organization, from past transactions. a) Balance Sheet; b) Short-Term, Long-Term; c) Creates Resources

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Revenues

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Income from sale of goods or services, including contributions. On Statement of Activities. Creation of Resources.

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Expenses

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Also on Statement of Activities. Use of Resources.

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Releases from Restriction

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Statement of Activities. Net Assets to Temporarily Restricted Assets to Unrestricted. Once a requirement of a donation is met, time, or program.

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Unrestricted Net Assets

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1st of The Three Buckets. No restriction. On Statement of Financial Position (Balance Sheet). Used for Operations.

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Temporarily Restricted Net Assets

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2nd of The Three Buckets. Temporarily restricted gifts for future period or a specific project. NOT part of Unrestricted Net Assets initially. They are only released from restriction when time or program restriction is met.

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Permanently Restricted Net Assets

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3rd of The Three Buckets. Permanently Restricted by donor for endowment purposes.

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Trend Analysis

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Look at changes in financial performance over a number of years

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"Mission Center" Departments

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a) Mission-Related Dpts: Education, Concerts/Performances, Exhibitions & Curatorial, Festivals, Parade, Workshops; b) Support Departments: Marketing, Executive, Finance, IT/Data Processing

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ASSETS Have DEBIT or CREDIT balances?

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ASSETS have DEBIT balances

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EXPENSES have DEBIT or CREDIT balances?

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EXPENSES have DEBIT balances

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LIABILITIES have DEBIT or CREDIT balances?

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LIABILITIESs have CREDIT balances

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INCOME has DEBIT or CREDIT balances?

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INCOME has DEBIT balances

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Why are ASSETS and EXPENSES alike?

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They use, consume or are resources

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Why are LIABILITIES and INCOME alike?

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They create resources

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Annual Audit

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Inspection of the Financial Statements by an external, independent service, Internal Control of Finances: a) Opinion Letter; b) Financial Statements; and c) Notes

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Audit Opinion Letter

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Letter issued and signed by an independent auditor, stating OPINION, demonstrating reliability of the org, on first page of Annual Audit.

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Internal Controls

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Controls to make sure checks and balances procedures are being done; making sure there is financial integrity of record-keeping.

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Segregation of Function

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Most important internal control. Making sure that double-checking of important transactions is happening. "Don't check your own work."

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Governance

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Board of Directors. They approve Annual Budget, establish policies, hire/fire top person, engage auditor. Given the custody of "public trust." Macromanage. SOX sets standard for governance.

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Stakeholders

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Has interest or is served by organization: Board, attendees, employees, donors, community, volunteers, etc.

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Inurement

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Personal benefit from a non-profit organization. Not OK.

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Organizational Culture and Structure

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a) Culture: Values and beliefs, the "style" and "norms" of how decisions are made. b) Structure: Reporting relationships of people and departments.

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Sarbanes-Oxley

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Federal Law, 2002. To encourage ethical and transparent organizational practices

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California Non-profit Integrity Act

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State Law, 2004. Increased accountability to non-profits in California.

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Why are the Finance and Audit Committees separate?

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Check and Balance. Finance Committee oversees Budget and Financial Statements. Audit Committee checks Evaluation. "You can't check yourself."

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Endowment

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Permanently Restricted Assets investing in providing income restricted by the donor. Invested to provide income in perpetuity to an organization.

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Investment Policy (Endowment)

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How the endowment is invested, spreading risk, stocks & bonds.

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Distribution Policy (Endowment)

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Designed to protect the long-term viability of the endowment by distributing the investment each year. (aka as "Spending Policy")

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Investments

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In: In stocks and Bonds and other varieties including Debt Securities and Equity Securities

-Asset (produces investment income)

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Investment Income

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-Dividents, Interests, Rents, Royalties and similar payments

-An asset (produces income; may produce investment expenses in certain cases).

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Affiliated Organizations

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-Example: College Alumni Association, Hospital Auxiliary, “Friends of the____” associations

-As investments in for-profit subsidiaries; they are financially interrelated.

-Consolidated Financial Statements and/or Consolidated Financial Reporting Entiry (joint Statement of Financial Position, Statement of Activities, and Cash Flows) decided by Management of Non-Profit, or with Auditors.

-It is an asset (A&L if consolidated)

-Produces income in most of the cases

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For-Profit Subsidiaries

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-Objective is maximization of profits

-Is it an asset or a liability?: Asset

-Does it produce income or expense?: Income

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Related-Party disclosures

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-Affiliates, Investments accounted for under the equity method, trust for the benefitof the employees

-Transactions recorded (not considered are compensation arrangements and expense reimbursements)

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Split-Interest Agreements

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-Revocable Split Interest Agreement
-Irrevocable Split Interest Agreement

Examples:
Charitable Lead Trusts
Charitable Lead Annuity Trust
Charitable Lead Unitrusts
Perpetual Trust Held by a Third Party
Charitable Reminder Trust
Charitable Reminder Annuity Trust
Charitable Reminder Unitrust
Charitable Gift Annuity
Pooled (Life) Income Fund

• Is it an asset or a liability?: Asset with a corresponding liability in some cases

• Does it produce income or expense?: Income (Contribution Revenue - either restricted or
temporarily restricted)
Expense (Reduction of the Contribution Receivable Account in some cases)

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Defined Contribution Pension Plans

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• Is it an asset or a liability?: Asset (Pension Plan that earns Investment Income)

• Does it produce income or expense?: Expense (Post Employment Contribution)
and Investment Income

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Defined Benefit Pension Plans

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• Is it an asset or a liability?: Asset (Prepaid Pension Costs)

• Does it produce income or expense?: Expense (Pension Expense)

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Deferred Compensation Plans (Commonly 403b Plans)

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• Is it an asset or a liability?: Asset (Prepaid Compensation Plan Costs)

• Does it produce income or expense?: Expense (Compensation Expense)

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Other Post-Retirement Benefits (Welfare benefits, life insurance to employees, etc)

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• Is it an asset or a liability?: Liability (FASB 106)

• Does it produce income or expense?: Expense

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Capital Lease / Operating Lease

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• Is it an asset or a liability?: Asset

• Does it produce income or expense?: Expense