12 things your board should know about nonprofit financial statements financial literacy basics part...

12 Things Your Board Needs to Know About Nonprofit Financial Statements:Financial Literacy Basics-Part I

Stephanie Spindell, MBASpindell Consulting

Stephanie Spindell, Founder, ConsultantSpindell Consulting

MBA-Finance

Certificate Nonprofit Financial Management

25+ years experience nonprofit & corporate data-driven, comprehensive organizational assessments

Special focus on problem identification and developing appropriate analytical assessment tools

Passions/interests dance, arts/culture, education

Spindell Consulting Feasibility Studies Financial Analysis Financial Literacy Training Financial Planning Organizational Effectiveness Performance Analysis Program Planning Revenue Enhancement Strategic Planning Sustainability

Contacting Spindell Consulting

stephanie@stephsconsulting.comwww.stephsconsulting.comwww.linkedin.com/in/stephaniespindell or http://linkd.in/1IZIG6P https://twitter.com/spindstephhttps://www.facebook.com/stephanie.spindell917-306-2913

AgendaWho? What? How? of Financials Statement of Financial Position

Cash and Liquidity

Common Cash Misconceptions

Unrestricted Net Assets

Transparency

Statement Analysis Tips

Stephanie Spindell│Spindell Consulting│stephanie@stephsconsulting.com│http://www.stephsconsulting.com/│June 2015

SStephanie Spindell│Spindell Consulting│stephanie@stephsconsulting.com│http://www.stephsconsulting.com/│June 2015

#1 Why do Financial Statements Matter?

Organization Plans/Forecasts

Competition

Your peer group or sector

Accurate and Quantitative Way to MeasurePerformance Against:

Financial Statements Facilitate:

Management Discussion

Planning and…

Decision Making

AND……

Funders, stakeholders, vendors, etc. want to

Hear your financial story!

#2 Know THY Financial Statements

Is this Man Preparing Your Financial Statements?

WHO? (CPA, internal accounting, finance, ED)

WHAT? (Audited, IRS 990, Unaudited)

HOW? (Method/basis of accounting or preparation)

Audited Financials vs. IRS 990

Audited Financials IRS 990

Prepared by Independent CPA Need not be prepared by CPA

Follow GAAP principles Tax document; Can be recorded using Cash Basis or Accrual/GAAP basis

Itemize: Restricted, Unrestricted Revenue No detail

Separation of operating vs. capital revenue No separation

Record: Contributions In-Kind (Identical revenue and expense entries)

No recognition of Contributions IK

Identify: Government Grants (Contributed Revenue) & Gov’t Contracts (Earned Revenue)

Identify: Government Grants (Other Gov’t Revenue) & Gov’t Revenue (Program Service Revenue)

Audited Financials

An independent (external) auditor (CPA) examines your financial records to ensure that they are materially correct and not misleading*

*Effective 7/1/14-required for organizations with revenue > $500K

(Previously >$250K)

Unaudited Financials

Any financial compilation or review of your organization that is NOT audited by an independent CPA

#3 Unaudited Financials Deserve Extra Scrutiny

Why?.....

Preparation/Review Process of Financials

Degree of Certainty- “Materially Correct”

Independent CPA Audit (“Audited Financials”)

Highest

Independent Accountant Review

Not as High

Accountant Compiled Financials

#4 Audited Financial Statements Include:

Statement of Financial Position

Statement of Activities

Statement of Cash Flows Statement of Functional Expenses (required for specific NFPs)Stephanie Spindell│Spindell Consulting│stephanie@stephsconsulting.com│http://www.stephsconsulting.com/│June 2015

Statement of Financial Position

AKA Balance Sheet

Assets=Liabilities+ Net Assets

Assets:What you own or others owe you

Liabilities:What you owe to/ (hold on behalf of) others

Assets

Can be converted to cash (or another asset)

Liquid or Non-liquid

Unrestricted or Restricted

#5 King of Assets

CASH is WHAT YOU NEEDto pay WHAT YOU OWEimmediately and in short term

Liquid Assets

CASH or readily converted to CASH

Less than one year maturity investment

Unrestricted funds from a donor

Non-Liquid Asset Examples

Property, Equipment

Long term investments

Restricted funds from donors (donor-imposed)

Endowment Fund

#6 Don’t Make this Mistake..

GAAP Revenue = CASH

Wrong. Why?.......

GAAP Accrual method of Accounting for Revenue

Accrual (GAAP) vs. Cash Basis of Accounting

Accrual CashRevenues recorded upon sale

Revenues recorded when cash received

Expenses recorded when incurred

Expenses recorded when paid

#7 Or this Mistake: Cash Flow = Cash

Cash flow = Cash In ─ Cash Out

#8 Growth in Net Assets…

Allows for organizational expansion and financial flexibility

Net Asset Calculation

Assets minus Liabilities OR

Sum of annual surpluses or deficits over organization lifetime

Change In Net Assets = Organization Profit/Loss

Net Assets

What’s left over after honoring obligations

Sometimes called capital

True or False:

Growth in net assets should give our Board comfort

Answer: It depends

Unrestricted Net Assets are what matter most

And……

#9 Liquid Unrestricted Net Assets…

Will pay your bills

Ask yourself these questions…..

What portion of your net assets are unrestricted?

What portion of your net assets are liquid?

What you Owe (Liabilities)

Payables (bills, salaries, credit card)

Accrued expenses (interest, vacation pay)

Drawings from Bank line of credit

Long term-loans, mortgages, > 1 year maturityStephanie Spindell│Spindell Consulting│stephanie@stephsconsulting.com│http://www.stephsconsulting.com/│June 2015

Data Transparency

Sometimes Less is More

But…

Financials need to show detail when relevant and necessary

#10 Transparency is Necessary to…..

Accurately exhibit and monitor progress

Explain variances or significant changes in key data items

Make possible corrective adjustments

Plan for the future (e.g., ways to increase revenue, improve cash flow, etc. )

Examples

Break out restricted assets, revenue from total assets, revenue

Keep track of cash generating contributions vs. in kind or for capital projects

Track individual program financial performance

And MOREStephanie Spindell│Spindell Consulting│stephanie@stephsconsulting.com│http://www.stephsconsulting.com/│June 2015

Analyzing Financial Data

Are you comparing Apples to Apples?

Audited, Unaudited, Tax-IRS 990?

Current period vs. budgeted same period?

This year vs. last year?

Quarterly, monthly, ETC.?Stephanie Spindell│Spindell Consulting│stephanie@stephsconsulting.com│http://www.stephsconsulting.com/│June 2015

#11 Analysis 101

Look for major trends (example: why did net assets decline 10% from previous quarter?)

What’s worsened OR IMPROVED? WHY?

Note WHERE and HOW cash was impacted

#12 Your mission, should you choose to accept it…

Don’t underestimate the power of financial data!

Financial statements show and measure performance

They help you monitor, stay on track and plan for the future

Make sure you

Aim for transparency and certainty!

Be accountable for safeguarding organizational assets

Ask the right questions

Can you explain your financial story?

Spindell Consultingstephanie@stephsconsulting.comLinkedInTwitterFacebook917-306-2913

More?....

Coming Soon-

Part 1: Intro to Statement of Activities

12 things your board should know about nonprofit financial statements financial literacy basics part...

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