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Finance Guide for Nonprofit Organizations
Informational SessionApril 13, 2005
Controller’s Office
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Questions/Wrap Up 20 minutes – 3:10 to 3:30
Audits and Miscellaneous 40 minutesJohn Haskell, Controller’s Office Performance Auditor
QuestionsBREAK (10 minutes – 2:20 to 2:30)
Financial Management Systems 40 minutesDeborah Gordon, Controller’s Office Financial Auditor
Handbook ReviewMonique Zmuda, Deputy Controller
Context 25 minutes – 1:15 to 1:40Introductions and Logistics 15 minutes
Agenda
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How much money do nonprofits receive in City payments annually?
How many nonprofit organizations contract with the City each year?
Trivia
Over 650 each year
Nearly $440 million (2003 dollars)
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Context
Monique ZmudaDeputy Controller
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This session is the first in a series of trainings for nonprofits doing business with the City. They will focus on finance-related issues.
1. Training program for nonprofits2. Streamlining monitoring procedures3. Audits
Controller’s Office project includes
Context, cont.
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Note: We are here to learn from each other. These sessions are meant to be interactive and informative.
Others? (You tell us, use feedback form, etc.)What Executive Directors should know (proposed)
Key elements of a financial procedures manual (proposed)
Cost allocation methodologies – indirect cost ratesUpcoming trainings
Finance Guide – overview of managing financial operations
Context, cont.
Training and Technical Assistance
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Provide base of knowledge on contractor expectations, evaluation criteria, and performance. The results of program reviews will be available to anyone who seeks this information
Reduce/merge contractor reporting requirements
Process underway to minimize redundancy in the City’s monitoring process
Monitoring Procedures
Context, cont.
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Results will require contractor response to findings and recommendations, department plan to implement recommendations, and possible hearing before the Board of Supervisors Government Audit and Oversight Committee
Combination of financial and performance audits
Risk Assessment will determine audit scheduleAudits
Context, cont.
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Accountability
Increasing demandsPerceptions of nonprofits and the CityWhat Executive Directors and finance staff should know
Environment and expectations
Context, cont.
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Additional demands by the public for more information on nonprofit organizations, services, and costs
Additional demands by the City to expand services, reduce costs, increase financial reporting
More categorical funding that changes agency practices and often requires separate management of services and funds
More complex State and Federal financial restrictions and requirements
Increased financial and programmatic reporting and accountability
Increasing demands on nonprofits
Context, cont.
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Neither of these perceptions are true. The City and the Controller’s Office are offering to assist nonprofits in meeting financial reporting requirements and maintaining financial accountability
Nonprofits operate autonomously from the City, and have poor accountability and little-to-no transparency to the public
Nonprofits are inexpensive, and can provide any service that the City requires
Two perceptions may exist
Context, cont.
Perceptions are not always correct
12Must report this information to the Board on a regular basisThe annual audit, financial statements and management letterThe agency’s reporting requirements
The cash flow cycle, and the legality of transferring funds fromone program to another
The cost of individual programs, who they serve, and how they are funded
Well versed in agency’s funding sources and their restrictions
Board of Directors, Executive Director, and Finance Director should function as a system of checks and balances – it is not one person’s responsibility to ensure accountability and financial viability
What an Executive Director must know to be accountable:
Context, cont.
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Supervise and manage financial planning; maintain internal controls; process financial transactions; execute monthly billing; monitor cash, accounts receivable, and accounts payable; participate in preparation of agency’s financial statements and annual audit
Maintain communication with agency program managers, City administrators and financial staff, as well as representatives from the nonprofit family
Inform Executive Director of all important phases of financial cycles (budget preparation, monthly monitoring of revenues and expenditures, annual audit), and report financial status to the Board of Directors
Role of the Finance Director and finance staff
Context, cont.
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Working together with the City
What can go rightWhat can go wrong
Why this is important
Context, cont.
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In some instances, success by nonprofits encourages a shift of funding and services from City programs to community-based nonprofits
Good reputation of agency – improves public perception of nonprofit sector as a whole
Stability of services – Ensures the well being of our community
Clean audit – Indicates that agency is financially stable
Success Stories
Context, cont.
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Funding is often reduced
Public, policy makers, and City officials lose faith in nonprofits
ResultKickbacks – jail time, agency closureContractor fails to deliver service to clients – funding lostFunds used for political purposes – debarment, loss of jobs
Funds used for personal use – public scandal, funding lostHorror Stories
Context, cont.
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Maintain dialogue with funding agencies regarding ability to meet funding requirements
Keep City departments informed about financial condition prior to audits or monitoring visits
Cooperate with departments in providing requested information and required reports on time
Testify before commission meetings and Board hearings regarding nonprofit services and funding
Attend and provide feedback to Controller on technical assistance and monitoring process
Participate in department workshops, trainings and other meetings
Working with the City
Context, cont.
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Goal of training series is to increase the awareness of financial requirements and to increase the proficiency of nonprofit financial staff
Per the Charter, Controller has responsibility to protect the financial and functional integrity of City government. The Controller is providing assistance to departments and their contractors in meeting this obligation
Training is for staff of nonprofits contracting with the City
Goals of training and technical assistance
Context, cont.
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Deborah GordonController’s Office Financial Auditor
Finance Guide: Financial Management Systems
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Finance Guide, Financial Management Systems
Record retentionSource documentsPolicies & procedures manualsChart of accounts General ledgerPayroll journalsReceipts journalsDisbursement journals
Accounting records
Revenue cyclePayrollExpenditure cycleReporting
Accounting cycles
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Finance Guide, Financial Management Systems
Internal Accounting Controls
Insurance
Leveraging memberships in professional organizations
Human resource practicesGeneral Internal Controls
ReportingSafeguardingComplianceOperations
Accounting Internal ControlsControl Activities
MonitoringRisk AssessmentInformation & CommunicationControl Environment
The COSO (Committee of Sponsoring Organizations) Components:
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Finance Guide, Financial Management Systems
Allowable costs means COSTS that do not include payroll advances or funding a severance reserve for administrative staff
Contract guidelines (program and finance staff each need to have a copy of every contract)Source of funding: sometimes not only local moneyOffice of Management and Budget (OMB) Compliance Supplements often list unallowable costsEven individual and foundation donations may have restrictions
Allowable costs
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Finance Guide, Financial Management Systems
Budget development and controls
Indirect costs: must be budgeted based upon anticipated actual benefits to cost center
By funding source
Matching funds
Shared costs: direct costs shared across more than one funding source
By program Budget Components
Board authorization (meets agency mission, within agency resources)
Staff input (workable, quality program)
Full participation
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Finance Guide, Financial Management SystemsCash flow management
Early payment discounts
Surplus strategies Buy goods & supplies on sale Investing (board should have
policy)
Lines of credit (often require that lines of credit be fully repaid for a number of consecutive days each year)Contract advances (funders that permit them have specified timing and process requirements)Fundraising (ongoing or intermittent?)
Shortfall strategies
Reduce expensesRenegotiate termsShort-term borrowingPostpone acquisitions
Cash flow projections: project out at least 6 months
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Finance Guide, Financial Management SystemsFinancial Reporting
Report reconciliations: should be able to reconcile any report to the accounting general ledger
California 199 RRF-1 IRS 990
Information returns to federal and state governments
Additional SchedulesStatement of Cash Flows Single Audit SchedulesStatement of Activities
Statement of Functional Expense
Statement of Financial Position
Reports required by funders Cost reports Final invoices
Annual Financial Statements
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Finance Guide, Financial Management Systems
Audit adjustments: posted to audit year and current year if new year has been openedStatus of prior year general ledger: if not closed, then have a copy of the general ledger that matches the audited financial statements saved to a disk and stored offsiteStorage of prior year accounting data: store records in a secure location, well-identified for easy retrieval
Closing the Books
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Finance Guide, Financial Management Systems
Be aware of natural accounting cycles for your organization in order to schedule most wisely: fund appeals, budget preparation, paying off lines of credit, hire of temporary help or consultants, approve staff vacations
Nourish your financial information garden: have a well-planned chart of accounts, a detailed budget, and good internal controls
Managing for a fruitful harvest of financial information:
Wrap Up
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Questions 5 minutes
Break 5 minutes
Finance Guide
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John HaskellController’s Office Performance Auditor
Finance Guide: Audits & Miscellaneous
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Finance Guide, Audits
Perform analyses outside scope of audit
Try to discover fraud or embezzlement unless a reason to suspect it is found
Initiate/ record transactions
Guarantee all transactions are accurate
Create original recordsWhat an auditor does not do
Issues an opinion (qualified or unqualified) or a report
Reviews recordsInterviews personnelRequests informationTests sample transactionsTests financial
statements
What an auditor does
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Finance Guide, AuditsAuditors are nice people and have been around for a long time …
For example:
H.L. Gunn - Auditor & Recorder Napa County, 1908
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Finance Guide, Audits
When required by the funderWhen Federal awards are $500k and above (A-133 audits)When requested by the Board of Supervisors or when the Controller determines an audit is neededSome City departments may build into their contracts an annual audit requirementController recommends all contractors have an annual financial audit by an independent firmController to begin regular audits of nonprofits
When is an audit necessary?
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Finance Guide, Audits
Structure your accounting systems and internal controls to be in compliance with requirements
Be familiar with requirements of OMB Circulars
•A-110 Administrative Requirements
•A-122 Cost Principles for Nonprofit Organizations
•A-133 Audit Requirements ($500k and above)
Know the requirements, laws and regulations governing the award
Federal Awards
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Finance Guide, Audits
Board minutes, leases/contracts, bank records, financial files, accounting system documentation, budget
Assign staff to coordinate with the auditor(s)
Evidence of internal controls
Schedules showing assets, liabilities, revenue & expenses
ConfirmationsGathering documentationConsiderations for selecting a CPA firm
How to prepare for an audit
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Finance Guide, Audits
CA Form 199 must be filed within 5½ months of end of FY
IRS form 990 or 990EZ must be filed within 4½months of end of FY
Tax Reporting RequirementsSources of information on filing requirements
California exemption granted by Franchise Tax Board
IRS 501(c)(3) tax exempt status applies to most nonprofits
Nonprofit Tax Status
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Finance Guide, Miscellaneous
Review/authorize plans, including the budget
Act as “ambassadors”Bring in outside contacts and information
Monitor & evaluate organization’s work
Select the Executive Director/CEO
Ensure compliance with legal & contract requirements
Board members provide governance over the organizationProtect the public interest
Provide special skillsRaise fundsBoards support and assist with staff-led workBoard responsibilities and development
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Required by SF Administrative CodeMust be filed by April 1Includes names of CEO or Director, all officers or directors and names of other boards on which they serveIncludes total expenditures, budget showing sources of funds & detailed expenditures by program
Annual Economic Statement
Finance Guide, Miscellaneous
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Finance Guide, Appendices
(1) Correlate to the budget and to IRS form 990 line item categories.
Liabilities – Obligations to creditors such as loans and accounts receivable.
Net Assets (fund balances) -reflect financial worth of organization.
See sample Chart of Accounts in Appendix A
Assets – tangible items such as cash, accounts receivable, equipment and property.
(3) Present account categories in a “standard order” as they are shown in the Statement of Position (balance sheet):
(2) Provide the information and reports you need to track income and expense items and make good financial decisions.
Chart of accounts should:
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Finance Guide, Appendices
See Appendix C for complete checklist
Internal accounting controls related to payroll ensure that employees and taxes are correctly paid
Payroll accounting checklist
See Appendix B for complete checklist
Controls over disbursements ensures that funds are safeguarded and unauthorized expenditures do not occur
Checklist for paying bills
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Finance Guide, Appendices
See Appendix D for descriptions and websitesCCSF Ethics CommissionCA Board of Equalization
CA Office of the Attorney GeneralCA Franchise Tax Board
CA Secretary of StateU.S. OMB
CA Employment Development Department
IRS
Be familiar with government forms and documents you may need from the following agencies:
Government Documents
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- show monthly expected revenues and expenditures and follow a format similar to the budget
- have options or corrective actions for addressing cash shortfalls or surpluses
See Appendix E for sample cash flow budget
A cash flow budget should:
- a financial management tool that allows you to account for changes in expected timing of cash receipts or disbursements, anticipate surpluses or shortfalls, and take corrective actions
- not the same as a “Statement of Cash Flows”, which is a required financial statement for nonprofit organizations
A cash flow budget is:
Finance Guide, Appendices
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Finance Guide, Related Resources
Eve Eichwald, 554-7526Project manager for nonprofit audits & technical assistance
For most contract-related questions you may want to contact your contracting department. For Human Services, contact Dave Curto, 557-5581. For Public Health, contact Anne Okubo, 554-2825.
Nori Hirasuna, 554-7647Financial audits
Naomi Little or Mike Ward, 554-6743Office of Contract AdministrationAllison McGee, 554-6125Mayor’s Office
Remy Nelly, 554-6609Accounting operations
Other contacts:
Monique Zmuda, 554-7500City budget
Mark Tipton, 554-7660Performance auditsPeg Stevenson, 554-7522Audits & technical assistance
Controller’s Office subject-area staff contacts:www.sfgov.org/controller - See “resources for nonprofits”
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Wrap-Up and Questions