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Presented by Daniel Lemm
Review the board’s role to provide financial
leadership
Identify six key financial questions to ask and
acquire tools to answer them
Apply financial information to your organization
Duty of Care “Act in good faith, in a manner the director reasonably believes to be in
the best interests of the corporation, and with the care a prudent
person in a like position would exercise in similar circumstances.”
Duty of Obedience “Follow the organization’s governing documents, carry out the
organization’s mission, assure that funds are used for lawful purposes,
and comply with state and federal laws that relate to the organization
and the way in which it conducts its business.”
Duty of Loyalty “Put the good of the organization first and avoid engaging in
transactions with the organization from which the director will benefit.”
www.ag.state.mn.us/Consumer/Publications/FiduciaryDuties.asp
Financial Management “Musts” Comply with all federal and state financial regulations:
• Independent audit if total revenues exceed $750,000
• Complete, approve and file Form 990
• Complete, approve and file MN Charitable Annual Report
• Make available three most recent Form 990s to general public
Financial Management “Shoulds” o Prepare and approve budget on annual basis
o Receive timely, consistent, and accurate financial reports
o Review and understand financials with key staff
o Implement separation of duties and create written
financial procedures
www.minnesotanonprofits.org/nonprofit-resources
Statement of Financial Position o Snapshot of financial position at a point in time
o Assets = Liabilities + Net Assets
Statement of Activities o Financial activity during a specified period
o Revenue - Expenses = Change in Net Assets
Budget vs. Actuals o Comparison of planned activities to actual
o YTD Actuals – YTD Budget = YTD Variances
Cash Flows Projection o Project peaks and valleys from cash transactions
o Beginning Cash + Cash Receipts – Cash Disbursements
= Ending Cash
What is our cash position?
Can we pay our debts?
What restrictions are there on our net assets?
What are the reasons for an operating surplus or
deficit?
How reasonable and effective are our internal
controls?
What is the key information in our Form 990?
What is our cash position?
Cash is the most important asset, it funds
operations and pays debts
Too much not always good
o FDIC limit of $250,000
o Return on checking/savings accounts little or zero
Board Skills Practice:
o Days Cash on Hand
o Cash Flows Projection
Number of days an organization has of cash to
cover operating expenses
Calculate Diversity Wilderness’ days cash on hand
Benchmark varies, generally 90 to 270 days
Days Cash on Hand =
Cash + Short-Term Investments
Operating Expenses
365 x (N/12)
Timing of future cash received and paid
Plan for cash shortfalls and surpluses
Review Diversity Wilderness handout:
o What can you tell about Diversity Wilderness’ cash flows
projection?
o What actions would you consider to ensure operations
remain uninterrupted?
Can we pay our debts?
Make sure enough resources are available to meet
current obligations
Timely payment of vendors makes for good working
relationships
Be familiar with types of current and long-term debt
Board Skills Practice:
o Current Ratio
Ability to pay short-term obligations
Calculate Diversity Wilderness’ current ratio
Benchmark ratio varies, generally greater than 1.0
Current Ratio = Current Assets
Current Liabilities
What restrictions are there
on our net assets?
Not all assets are available to be used however the
organization needs them to meet its mission
Limits may be placed on what is owned from the
existence or absence of donor-imposed restrictions
Three Net Asset classes:
o Unrestricted
o Temporarily Restricted
o Permanently Restricted
Board Skills Practice:
o What does the breakdown of Wilderness
Diversity’s net assets tell you?
No restrictions on use except to advance mission
May divide into Undesignated & Board Designated
Examples:
o General contributions
o General operating grants
o Gains/Losses on investments
o Earned income
o Membership dues
Restricted for specific use or passage of time
Amounts released from restrictions moved to
unrestricted net assets
Examples:
o Program grants
o Capital campaign contributions
Cannot be released by either time or use
Donor or courts may release restriction
Examples:
o Endowment fund contributions
o Real asset for specific use
What are the reasons for an
operating surplus or deficit?
Results from operating activities are an indication
of the financial direction of an organization
Focus on major categories, discuss large variances
Surplus not always good, deficit not always bad
Budget is a guide and not the law
Board Skills Practice:
o What story can you tell from the operating
surplus’ of Diversity Wilderness?
o How does current depreciation expense
affect future budgets?
How reasonable and effective
are our internal controls?
Gauge whether the risk of loss due to fraud,
misuse, and abuse has been minimized
Then, assess how written policies and procedures
have been implemented into daily operations
There exist inherent limitations on internal controls
Consider the opportunity for internal audits and
external reviews
Internal Controls is a process designed to provide
reasonable assurance regarding the achievement
of organization objectives in three categories:
1) Effectiveness and efficiency of operations
2) Reliability of financial reporting
3) Compliance with applicable laws and regulations
Fraud is the intent to deceive for personal or
organizational gain,
Critical for board and executive staff to set proper
tone at the top
Opportunity ability to commit fraud
Motivation Rationalization reason to commit fraud justification for fraud
Complete separation of duties means no one
employee performs multiple functions
Four Functional Areas: 1) Custody of Assets
2) Authorization of Transactions
3) Recording of Transactions
4) Reconciliation
Recommended for small and mid-sized
organizations to incorporate compensating controls
What is the key information
in our Form 990?
Part I – Summary o Activities and Governance
o Revenue, Expenses and Net Assets
Part III – Program Service Accomplishments
Part VI – Governance, Management and Disclosure o Conflict of Interest Policy
o Whistleblower Policy
o Document Retention and Destruction Policy
o Process for Executive Compensation
Part VII – Compensation of TDOKEs & HCEs
Part IX – Statement of Functional Expenses
Schedule A – Public Support Test o 33 1/3% Support Test
o 10% Facts and Circumstances Test
Schedule O – Supplemental Information
American Institute of Certified Public Accountants www.aicpa.org
Association of Certified Fraud Examiners www.acfe.com
BoardSource www.boardsource.org
Internal Revenue Service www.irs.gov/charities
MAP for Nonprofits www.mapfornonprofits.org
MN Council of Nonprofits www.minnesotanonprofits.org
Nonprofits Assistance Fund www.nonprofitsassistancefund.org
Nonprofit Finance Fund www.nonprofitfinancefund.org