Track 1 Finance: The Financial Basics of Grant Review

THE FINANCIAL BASICS OF GRANT REVIEW

Joe McCarthyand Tina Kasmarzik

September 26, 2005

AGENDA

• FINANCIAL BASICS

- FINANCIAL STATEMENTS

AND DETERMINING FINANCIAL

HEALTH• UNDERSTANDING BUDGETS• REVISING PROJECT BUDGETS• WAR STORIES

FINANCIAL STATEMENTS AND DETERMINING FINANCIAL

HEALTH

• CHART OF ACCOUNTS• INCOME STATEMENT/ STATEMENT OF ACTIVITIES• BALANCE SHEET/ STATEMENT OF FINANCIAL

POSITION• CASH FLOW STATEMENT• AUDIT REPORT• ANALYSIS

UNDERSTANDING BUDGETS

• WHAT IS A BUDGET?• WHAT DO YOU WANT TO

SEE IN A PROJECT BUDGET?

• BUDGET FORMAT• HOW DO YOU ANALYZE THE

BUDGET USING THE FINANCIAL STATEMENTS?

REVISING PROJECT BUDGETS

• WHEN WILL GRANTEES TRY AND REVISE THEIR BUDGETS?

• WHEN SHOULD YOU LET A GRANTEE REVISE THEIR BUDGET?

• HOW MUCH DOES IT COST TO REVISE A BUDGET?

WAR STORIES

• CONFERENCE ATTENDEE QUESTION AND ANSWER SESSION

• FREE CONSULTING

(for whatever that is worth)

CONFERENCE ATTENDEES

• WHO IS IN THE AUDIENCE?

• WHAT IS THE LEVEL OF FINANCIAL EXPERTISE?


HEALTH

• CHART OF ACCOUNTS• INCOME STATEMENT/ STATEMENT OF ACTIVITIES• BALANCE SHEET/ STATEMENT OF FINANCIAL

POSITION• CASH FLOW STATEMENT• AUDIT REPORT• ANALYSIS

ACCOUNTING EXPERIENCE

• WHO IN THE AUDIENCE HAS EVER PERFORMED AN ACCOUNTING ENTRY?

CASH EXPENSE

CASH EXPENSE (DEPOSIT) (WITHDRAWAL)

TAKE SOMETHING WITH YOU

• AS WE MOVE THROUGH THE PRESENTATION, IF YOU HAVE LITTLE OR NO KNOWLEDGE OF FINANCIAL MANAGEMENT, JUST RELATE THE INFORMATION TO YOUR PERSONAL FINANCES, AND YOU’LL LEARN SOMETHING.


HEALTH

• CHART OF ACCOUNTS

A LISTING OF THE ACCOUNT TITLES AND ACCOUNT NUMBERS BEING USED BY AN ORGANIZATION FOR RECORDING FINANCIAL TRANSACTIONS.

CHART OF ACCOUNTS

• 1xxx ASSETS• 2xxx LIABILITIES• 3xxx EQUITY• 4xxx REVENUE• 5xxx EXPENSE

TYPES OF ACCOUNTING CASH / ACCRUAL

• CASH BASIS ACCOUNTING ACCOUNTING FOR CASH WHEN

RECEIVED AND CASH DISBURSEMENTS WHEN MADE

• ACCRUAL ACCOUNTING ACCOUNTING THAT RECOGNIZES

REVENUE WHEN EARNED AND EXPENSES WHEN THEY ARE INCURRED

CASH / ACCRUAL ACCOUNTING

CASH BASIS – DR. OFFICE

ACCRUAL – 95% OF ALL BUSINESSES

EXAMPLE – ORDER $10,000 OF FURNITURE WITH 2 MONTH LEAD TIME


HEALTH

• INCOME STATEMENT/ STATEMENT OF ACTIVITIES

THE PURPOSE OF AN INCOME STATEMENT IS TO SHOW THE REVENUE AND EXPENSES OF A BUSINESS OVER A PERIOD OF TIME (MONTH OR YEAR)

STATEMENT OF ACTIVITIES

• THE DIFFERENCE BETWEEN REVENUE AND EXPENSE IS

- NET INCOME

(FOR PROFIT WORLD)

- CHANGE IN NET ASSETS

(NON-PROFIT)


REVENUE PROGRAM FEES SERVICE FEES GRANTS INTEREST EARNINGS

EXPENSE SALARY BENEFITS RENT SUPPLIES

EACH ACCOUNTING PERIOD THESE ACCOUNTS ARE CLOSED (ZEROED OUT) AND BALANCES REVERT TO THE EQUITY SECTION OF THE BALANCE SHEET (AS EITHER PROFIT OR LOSS)


• IN-KIND REVENUE AND EXPENSE

(GAAP ACKNOWLEDGES IN-KIND)

WAR STORY – ADP GROCERY STORE WITH $1 MILLION BUDGET AND BASIC SUPPORT APPLICANT WITH $200,000 BUDGET


HEALTH

• BALANCE SHEET/STATEMENT

OF FINANCIAL POSITION

PURPOSE OF A BALANCE SHEET IS TO SHOW THE FINANCIAL POSITION OF A BUSINESS ON A PARTICULAR DATE (SEPTEMBER 30, 2005)

BALANCE SHEET

• A BALANCE SHEET CONSISTS OF A LISTING OF THE ASSETS AND LIABILITIES OF A BUSINESS AND THE EQUITY (ALSO REFERRED TO AS NET ASSETS)

BALANCE SHEETASSETS ARE RESOURCES OWNED BY A

BUSINESS CASH AND INVESTMENTS EQUIPMENT

BUILDINGLIABILITIES ARE DEBTS

ACCOUNTS PAYABLEACCRUED SALARYLOAN BALANCE

EQUITY/NET ASSETS – RESIDUAL BALANCE IN ASSETS AFTER DEDUCTING LIABILITIES


HEALTH

• STATEMENT OF CASH FLOW

- CASH IS THE MOST USEFUL LIQUID ASSET

- THE EFFICIENT USE OF CASH IS ONE OF THE MOST IMPORTANT TASKS OF MANAGEMENT

STATEMENT OF CASH FLOW

• A CASH FLOW STATEMENT IS PREPARED TO PROVIDE INFORMATION ON CASH RECEIPTS AND CASH DISBURSEMENTS THAT OCCURRED DURING AN ACCOUNTING PERIOD (MONTH OR YEAR)


SOURCES OF CASH COLLECTIONS FROM CUSTOMERS

GRANT FUNDS RCV’D

LESS USES OF CASH

EQUIPMENT PURCHASE


EQUALS EITHER AN INCREASE OR DECREASE IN CASH

ADD CHANGE TO CASH AT THE BEGINNING OF THE PERIOD

TO EQUAL CASH AT THE END OF THE PERIOD

(ENDING CASH TIES TO THE CASH ACCOUNT ON THE BALANCE SHEET)


HEALTH

• AUDIT REPORT

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REVIEW ACCOUNTING PROCESSES, TRANSACTIONS, RECORDS AND FINANCIAL STATEMENTS

(IN MOST CASES ANNUALLY)

AUDIT REPORT

• AUDIT FIRM EXPRESSES AN OPINION (ALSO REFERRED TO AS AN AUDIT REPORT)

• AUDIT REPORTS FREQUENTLY INCLUDE A ‘MANAGEMENT LETTER’ THAT CONTAINS RECOMMENDATIONS

ANALYSIS OF FINANCIAL STATEMENTS

• RATIO ANALYSIS

A RATIO IS A SIMPLE MATHMATECIAL EXPRESSION OF THE RELATIONSHIP OF ONE ITEM TO ANOTHER ITEM

MOST RATIOS ARE APPLICABLE IN A FOR-PROFIT ENVIRONMENT BUT SOME ARE APPLICABLE IN THE NON-PROFIT WORLD ALSO

OPERATING EXPENSE RATIOTOTAL EXPENSE/REVENUE

PROGRAM EXPENSE OR OVERHEAD EXPENSE RATIO

EXPENSE /TOTAL EXPENSE

(BOTH RATIOS MEASURE ABILITY TO CONTROL EXPENSES)

RATIO ANALYSIS – STATEMENT OF ACTIVITIES

PROFITABILITY RATIO

NET INCOME/REVENUE

(MEASURES LEVEL OF PROFITABILITY)

RATIO ANALYSIS – STATEMENT OF ACTIVITIES

CURRENT RATIOCURRENT ASSETS/CURRENT LIABILITIES(MEASURES SHORT-TERM ABILITY TO PAY DEBTS

DEBT RATIOTOTAL LIABILITIES/TOTAL ASSETS(MEASURES BURDEN OF DEBT)

DAYS CASH ON HAND TOTAL EXPENSE/360 = DAILY ‘BURN’ RATE CASH/’BURN’ RATE = DAYS OF CASH (MEASURES ABILITY TO PAY BILLS)

RATIO ANALYSIS – STATEMENT OF FINANCIAL

POSITION

ANALYSIS OF FINANCIAL STATEMENTS

• COMPARATIVE FINANCIAL ANALYSIS

OCCURS WHEN YOU PLACE FINANCIAL STATEMENTS SIDE BY SIDE OVER A PERIOD OF TIME (USUALLY YEARS) TO ANALYZE CHANGES

BUDGETS


• WHAT IS A BUDGET?• WHAT DO YOU WANT TO SEE

IN A PROJECT BUDGET?• BUDGET FORMAT• HOW DO YOU ANALYZE THE

BUDGET USING THE FINANCIAL STATEMENTS?


• WHAT IS A BUDGET?

A BUDGET IS A FINANCIAL PLAN LISTING ALL REVENUES AND EXPENSES FOR A PERIOD OF TIME FOR AN ORGANIZATION OR FOR A SPECIFIC PROJECT

(YES, REVENUES )


• IF YOU DON’T RECOGNIZE NEW REVENUE THAT IS GENERATED AS A DIRECT RESULT OF A GRANT AWARD, YOU ARE OVERFUNDING A PROJECT

EXAMPLE: MENTAL HEALTH CONSULTING SERVICES WITH A CO-PAY

WAR STORY – McC COUNSELING


• WHAT DO YOU WANT TO SEE IN A PROJECT BUDGET?

• ANSWER

REALITY


• BUDGET FORMAT

(THE SIMPLER…THE BETTER)

MFH BUDGET FORMAT

MFH STARTED OFF REQUESTING TOO MUCH DETAIL

- LISTING FRINGE BENEFITS (FICA, MEDICAL,PENSION, ETC.)

- LISTING OVERHEAD EXPENSES (PHONE, RENT, ETC.)

- APPLICATIONS GOT TOO COMPLEX AND CONTAINED TOO MANY ERRORS

• HOW MANY APPLICANT BUDGETS FAILED THE FIRST TIME THROUGH THE INTERNAL REVIEW PROCESS?

MFH BUDGET FORMAT

95%

• MFH BUDGET FORMAT HAS BEEN GREATLY SIMPLIFIED TO REDUCE RE-WORK AND ANALYSIS- ESTABLISHED MAXIMUM

FRINGE RATE BY SALARY - ESTABLISHED OVERHEAD RATE (15% OF SALARY)

WAR STORY - UNIVERSITIES

MFH BUDGET FORMAT

ANALYZING BUDGETS

• HOW DO YOU ANALYZE THE BUDGET USING THE FINANCIAL STATEMENTS?

ANALYZING BUDGETS

• YOU’RE ALL FINANCIAL MANAGERS NOW, YOU SHOULD KNOW HOW TO DO THIS

(RATIO ANALYSIS, COMPARATIVE ANALYSIS)

ANALYZING BUDGETS

• ANALYZE BUDGETS USING COMMON SENSE

- ANNUAL SALARIES

- FRINGE RATES

- COST FOR EQUIPMENT

- TOTAL COST ON A PER

PERSON SERVED BASIS


• WHEN WILL GRANTEES TRY AND REVISE THEIR PROJECT BUDGETS?

• WHEN SHOULD YOU LET A GRANTEE REVISE THEIR PROJECT BUDGET?



• WHEN WILL GRANTEES TRY AND REVISE THEIR PROJECT BUDGETS?

ANSWER: JUST ABOUT ANY TIME THAT THEY THINK THEY CAN GET AWAY WITH IT


• WHEN SHOULD YOU LET A GRANTEE REVISE THEIR PROJECT BUDGET?

ANSWER: AS SELDOM AS POSSIBLE

• MFH HAS A 25% BUDGET REVISION RATE – TOO HIGH

• MFH HAS BEEN FORCED TO ESTABLISH A POLICY TO NOT ACCEPT BUDGET REVISIONS WITHIN 1ST YEAR OF A PROJECT

• AND ONLY ONCE A PROJECT YEAR THEREAFTER




ANSWER: TOO MUCH FOUNDATION STAFF TIME

- PROGRAM OFFICER TIME

- GRANTS MANAGER TIME

- BUDGET REVISION

- CONTRACT AMENDMENT


• BUDGET REVISIONS MUST BE TIGHTLY CONTROLLED

• MFH ENFORCES BUDGETS THROUGH GRANT AWARD AGREEMENT


• INTERIM FINANCIAL REPORTS MUST TIE OUT TO THE APPROVED BUDGET (OR NEXT CHECK HELD)

• FINAL REPORT MUST ALSO TIE OUT (5% WITHHOLD)

BUDGET ISSUES

• MFH HAS A LATE PAYMENT REPORT (WATCH LIST)

WAR STORIES–BOOTHEELTHE CLINICST. CHAS DENTAL

CONTROL BUDGET ISSUES

• SET A CAP ON GRANT AWARDS AS A % OF OPERATING EXPENSE

• CONDUCT GRANTEE ORIENTATIONS

• ANALYZE FINANCIAL REPORTS – INVITE GRANTEES TO VISIT CFO IF OUT OF TOLERANCE

WAR STORIES

• NOW IS THE TIME TO SHARE YOUR WAR STORIES

• QUESTIONS, CONCERNS OR ISSUES RELATING TO GRANT APPLICANT FINANCIAL STATEMENTS OR PROJECT BUDGETS

Documents

Track 1 Finance: The Financial Basics of Grant Review