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Use Your Financial Statements to Increase Nonprofit Sustainability
Diaper Banks in America Conference
October 30th, 2015
Top Ten Board/Finance Committee Reporting Mistakes
Speed Reading Financial Statements
Statement of Financial Position (Balance Sheet)
Statement of Activities (Income Statement, Statement of Revenues, Expenses, and Changes in Net Assets)
Speed Reading Form 990
Q&A
Top Ten Nonprofit Reporting Mistakes1) We have no clue what our Board
members know…or don’t know…
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FUN Tool: Quick Assessment
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FUN Tool: Know Your People
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Top Ten Nonprofit Reporting Mistakes1) We have no clue what our Board
members know…or don’t know…2) We provide inadequate or no training on
financial reports and related concepts …
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FUN Tool: Board Orientation Checklist
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FUN Tool: Board Orientation Checklist
8
FUN
www.washingtonnonprofits.org/fun
Unlock Financial Literacy for Nonprofit Board Members to Deliver Mission & Protect Assets
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6 Short Videos
6 Kits
BINGO card + Summary
Finance Unlocked for Nonprofits
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Top Ten Nonprofit Reporting Mistakes1) We have no clue what our Board members
know…or don’t know…2) We provide inadequate or no training on
financial reports and related concepts … 3) We set a tone that de-prioritizes the
importance of our organization’s finances… 4) Our finance presentation is always …
exactly … the … same …5) We constantly use accounting terminology,
jargon, and acronyms …
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Top Ten Nonprofit Reporting Mistakes6) Way too much information … 7) Not enough information …8) Our reports are a moving target …9) We use dashboards … the wrong way …10)We rely on these reports but don’t
understand the system that produces them …
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The Statement of Financial Position (or Balance Sheet) summarizes what is owned and owed at a point in time
Assets & liabilities differ little from those of for-profit entities
The biggest difference on the Statement of Financial Position is the Net Assets section
2011 2010Current Assets
Cash and cash equivalents $ 4,298,432 $ 5,160,945 Investments 3,927,845 4,117,419 Accounts receivable 48,321 57,499 Grants receivable 84,673 105,884 Promises to give 2,680,466 1,421,444 Prepaids and deposits 12,843 17,433
Total Current Assets 11,052,580 10,880,624 Land 478,393 428,393 Building and Equipment, net 2,449,721 1,891,757 Endowment Investments 2,914,619 3,489,587
$ 16,895,313 $ 16,690,361
LIABILITIES AND NET ASSETS
Current LiabilitiesAccounts payable $ 993,201 $ 598,313 Accrued liabilities 249,688 242,205 Line of credit 300,000 - Current portion of long-term debt 26,617 27,584
Total Current Liabilities 1,569,506 868,102
Long-term Debt, less current portion above 777,307 804,891 Total Liabilities 2,346,813 1,672,993
Net Assets
Unrestricted (111,032) 197,096
Temporarily restricted 11,546,402 11,732,142 Permanently restricted 3,113,130 3,088,130
Total Net Assets 14,548,500 15,017,368
$ 16,895,313 $ 16,690,361
The most significant difference in net assets between for-profits and not-for-profits is the concept of restrictions
Not-for-profit net assets are classified into one of the following restriction categories:
Unrestricted – no donor imposed stipulations, but may include board-designated funds
Temporarily restricted – those assets with a time and/or purpose restriction as stipulated by a donor
Permanently restricted – the corpus of these gifts are maintained in perpetuity with income to support general operations or a specific purpose
Non-financial executives should monitor four important numbers/ratios related to the Statement of Financial Position
LiquidityLiquidity
Is the Current Ratio (= current assets/current liabilities) greater than 1?
Are you meeting financial reserve targets?
DebtDebt
Is debt activity consistent with expectations?
Is there sufficient access to capital to cover emergencies?
TrendsTrends
Are there any unusual or unexpected trends in the balances?
Unrestricted Net AssetsUnrestricted Net Assets
Are there enough unrestricted, liquid net assets, to protect the organization in the event of an economic downturn or crisis?
Statements of Activities prepared for internal use often look very similar to for-profit Income Statements
Support & Revenue
Expenses:
Excess (Deficit): Net Income/ (Loss)
Budget Budget AnnualYTD Actual YTD Budget Variance $ Variance % 2011 Budget
SupportContributions $ 1,285,493 $ 1,188,701 $ 96,792 8% $ 1,584,935 Foundation grants - XXX Foundation 150,000 750,000 (600,000) -80% 1,000,000 Foundation grants - other 258,495 262,500 (4,005) -2% 350,000 Government grants 209,472 246,431 (36,959) -15% 328,574 Special events 213,954 206,250 7,704 4% 275,000
Subtotal 2,117,414 2,653,882 (536,468) -85% 3,538,509
RevenueAdmissions 297,594 283,196 14,399 5% 377,594 Membership fees 94,796 93,750 1,046 1% 125,000 Interest income 16,749 17,250 (501) -3% 23,000 Gain (loss) on investments (189,574) 26,250 (215,824) -822% 35,000 Other revenue 6,743 4,125 2,618 63% 5,500
Subtotal 226,308 424,571 (198,263) -755% 566,094
Total Support and Revenue 2,343,722 3,078,452 (734,730) -840% 4,104,603
ExpensesSalaries, benefits & taxes $ 2,007,642 $ 2,180,732 $ (173,090) -8% $ 2,907,642 Occupancy (rent, utilities) 219,874 249,107 (29,233) -12% 332,143 Program expenses 70,813 128,110 (57,297) -45% 170,813 Professional fees 284,773 112,500 172,273 153% 150,000 Supplies 57,493 62,048 (4,555) -7% 82,730 Printing 68,321 73,725 (5,404) -7% 98,300 Insurance 13,855 12,632 1,223 10% 16,843 Fundraising 42,947 40,744 2,203 5% 54,325 Interest 18,654 18,671 (17) 0% 24,895 Miscellaneous 6,843 7,125 (282) -4% 9,500 Depreciation 21,375 21,375 - 0% 28,500
Total Expenses 2,812,590 2,906,768 (94,178) 85% 3,875,691
Excess (Deficit) $ (468,868) $ 171,684 $ (640,552) -925% $ 228,912
Unaudited – Internal Use Only
However, Statements of Activities prepared for external use probably follow the following format
Temporarily Permanently 2011 2010
Unrestricted Restricted Restricted Total Total
Public Support and Other RevenuesPublic Support
Contributions $ 1,200,999 $ 59,494 $ 25,000 $ 1,285,493 $ 1,384,935
Foundation grants 408,495 408,495 977,322
Special events 190,070 23,884 213,954 273,433
Total Public Support 1,799,564 83,378 25,000 1,907,942 2,635,690
Revenue
Admissions 297,594 297,594 377,594
Membership fees 94,796 94,796 83,992
Government grants 209,472 209,472 328,574
Interest income 16,749 16,749 24,844
Gain (loss) on investments (189,574) (189,574) 32,822
Other revenue 6,743 6,743 5,534
Total Revenue 435,780 - - 435,780 853,360
Net Assets Released from Restrictions
Time restrictions 35,000 (35,000) - - -
Purpose restrictions 234,118 (234,118) - - -
Total Public Support and Other Revenues 2,504,462 (185,740) 25,000 2,343,722 3,489,050
Expenses
Program expenses $ 2,306,324 $ 2,306,324 $ 2,907,642
Management and general 281,259 281,259 309,385
Fundraising 225,007 225,007 216,007
Total Expenses 2,812,590 - - 2,812,590 3,433,034 Total Change in Net Assets $ (308,128) $ (185,740) $ 25,000 $ (468,868) $ 56,016
Support & Revenue: with donor restrictions identified
Expenses: grouped functionally
Change in Net Assets/ Net Income
Not-for-profits have two key sources of income:revenue and support
Revenue
Includes resources that resulted from an exchange transaction, such as:
Program or service fees
Government or other grants
Ticket sales or event income
Investment income
Support
Includes resources for which no services or goods were received, such as:
Grants
Contributions (unique to non-profits)
In-kind donations (unique to non-profits)
The Statement of Activities (or Income Statement) shows the results of the organization’s financial operations for a period of time
Not-for-profits have many of the same expense categories as other organizations do …
Common Expenses
Wages/salaries (generally the largest expense)
Operating expenses such as rent, postage, telephone, travel, etc.
Marketing/development expenses such as printing, advertising, event-related costs
However, not-for-profits are required to show expenses on the face of the financial statements or in the footnotes based on the functional classification: Program Services, Administration or Fundraising
When reviewing the Statements of Activities you should monitor these four critical areas
Budget vs. ActualBudget vs. Actual
How is the organization doing relative to the budget? If there are large variances, how is management addressing them?
Revenue & SupportRevenue & Support
Is the organization overly dependent on a single revenue or support source?
Does management have a contingency plan to address an unexpected drop in income?
TrendsTrends
When reviewing budgeted expenses, are there any that are rising more rapidly than the corresponding revenue or support source?
The Bottom LineThe Bottom Line
Is the bottom line consistent with expectations, both overall and by restricted net asset class?
Your review of the financials should include all attachments, including footnotes and, if audited, the auditor’s opinion
Auditor’s OpinionAuditor’s Opinion
Did you receive a clean audit opinion?
Were there any significant deficiencies or material weaknesses?
Donor’s PerspectiveDonor’s Perspective
When your financial statements, including the footnotes, are viewed from a donor’s perspective, do they present a compelling story?
FootnotesFootnotes
Does anything disclosed in the footnotes alter your perception of the organization’s financial health?
Other Users’ PerspectivesOther Users’ Perspectives
Are you meeting grant, loan and other legal covenants?
The IRS Form 990 should also be a part of your
financial review process
IRS AuditIRS Audit
Non-FinancialNon-Financial
Governance Governance
MonitoringMonitoring
Time consuming
Penalties
Revoke exempt status
Accomplishments (60 families served)
Volunteers (295 people & 900 hours)
Areas served (King & Pierce counties)
Exempt purpose (Mission)
Board independence
Policies and procedures
Process is like a financial audit (and more)
Suggests best practices (rebuttable rules)
Are you maintaining your exempt status?
Depending on your gross receipts and assets, there are several different Form 990s available
• If organization has gross receipts of $50,000 or less, it files Form 990-N Electronic Notice (e-postcard)
• Also, larger “small” organizations can file the simpler Form 990-EZ if gross receipts are between $50,000 and $200,000 and if assets are less than $500,000.
• Larger organizations file the full Form 990
Your return is due 4 ½ months after your year-end. Two extensions possible to 10 ½ months.
If you have revenues unrelated to your organization’s exempt purpose, you may also need to file a 990-T
• Organizations with $1,000 or more of gross unrelated business income must file a Form 990-T
• Organizations frequently overlook UBTI sources such as:– Advertising – Parking fees– Subleased space
• UBTI is reported on page 1 and page 5 of new 990• IRS is looking for continuing losses that are unreasonable in a
business setting, or due to the over-allocation of expenses• Applies to 990, 990-EZ and 990-N filers
You can improve your ability to speed-read a Form 990 by starting with four key pages
Snap Shot – Page 1Snap Shot – Page 1
Checklist of Required Schedules – Page 3Checklist of Required Schedules – Page 3
Accomplishments – Page 2 Accomplishments – Page 2
Governance, Mgmt & Disclosure – Page 6Governance, Mgmt & Disclosure – Page 6
Basic information, summary of activities, governance, revenue, expenses , assets, liabilities and nets assets.
Did you file a complete and accurate return? Most charities have contributors, fundraising, grants, non-cash gifts and other disclosures.
Mission, new programs, three largest programs, number of patients served, expenses , grants & revenue by program.
Board independence
Written policies
Governance documents made available
Next, review your compliance requirements …
Jeopardizing exemption (political activity/personal benefit)
Substantiation of contributions ($75/$250)
Public disclosure (1023, 990, 990-T)
Filing & extension due dates ($20/$10,000)($100/$50K)
Recordkeeping (what & how long?)
Compliance tests (public support %)
Page 5 of the 990 has filing and tax compliance information
Resource - IRS Stay Exempt
… and whether you pass the IRS tests for maintaining tax exempt status
Proper OrganizationProper Organization
CommercialityCommerciality
Broad Public Support Broad Public Support
Community BenefitCommunity Benefit
Do you operate more like a commercial business than a charity, with direct counterparts, retail pricing, advertising, business hours, no volunteers and no contributions?
Did you get more than 33% of your support from the public? (Look at Schedule A)
What is your program expense %?
Do you serve the public and not private interests?
Are your programs real and substantial?
Do your Articles state your exempt purpose and operation/termination requirements? Have you updated changes?
Recognizing red flags ahead of time can limit your exposure to a potential IRS audit
Incomplete ReturnIncomplete Return
Checklist of Required SchedulesChecklist of Required Schedules
AccomplishmentsAccomplishments
Governance, Mgmt & DisclosureGovernance, Mgmt & Disclosure
Completed checklist but did not complete required schedules for contributors, fundraising, grants, non-cash gifts and other disclosure.
Missing three largest programs, program expenses , grants & revenue by program.
Basic information missing, return not signed, no board roster and/or no fundraising expenses listed.
For example:• No independent board members• No written policies• ED salary is 51% of all expenses
Want more information about issues affecting not-for-profits? Sign up for On Board, an e-newsletter featuring finance-related articles geared exclusively towards board members!
Just email us at [email protected] and ask to be added to the list.
We understand the value a strong Board can bring to a not-for-profit organization …
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Erin Welch, CPA – Partner, Jacobson JarvisÖ Over 14 years of experience serving for not-for-profits Ö Works with clients through the audit process to improve
efficiencies and reduce risks Ö Focused on helping clients leverage financial data to
strengthen mission-building efforts, including use of dashboards
Ö Conducts financial health assessments for all types of organizations
Ö Facilitates financial training workshops for board members and other not-for-profit leaders
