Posts made in February 2019

Beyond the Debits and Credits: A Management and Governance Checklist for Implementing FASB ASU 2016-14

Beyond the Debits and Credits: A Management and Governance Checklist for Implementing FASB ASU 2016-14

 The time has come to dive into the details of how to implement FASB Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. For that purpose, you can’t beat a good checklist. While there are several checklists available online to assist you with the financial-statement-presentation aspects of ASU 2016-14 implementation, this checklist addresses the governance side of implementation. What needs to be considered from a process perspective; what needs to be communicated and to whom?

The checklist is divided into the five key areas:

  • Classifying net assets
  • Reporting investment returns
  • Reporting expenses by function and nature
  • Preparing the statement of cash flows
  • Preparing disclosures about liquidity and availability of financial assets

Each section contains a high-level overview of the requirements, followed by questions that management should consider when implementing the standard as well as steps that may be taken to ensure that your board understands the implications.

Net Asset Classification

ASU 2016-14 replaces the three classes of net assets – permanently restricted, temporarily restricted and unrestricted –with two classes – net assets with donor-imposed restrictions and net assets without donor restrictions. To ensure that there is no loss of information, the standard requires not-for-profits to provide information about the nature and amounts of donor restrictions on net assets, as well as the amounts and purposes of net assets that have been designated by the governing board.

Amounts by which endowment funds are underwater will now be reported within net assets with donor restrictions rather than in unrestricted net assets. In addition, organizations will be required to disclose their policy for spending from underwater endowments and the aggregate original gift amounts of underwater funds, along with the fair value of those funds.

The policy option to imply a time restriction that expires over the useful life of donated long- lived assets will no longer be available. Instead, absent specific donor stipulations, restrictions on capital assets will be released when the asset is placed in service.

 

Considerations Yes/No Actions Required
1. Should current classifications be reviewed to ensure accuracy?    
a) Are processes in place to ensure that donor restrictions have been released appropriately?    
b) Are there unidentified balances in temporarily restricted net assets that should be examined?    
2. Does the organization have board designated net assets?    
a) Are the purposes for which the net assets are designated still appropriate?    
b) Has the board’s approval of designated amounts been adequately documented?    
3. Does the organization have endowment funds that are underwater?    
a) Are systems and processes in place that enable identification of underwater funds?    
b) Will the transfer to net assets with donor restrictions adversely affect ratios or covenants?    
c) Is the organization’s policy for spending from underwater endowments still appropriate and adequately documented?    
4. Does the organization have a policy to imply a time restriction that expires over the useful life of donated long-lived assets?    
a) What is the potential effect of releasing from restriction net assets to which that policy has been applied?    
5. Does the organization’s chart of accounts need revisions to support the net asset changes?    
Considerations for Board Communication
1. Explain the new net asset categories.    
a) Review terminology changes.    
b) Illustrate how the changes will affect statement presentation.    
2. Describe any impact of underwater endowments on net asset balances.    
3. Describe any impact on net asset balances if policy to imply a time restriction on donated long-lived assets is currently being used.    
4. Reaffirm prior board decisions.    
a) Review existing board designations.    

 

b) Ensure policy for spending from underwater endowments is still appropriate.    
5. Discuss additional costs associated with changes.    
a) Additional audit fees    
b) Necessary system and/or process changes    

Reporting Investment Returns

Under ASU 2016-14, investment returns will be presented net of external and direct internal expenses in the statement of activities. The current requirement to disclose the amount of netted investment expenses has been eliminated. In addition, NFPs will no longer be required to display the investment return components (income earned and net realized and unrealized gains or losses) in the rollforward of endowment net assets.

 

Considerations Yes/No Actions Required
1. Identify the costs, if any, that are being netted today.    
a) Do costs currently being netted meet the definition in the standard?    
b) Will any additional costs need to be netted?    
2. Consider how to communicate any significant changes in net investment revenue reported in the financial statements.    
a) Who needs to communicated with?    
b) What is the best means of communicating (i.e., in person, by email, other)?    
3. Will a change in net investment return have any adverse consequences that should be addressed prior to implementation?    
a) Debt covenants    
b) Regulatory requirements    
c) Other    
4. Does the organization produce other reports that should be revised to provide consistent information?    
Considerations for Board Communication
1. Explain the new requirement for netting investment expenses.    
2. Identify any changes to the current amounts, if any, being netted.    
3. Describe any impact on net investment return to be reported in the financial statements and any adverse consequences of the change.    

Reporting Expenses by Function and Nature

ASU 2016-14 requires an analysis of total expenses by both their function and nature in a single location either on the face of the statement of activities, as a schedule in the notes to financial statements, or in a separate financial statement. To the extent that expenses are reported by other than their natural classification (such as salaries included in cost of goods sold or facility rental costs of special events reported as direct benefits to donors), they must be reported by their natural classification in the functional expense analysis. For example, salaries, wages, and fringe benefits that are included as part of the cost of goods sold on the statement of activities should be included with other salaries, wages, and fringe benefits in the expense analysis. External and direct internal investment expenses that have been netted against investment return may not be included in the functional expense analysis. Enhanced disclosures about how costs are allocated among functions are also required.

 

Considerations Yes/No Actions Required
1. Determine the best format for presenting the expense analysis:    
a) On the face of the statement of activities?    
b) In the notes to the financial statements?    
c) As a separate statement (i.e., a statement of functional expenses)?    
2. Are the current functional expense classifications still appropriate?    
a) Are there too many?    
b) Are there too few?    
c) Is any renaming necessary to accurately depict what is included in a specific function?    
3. Ensure functional classifications are being accurately captured in the financial statements.    
a) What processes are in place to ensure that expenses are properly classified?    
b) Is a review of the classification necessary to ensure accuracy?    
4. Are expenses by natural classification being properly captured?    
a) What processes are in place to ensure expenses are properly recorded?    
b) Are employee reimbursements in accordance with the organization’s policy?    
5. Are the current natural expense classifications still appropriate?    
a) Are there too many?    
b) Are there too few?    

 

6. Are current allocation methodologies appropriate?    
7. If comparative years are presented, should the expense analysis be presented for the current year only or for all years presented? (Note: NFPs that previously were required to present a statement of functional expenses do not have the option to omit prior-period information.)    
Considerations for Board Communication
1. Discuss how this analysis may differ from the similar analysis required on the IRS Form 990.    
2. Identify any additional costs anticipated in preparing the disclosure (i.e., costs to review existing functional expenses).    

Statement of Cash Flows

ASU 2016-14 allows an organization to present cash flows from operating activities using either the direct or indirect method. If the direct method is chosen, the indirect reconciliation is not required, but may still be provided if desired.

Considerations Yes/No Actions Required
1. Determine which presentation method is best for the organization.    
2. If contemplating a change:    
a) Consider recasting current statement into the new format.    
b) Identify any system changes needed to support the new format.    
c) Determine if any process changes will be necessary.    
d) Decide whether to include the indirect reconciliation in the financial statements.    
Considerations for Board Communication
1. Discuss the pros and cons of each format and get input on the board’s preference.    
2. Consider preparing statements in each format and highlight differences.    
3. Identify any additional costs associated with making a change.    

Disclosures about Liquidity and Availability of Financial Assets

The new standard requires not-for-profits to disclose both qualitative and quantitative information about liquidity and availability of resources as follows:

  • Qualitative information that communicates how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet
  • Quantitative information that communicates the availability of the organization’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet The availability of a financial asset may be affected by its nature; external limits imposed by donors, laws, and contracts with others; and internal limits imposed by governing boards.

These disclosures can take many forms depending on the relative liquidity of an organization’s resources, donor-imposed restrictions on those resources, internal board designation of resources, and so on.

Considerations Yes/No Actions Required
1. What is the message the organization wants to convey?    
a) Does the organization have ample resources to fund activities over the next 12 months?    
b) Are there significant restrictions or internal designations limiting the use of resources?    
c) What additional sources of liquidity are available?    
2. Identify the best way to present the message:    
a) Text only?    
b) Tables and text?    
3. Identify current procedures around board designations.    
a) Are procedures formally documented?    
b) Does the board delegate authority for designation of net assets?    
i.   Is the delegation documented?    
ii. Are the levels of delegation still appropriate?    
4. Review current policies.    
a) Will any new policies be required?    
i.   Net asset designation policy?    
ii. Operating reserve policy?    
b) Do existing policies need updating or formalizing?    
5. Are system changes needed to easily capture information for disclosure?    
6. Does the organization’s chart of accounts need revisions to support the disclosure?    

 

7. Do current processes need to be modified?    
8. Are any new processes necessary?    
9. If comparative years are presented, should the liquidity disclosures be presented for the current year only or for all years presented?    
Considerations for Board Communication
1. Explain the disclosure requirements.    
2. Discuss the best presentation for achieving desired transparency.    
3. Recommend any policy changes or additions.    
4. Discuss any additional costs anticipated for preparing the disclosures.    

Source: “Beyond the Debits and Credits: A Management and Governance Checklist for Implementing FASB ASU 2016-14,” American Institute of Certified Public Accountants, Not-for-Profit Section.

Nonprofit Cash Flow Management: Day-to-Day Liquidity

In recent years, the concept of the “business model” has gained a great deal of currency within the nonprofit sector, with nonprofit leaders as well as grantmakers and other stakeholders focused on understanding and improving the business and financial underpinnings of how organizations deliver on their missions. Discussions of the nonprofit business model often include considerations of things like cost to deliver services, mix of sources of funding, and key drivers of financial results.  Discussions of financial stability and sustainability often focus on the overall health of the balance sheet and (accrual-based) operating results. While these are all essential elements to understanding an organization’s finances and business model, such conversations sometimes miss one critical component of any business—namely, day-to-day liquidity. This article will discuss ways in which cash flow impacts—and is impacted by—the way a nonprofit organization does its business.

Cash flow is simply the mix—and timing—of cash receipts into and cash payments out of an organization’s accounts. It is where the numbers on budget spreadsheets and financial reports translate into the reality of money changing hands. And as such, it is a very specific lens on the reality of a business model—one that takes into account not just what an organization’s revenues and expenses look like, but when they come and go.

Managing cash flow, therefore, is primarily a question of when—when we pay our staff, when this bill is due, when the grant payment will come in. And as there are many varieties of nonprofit business models, each one has a particular bearing on many of those whens.

Nonprofit business models have two main components: what kinds of programs and services nonprofits deliver, and how they are funded.  For nonprofits, the latter component is a bit more complicated than for our colleagues in the for-profit world, for whom the answer is (nearly) always “by selling them to customers.” Of course, this isn’t to say that cash flow is perfectly smooth or friction less even in the for-profit sector, only that the range and variety of funding models for nonprofits (including not just “customers” but also third-party funders such as foundations, governments, and even individual donors) adds additional complexity.

Each component of the nonprofit business model—the delivery model and the funding model—has implications for organizational cash flow that should be understood for effective financial planning. We’ll look at each one in turn before discussing some strategies for addressing the almost inevitable occasions when the cash flowing in doesn’t match the cash flowing out.

What Do We Do?

 “What do we do?”—what kinds of programs and services an organization delivers (and how it delivers them)—is really a more high-minded way of asking, “What do we spend our money on?” (Granted, some services may be delivered by volunteers or use donated goods, but money is still necessary to pay managers and fund operations.) Really understanding “what we spend money on” will also generally give us a good idea of “when we spend it.” For example, a performing arts company that does four productions a year will have a fairly steady base of ongoing expenses, with spikes during the periods when productions are being prepared and staged. An emergency relief organization may have its baseline of operating expenses, with sudden (and unpredictable) surges of cash needs in response to a local hardship or disaster. A social service organization may have very predictable and consistent monthly cash outlays: payroll every two weeks, rent on the first of the month, invoices on the fifteenth and thirtieth. In each case, the cash flow demands are inherent in the business model.

Job one for cash flow management, then, is to understand the timing of cash needs—the magnitude and due dates of an organization’s bills.    Again, the “what do we do” side of the business model is the guide. If what you do is relatively stable, consistent, and predictable (as in the social service organization example), your cash needs likely will be as well. If what you do is predictable but not consistent (as in the performing arts company with productions at various points throughout the year), you know to plan for the surge in cash needs when the programming picks up. If what you do is unpredictable (as in the disaster relief agency), you will need cash available to deploy at a moment’s notice.

The examples above only take into account normal operations—businesses also need cash at certain points for longer-term investments like moving to a new space or buying a building. And while a major investment like that wouldn’t happen without a solid plan, there are also the occasional random but significant expenses like facility repairs. Again, the business model tells the story of the cash needs: while the social service organization may not be making capital purchases beyond a new set of computers, a housing development organization may need enough cash for major real estate purchases or construction of buildings. However large or small the investment, at the end of the day it means cash flowing out of your account.

How Are We Funded?

 Wouldn’t it be nice if the biggest task were simply thinking through one’s program delivery model to identify when the cash will be needed, and then turning on the tap to make it flow? Unfortunately, cash doesn’t work like a tap (and in fact, we have to have cash to keep water flowing). While the ideal case scenario is that cash comes into an organization at a similar volume and velocity to how it goes out, in reality nonprofit funding streams very often don’t work like that. In fact, an organization with a balanced (or even surplus) budget can still end up running out of cash due to timing mismatches. Looking at the “how are we funded” side of the business model can give us a better sense of what to expect in terms of cash inflows and of what to do if they don’t line up with the “what do we do” side. Each type of income stream tends to have particular implications and challenges for cash flow, so a business model built primarily around one type of funding will need to understand and plan for those implications and challenges.

A revenue-side business model that we see posing one of the biggest challenges for cash flow management is funding from government (particularly state and local) sources. In general, contracts with government entities pay for services only after the services are delivered, forcing the service-providing nonprofit to cover the initial outlay of cash to deliver those services. This is actually fairly typical of any business (for example, a retailer has to front the cash for inventory before generating income from sales; a professional services firm delivers services to clients prior to invoicing and collecting cash), but it is often compounded in the case of government funding by bureaucratic delays in registering contracts or processing invoices and payments. In some extreme cases, we have seen gaps of several months or more between an organization’s disbursement of cash to deliver contract services and collection of cash under the terms of the contract. In the absence of other revenue streams or other ways of accessing cash (about which more later), nonprofits in situations like this can face true cash flow crises.

Earned income from nongovernment sources—for instance, ticket sales for a performing arts organization—brings some of the same challenges, although (ideally) without the additional bureaucratic delays sometimes inherent in working with government. Even so, cash outlays typically happen in advance of cash collection—performances are rehearsed and sets are built before the audience buys tickets. This means that an organization needs cash to finance those costs that will later generate revenue back into the organization. (Any sort of prepayment on earned income—for example, advance ticket sales for performances or advance payments or retainers for service delivery—can help to fund the initial cash outlays.)

Cash from contributions and donations doesn’t come with the bureaucratic delays of government funding or the up-front outlays required to generate earned income. But organizations whose revenue model is primarily driven by voluntary contributions often face another reality of managing cash, which is that cash inflow can be very concentrated at a particular point (or points) within the year. For example, an organization that generates a significant portion of its income from an annual gala-type fundraiser may have an event in spring whose receipts may have to carry it much of the way until the next spring. Another may see much of its cash come in from an annual campaign timed to take advantage of end- of-year holiday (and tax write-off) giving. Nonprofits with highly concentrated cash inflow can exist in something of a “feast or famine” mode— flush when the money is rolling in but concerned that it will have to carry all the way until next year, or at least the next campaign.

Support from foundations and institutional philanthropy has its own implications for cash flow. On the positive side, grants are generally paid at the start of a funding period rather than following the delivery (and costs) of programs and services. On the negative side, grantmaking calendars can vary considerably from a nonprofit’s own programming calendar, so there can still be periods when ongoing program or operating costs have to be financed from other sources. Another relatively common characteristic of foundation support (and a cash flow consideration unique to the nonprofit sector) is its restriction to particular programs or activities, meaning that a condition of a grant is that its funds be used only for a specified purpose. So, what may look like readily available cash to meet current needs could technically be a set-aside for expenses weeks or months down the road.

Each side of the nonprofit business model—what and how we deliver, and how we fund it—helps set expectations about the timing of cash into and out of the organization’s accounts. But, particularly given the fact of nonprofit life that our “customers” and “payers” are often different entities, there’s only so much we can do to line up that timing to smooth out cash flow. If it does happen to line up perfectly, it’s probably due more to coincidence (or miracle) than conscious effort. So, once we establish solid expectations for what our business model means in terms of the timing of cash going out and coming in, the task is how to manage the many and inevitable instances when the timing doesn’t line up.

Balancing Cash In and Out

Regardless of the nature of our business model, or of how well we plan, there will inevitably be periods in which more cash is going out of an organization than is coming into it. This is most obvious during a start-up phase, when the initial investments made in (or loans made to) a new organization are essential to meeting cash needs before income generation kicks in. But even for an established organization in a relatively steady state, “you have to spend money to make money” (and generally in that order) is a rule of business. So, how do we meet our cash needs in those times when there is not enough coming in from operations?

Before discussing that question, one critical point: It’s true that in almost any business, there will be times when cash coming in doesn’t cover the full need for cash going out. That may be because of certain timing issues inherent in the organization’s business model—slow payments for services delivered under a government contract, say. But it may also be because there’s simply not enough revenue in the business model to cover the expenses of operating the business. If the issue is a temporary cash shortage, then an organization’s leaders will know (or have a reasonable sense of) when the situation will be back in balance, with sufficient cash coming in to cover expenses. If the issue is a more permanent imbalance, what may be presenting as a cash flow problem (i.e., a matter of timing) is in reality a broader business model problem—not just a disconnect between when money is coming in versus going out, but between how much money is coming in versus going out. If an organization’s overall business model is in deficit and out of balance, cash flow problems will certainly exist, but not ones that can be resolved by the methods discussed further down. In those cases, cash flow problems are just a symptom of the bigger challenge of overall revenues not being enough to cover expenses; treating that situation as a matter of cash flow timing will only delay and intensify the necessity to address the deeper need to increase revenues and/or decrease expenses.

On the flip side, an apparently healthy cash balance doesn’t necessarily translate to cash fluidity. For instance, particularly in organizations that have multiple streams of funding for individual programs (where, as alluded to earlier, some money is restricted to certain activities), it is easy to lose track of the purposes for which each stream may be used. You may have enough money to run the program, but the money may end up being spent in ways other than what each funder requires. To make a bad situation worse, such mistakes can be punishable by a requirement to repay, making future cash even harder to come by. Thus, in nonprofit finance, cash is not fungible like it is in most for-profits: you cannot necessarily take it from one overfunded function and devote it to another that is underfunded. This can be confusing to boards—and also, too often, to unschooled executives. Such mistakes with government contracts and other forms of restricted funding can have serious high-profile repercussions for your long-term financial health and cash flow.

With that major caveat out of the way, let’s turn back to the question of how to address timing issues when last month’s collections are lower than this month’s bills. The most basic (and important) solution is drawing on an organization’s own cash reserves, which supply the working capital to keep current on payroll, rent, and other expenses. Having a cushion of a few months’ worth of expenses built up in the bank account provides the liquidity necessary to avoid being at the mercy of each day’s cash receipts to determine which bills to pay. Cash reserves are a good indicator of a nonprofit’s overall financial health and sustainability, but from an even more practical perspective they are an essential resource for managing cash flow and payment schedules.

Unfortunately, development of a robust cash reserve can be a significant challenge for many organizations. While financial surpluses and accumulations of reserves should always be a goal of budgeting and financial management, some organizations’ business models make this particularly challenging. For instance, heavily government-funded social service providers face a Catch-22, in that expense reimbursement contracts cannot by definition operate at a surplus, yet the typically slow pace of cash receipts makes it particularly important to maintain a significant cash reserve. What options exist in such cases?

For any business unable to meet cash needs with its own resources, it must meet them by borrowing from someone else’s resources (that is, taking on debt). To meet operating cash needs in the absence of adequate cash reserves, a nonprofit can turn to a line of credit as a “floatation device” to meet the temporary imbalance between available cash and expenses due. We stress the word temporary here to echo the important point made a few paragraphs back: that lines of credit should be used only to address a timing discrepancy between payment of expenses and receipt of cash.

Without a reasonable and relatively specific understanding of when the cash will be available to repay the line of credit, an organization is at risk of using credit to fund an operating deficit—and, of course, exacerbating the deficit with the interest expense associated with the debt!

That said, credit lines used responsibly can be a useful and vital tool for cash flow management, particularly for those organizations whose business models entail slow collection of major receivables or long gaps between cash infusions. We typically recommend that organizations in those situations secure a credit line at least as a safety net, since using credit is generally a better course of action than delaying payment of expenses that are critical to the functioning of the organization. And, as a general rule, it’s much easier to secure a line of credit before it’s needed than it will be when and if the situation becomes urgent. Of course, credit doesn’t come free, and organizations using lines of credit must also plan and budget for interest expenses and any other transaction costs associated with taking on debt.

If neither reserves nor credit are options in a cash crunch, nonprofits may be forced to resort to less appealing means of riding out the storm. These may include measures such as approaching funders for accelerated or advanced payments (here again, it would be critical to show that the problem is only one of timing mismatch in order to avoid raising a huge red flag to a funder) or delaying payment of certain noncritical vendors. An even less appealing option would be a loan from a staff or board member, which could raise conflict-of-interest concerns. Probably the worst-case scenario is delaying payroll for some or all staff, which could jeopardize the organization’s programs as well as potentially raise legal issues. Far better to understand your business model and budget, and plan in such a way as to establish a solid cash cushion for the lean times.

Cash Management across an Organization

The challenges and consequences nonprofit organizations face with respect to cash flow are to a large extent inherent in the business models those organizations operate with—what kinds of programs and services they deliver and the way(s) they are funded. But this isn’t to say that nonprofit leaders are purely at the mercy of the business model; understanding the way the model impacts cash flow is the first step toward planning for and managing it. While it may be impossible to ensure that cash is coming into the organization exactly on time and on target to keep things on automatic pilot, it is certainly possible to plan for those times when it isn’t, and to take advance measures to be sure that bills (and staff) are paid on time.

In this effort, it helps to take a team approach. While one person or department (finance) will be in charge of the central cash flow projection tool, effectively planning and managing cash requires input from across an organization. Program and human resources staff have the most insight into the timing of expenses. The fundraising team knows the most about timing of grant payments and donor gifts. Contract managers can set expectations about reimbursement schedules. Team members working on earned income projects can estimate billing and collections. Ultimately, all of this information should flow to the CFO to project and plan for any potential shortfalls (or, in the happy event of significantly more cash than necessary, to park it in safe short-term investments). Staff across the organization may also be asked to help manage challenges as well—perhaps by rethinking timing of certain expenses or working on accelerating collection of cash from donors or customers. Being informed, strategic, and collaborative in cash flow management can help to ensure that a nonprofit’s long-term strategy isn’t derailed by avoidable—if inevitable—short- term obstacles.

Source: Cash Flow in the Nonprofit Business Model: A Question of Whats and Whens by Hilda H Polanco and John Summers, Nonprofit Quarterly, February 13, 2019

5 Tips for Nonprofit Internal Financial Reports

When it comes time to present internal reports to the board, more likely than not we have grown to expect a few yawns, complimented by blank stares. This article has the ability to engage, enhance, and provide useful information to the board during these internal report presentations.

A not-for-profit should consider the following best practices to ensure that internal financial reports prepared for its board of directors and other governance committees are accurate, timely, and decision-useful.

The following 5 Tips are provided to make your Nonprofit Internal Financial Reports more effective and useful.

Make it easy to read. Internal financial statements that include management’s discussion and analysis of the results presented can be helpful to board members as they carry out their oversight responsibilities. A brief overview of the period presented and highlights of the results that are meaningful to the organization will assist the governing bodies in their decision-making processes. The analysis should be easy to read, avoiding overly technical language while conveying the organization’s financial story. In addition, the accompanying financial statements should include, at a minimum, comparative statements of financial position (balance sheet), statements of activities (income statement), and budget-to-actual report.

Describe profit and loss by program. Not-for-profits operating multiple programs (especially those relying on governmental funding) should also consider, as a best practice, producing a profit and loss statement for each program on at least a quarterly basis. The surplus or loss on each program should be compared with the surplus or loss of the corresponding period in the previous year with significant variances explained. As an additional best practice, on an annual basis, a reconciliation should be prepared between the budgeted surplus (or loss) to the surplus (or loss) from the audited financial statements. If a program is regularly operating at a loss, management and the board can evaluate whether the organization should continue to subsidize the program.

Use ratio analysis. Ratio analysis is an effective tool for assessing an organization’s financial viability. When produced on at least a semiannual basis, internal reports on key ratios can help organizations monitor their liquidity, performance, activity, and leverage. The ratios can also be used for benchmarking purposes. Each organization should identify which key ratios and metrics are the most meaningful to their business model.

Present cash flow and liquidity data. Periodically throughout the year, organizations should assess their liquidity and availability of resources to meet their cash flow needs for a specified time. These assessments should be shared with the board on a quarterly or semiannual basis. For organizations struggling with cash flow or liquidity issues, reporting may need to be more frequent.

Keep it simple. Avoid lengthy reporting and choose a format that is easy to follow. Provide training to board and senior staff members on how to read and understand the reports so they can ask appropriate questions and make effective decisions. In some cases, dashboard reporting, using visuals to highlight key metrics and indicators, is very effective. Having accounting software that can produce internal financial statements with minimal edits outside of the system is important, providing data integrity while maximizing efficiency.

Source: “Tips for NFP Internal Reports”. Journal of Accountancy. November 2018.

7 steps to planning a successful not-for-profit audit

Year-end financial statement audits serve a valuable purpose in helping maintain the financial integrity of not-for-profit organizations so they can successfully complete their missions. These audits can be more effective and less challenging with a little bit of preparation and planning on the part of the not-for-profit management and finance team.

This preparation starts with your accounting system, because everything you do on a monthly basis will pay dividends as you gear up for your year-end close and the audit. Chances are your accounting system is very good for everyday things, such as processing customer/donor billings, receiving payments, paying bills, and making payroll. And you probably do other things every month in the normal course of your monthly closing cycle, such as review and reconcile various accounts.

Having these processes in place provides a good start in preparation for your year-end audit.  There are 7 planning steps to help your year-end audit be successful:

Analyze, review, and reconcile significant balance sheet accounts. Use a roll forward schedule to capture all the account activity. You and your auditor can agree as to the exact form and layout of the schedules to ensure they serve the dual purposes of the year-end close worksheet and audit schedule:

Beginning balance + additions – reductions +/- adjustments = Ending balance

Completing the schedule ensures that the account balances roll forward from the prior year end to the current year end, which provides assurance that the income statement effects of the changes have been properly recorded.

The following balance sheet accounts (and related income statement accounts) that you will want to reconcile and roll forward. Be sure to add other accounts to meet your organization’s unique needs.

Balance Sheet to reconcile and roll forward include Cash, Investments, Account Receivable, Pledge Receivable, Prepaids, Property and Equipment and related accumulated depreciation, Accounts Payable, Accrued Expenses, Deferred Revenue, Debt including capital lease obligations, and Net Assets.

Meet with your auditor to confirm the audit plan and timeline. Be sure you both come away with a clear understanding of the who, what, when, where, how, and why for each step of the audit process all the way to delivery of the final reports. The result of these efforts will be a matrix of roles, responsibilities, and dates that you both agree to uphold. Review all the audit confirmations, schedules to be prepared, documents to be pulled, and other support functions your organization will provide to the auditor. Ask for items that can help reduce your work in preparing for the audit.

Talk to your internal accounting team. Discuss the expectations, concessions, adjustments, and accommodations needed to make the year-end closing plan work. Build some contingency time into your planning, as the unexpected has an uncanny way of sneaking into even the best of plans.

Inform others in your organization about what to expect. Share your plan outside of the accounting department. Talk about what to expect from your team and the auditors when they arrive on-site. Now is a good time to reserve space for the auditors and ensure that adequate electrical outlets, internet service, photocopying/scanning, and other resources needed by the audit team will be ready and waiting when they arrive.

Finish recording all the activity for the year. Before closing your fiscal year, post the accruals and adjustments necessary to put your books fully on GAAP basis of accounting. The objective at the finish is to have a closed general ledger that will need no adjustments by your auditor. As part of the closing process, you will be completing all the roll forward schedules and account reconciliations, adjusting depreciation, recording all payables and receivables, adjusting bad debt allowances, and so on. Be sure to perform a final check of roll forward schedules to be sure they agree with final general ledger balances.

Have everything ready for the audit team when they arrive on-site. If possible, try providing items as they are completed, which will give your auditor a chance to review them in advance, potentially saving time for you and your auditor.

Don’t forget to communicate. Kindness and communication throughout the year-end closing process will produce the best results, minimize stress, and make life more pleasant for all. Be sure to build in breaks and a little downtime to help everyone maintain a healthy balance and perspective as you work together through what can be a bit overwhelming at times

Source: “7 steps to planning a successful not-for-profit audit”  AICPA CPA Insider, April 24, 2017, Tim McCutcheon, CPA