Posts tagged with "nonprofit finance"

Finance for Every Board Member

Finance for Every Board Member
As a Board member for a not-for-profit organization, you wear many hats – some fun, and some very serious. Overseeing the finances of your organization is one of the more serious roles because it ties so directly to your agency’s long-term existence, reputation, and ability to provide services.

Finances Are Means To an End

While every Board member must take personal responsibility for understanding the financial condition of the organization, you must also keep in mind that the organization does not exist merely for its finances. You exist in order to accomplish a mission – some critical benefit to society. So – don’t let finances dominate your meetings. Many boards struggle with having too much information yet not feeling they know what is happening with the organization. Decide what you need to know and the best way to appropriately oversee financial operations and move on to what really matters.

But We Have a CPA On the Board

Having financial professionals on your Board is a great asset and advantage. However, far too many not-for-profits utilize the skills of their financially astute board members while letting everyone else “off the hook”.

If you have a CPA (Certified Public Accountant) on your Board, I would suggest they may be looking for a more people or program-oriented opportunity to participate.  If they are excited about supporting your financial function, then connect them on a team with others including some non-finance professionals.

In addition to continuity through board member terms, these lay people may be more effective at presenting the numbers to the board in understandable terms plus bringing insights about the “programs and activities behind the numbers”. You may also find that CPAs are not very available during certain times of the year, making your “one-person finance committee” less effective or highly stressed.

Contents
Key Differences Between Businesses and Not-for-Profits
Different Sources of Income & Expense
Why is a Budget so Important?
What to Look for in Our Financial Reports?
What are Clues to Poor Financial Management?
Why Do We Need an Audit?
What is “Conflict of Interest”?
What Does the Finance Committee Do?
What is the IRS Form 990?
What is Accrual versus Cash-basis Accounting?
Restricted versus Unrestricted Gifts
What’s The Big Deal About Fund Accounting?
We Have to Show Pledges as Income?
How Do We Reduce the Likelihood of Theft or Fraud?
Will We Lose our Not-for-Profit Status If We Run A Business?
Is It Appropriate to Have a Financial Reserve?
Managing Risks and Disaster Recovery
Staffing the Accounting or Financial Office
Sharing Services or Outsourcing
Buying Nonprofit Financial Software
Glossary of Terms
Key Differences Between Business and Not-for-Profit

Businesses and charitable not-for-profit organizations have much in common. They both have mission statements and employ people, own and lease facilities or office space, and provide a service or product that meets a need. The key difference is that a business exists to make money for its investors and owners while the not-for-profit is focused on fulfilling a need in the community that cannot typically be supported by a business – harnessing donations of time and money to fulfill its obligations, and enriching no one but the community. As a Board member, it is your job to effectively steward the organization on behalf of your local community.

Question Business Not-for-Profit
What defines Success? Profits Mission Results
Who owns the organization? Investors Community
Where does the organization get operating funds? Sales Revenue

Banks

Foundation Grants, Government Contracts, Donations, Fundraising, and Fees for Services
When revenues exceed expenses, what happens to the surplus? To owners to invest in business Expand Program Services
Who performs the work of the organization? Paid Employees Volunteers, Paid Employees, Contract Employees
What is the primary basis for decision making? Profitability Mission
How is accounting organized? Cost of Goods and Services Expenses by Funding Source/Program

Different Sources of Income and Expense
If you are new to the nor-for-profit sector, you may not have noticed that different
types of organizations receive their funding from very different sources.
• Membership organizations usually receive their income from dues,
conferences, and services sold to members.
• Churches rely primarily on donations from individuals.
• Colleges and Universities receive tuition from students (fees for
service) plus additional funding from individual and corporate
donations, sports events and licensing revenues, and often government
funds.
•Arts organizations look co ticket sales, sponsorships from businesses,
and individual donations. Foundations will often support
the education and outreach efforts of arcs organizations.
• Finally, human services organizations commonly look to foundations,
individuals, United Way, and the government for support.
• Many organizations are now exploring businesses to further their
missions or make money for programs. Goodwill is an example of a
nor-for-profit chat runs retail stores to provide financial support for
programs and to create job training opportunities. The YMCA runs
fitness centers to subsidize work with youth and urban families.

On the expense side, there is more commonality between not-for-profits. As service providers, nor-for-profits look similar to service businesses. The largest expense item is almost always staffing costs, sometimes running as high as 80% of the budget. Other major line items can include facilities, transportation, insurance, and contracted services.

The focus of this booklet is on the boards of charitable 50 I (c)3 not-for-profit organizations – organizations that are able to accept tax-deductible gifts from donors.  The advice will also apply to organizations that are on their way to forming a charitable not-for-profit.

Why is a Budget So Important?

The Board of Directors has three primary avenues to oversee and direct the organization, all very important:
1) Confirm the Mission and Establish the Strategic Plan
2) Hire, supervise and evaluate a capable Executive Director or Chief Executive
3) Review and approve an Annual Budget that ties to the current year’s implementation
of the Strategic Plan, then monitor expenditures and manpower to that budget. The budget should serve as the financial blueprint and prioritize
the organization’s objectives for the coming year.

Working With The Budget
The entire Board should look at the actual financials compared to budget at least quarterly with the finance committee or treasurer examining monthly reporting.

Keep in mind that finances are a lagging indicator, so even when you are reviewing current financials, the information is at least a month old. Don’t allow this to become casual or “take a couple months off”. You cannot expect to identify problems or spot trends in time to correct them if you are not catching chem immediately. In addition, staff should intentionally keep the Board informed of any factors that might cause funding sources or donors to increase or decrease funds. The budget should be updated, with Board review and approval, for major changes that
occur during the year in order to keep reporting relevant.

What to Look For in Financial Reports
It is easy to gee overwhelmed by Board reports that give you lots of numbers but
very little information. The financial detail that the whole board sees is driven by
several factors:
1) The size of the Board
2) The complexity and size of the organization
3) The existence of a finance or audit sub-committee
4) The financial expertise of the board “as a whole”
5) The financial expertise of the staff
Every Board will have different information needs, and it is important that overall Board reporting focus first on what the organization is accomplishing and then financials – often reported in terms of progress against the goals of the Strategic Plan.
Typical Financial Reports (Revenue/Expenses)
• Revenue/Expenses vs. Budget for month and year to date
• Revenue/Expenses vs. Prior Year for month and year to date
• Projected Year-end Revenue/Expenses vs. Budget

Questions you might ask about these reports include:
• Did we have significant unexpected income or expenses during this period?
•Why are we way over or way under budget and/or prior year income or expenses in a major category?
• Is the amount of the expense budget remaining in each category sufficient to complete the year?
• Do we have any one time or seasonal expenses in the next period?
• Do we have any open staff positions and what was their financial and programmatic impact?
• Have we changed any of the basic assumptions that we used in assembling our budget? If so, what is the impact?

Typical Financial Reports (Assets/Liabilities)
• Assets and Liabilities – Shows what we own and what we owe
• Assets and Liabilities vs Prior Year – How we compare to last year
• Cash Flow Forecast – Shows timing of anticipated cash income and expenses, identifying when shortfalls will occur and when excess funds may be available for short-term investment.

Questions you might ask about these reports include:
•What is our balance of restricted and unrestricted funds?
• Do we have cash to cover current expenses in the months ahead?
• Do we have relationships with banks or other funders to cover shortfalls?
• Has our unrestricted reserve balance increased or decreased during the past 3 months, 6 months, or year?

What Are Clues to Poor Financial Management?
Whether you are a new Board member or a long-rime Board member who has not
had much participation in the finances of the organization, here are a few things to
look for:
• Financial reports are not timely and accuracy is often questioned.
• No one seems to know the current financial condition.
• One person controls all financial information and does not share it openly.
• Finance personnel seem to work long hours for limited results.
• The annual audit report and management letter have many comments.
• The issues from prior years audit report have nor been addressed.
• The auditor or accounting staff people turn over frequently.
• Board members routinely use their position to do business with the
organization or to get favors for family or friends.

Do We Really Need an Audit?
Yes and No. From your perspective as a Board member, an audit has several desired
goals:
1) To provide some assurance that the financial records of the organization are appropriately organized and that revenues and expenses are being tracked and recorded according to Generally Accepted Accounting Principles (GAAP).
2) To have an outside, independent party regularly examine your records to decrease the likelihood of financial mismanagement or fraud.
3) To increase the credibility of your organization to the board, donors, and other funders.

An audit is not designed to detect fraud, but all auditors must review your internal control systems and make recommendations on how they can be improved .  The audit is best performed by a Certified Public Accounting firm who is trained both in the process of auditing your financial records and is familiar with not-for-profit operations and accounting. A “free” or low-cost audit provided by a CPA “friend of your organization” who is not a not-for-profit accounting specialist may not provide the guidance and credibility you seek from this process. One test of
credibility is whether the accountant is familiar with Office of Management and Budget (OMB) Circulars.  Unfortunately, audits by well-qualified firms typically start at $5-7,000 and quickly move past $ 10,000 based on your size and if you have any complex program reporting requirements from funders. The audit is considered an indirect expense, so few funders are interested in funding it, though they expect it of well run agencies.

Alternatives – There are two less expensive alternatives to a full audit, but they also bring less credibility. If you are a small or start up organization and your financials are quite limited, they may be suitable until you have a specific requirement expressed by a foundation, government funder, or major donor.
• A “compilation” puts your records in the hands of an experienced outside party to assemble financial reporting and offer insights on improving accounting operations.
• A “review” is more thorough and looks deeper into your financial records and the way you process transactions, but falls short of the
assurances that come with an audit.

What is “Conflict of Interest”?

In terms of not-for-profit board service, a conflict of interest question arises when a board member uses their access to the organization to derive a direct benefit for themselves, their business, or their family or friends. This can be a sensitive legal issue and different organizations will have more or less lenient policies.

In general terms, as a board member, you are expected to act in the best interests of the organization – not your personal interests. This means that you encourage and respect the procedures established in the organization to solicit bids before purchasing products or services and that you do not ask special favors of the staff in hiring relatives or friends. And you respectfully open discussions around issues or transactions that could be perceived as conflicts of interest for board or staff members.

You should never join a board with the expectation that you can sell your services to the organization. To the contrary, I would suggest that you join the board expecting to give your services to the organization.

Some organizations will allow board members to submit bids to provide services along with other vendors. General practice would be for that board member to leave the meeting during the discussion and vote. If it is believed by the board that the board member’s business can provide the best value to the organization, they may choose to contract – keeping in mind the uncomfortable situation with your
board member if service is unsatisfactory.

What Does the Finance Committee Do?
The Finance Committee is typically chaired by the Board Treasurer and staffed by the lead Accounting staff member or Executive Director. A typical list of responsibilities and expectations of the Finance Committee would include:
• Regularly review financial reports with the agency staff.
• Regularly present the financials and report to the Board on the financial condition of the organization, including variances to budget.
• Report to the board any financial irregularities, concerns, or opportunities.
• Recommend financial guidelines, financial policies, and procedures to the board (such as expenditure authority or appropriate financial
reserves to maintain).
• Work with staff to design financial reports and ensure that reports are accurate and available in a timely manner.
• Recommend selection of the auditor and work with the auditor, unless there is a separate audit committee.
• Establish budget assumptions with the staff and outline the annual budgeting process.
• Review budgets drafted by staff and ensure appropriate links between the budget and the organization’s plans.
• Serve as advisors to the Executive Director and staff on other financial priorities, such as insurance or investments, depending on committee member expertise.

What is the IRS Form 990?
The 990 is the informational tax return that essentially every 50 I (c)3 nonprofits files annually with the IRS. The 990 is initially drafted by either your organization’s audit firm, accounting firm or by the organization.    Every board member is asked to review the form prior to submission.

In addition, your Form 990 is a public record and muse be made available upon request to anyone who wants to know more about your organization. Take the extra time to ensure it is accurate, conveys what your organization does, and looks neat and professional. Go to www.guidestar.org and look up your organization’s latest 990.

What is Accrual versus Cash-basis Accounting?
This is less confusing than it sounds. Accrual accounting works the same way in the not-for-profit environment as is does in business. While small agencies may run on a cash basis for several years, eventually they will grow tired of financial reports rarely matching budgets as large expenses throw off a different category each month.  The Accrual Accounting method shows what the organization owns and owes based
on when the organization earned or incurred the financial obligation not based on when the cash was received or disbursed.

An example is when three bi-weekly pay periods are paid in one month – a twice a year happening. On a cash basis, you would see three pay periods or six weeks pay in the month (overstating) with 4 weeks pay in the months surrounding it (understating).  The accrual method would show payment for the number of accrual workdays in the month – usually 21 -23.

Restricted versus Unrestricted Gifts
When a foundation, government, or a donor gives money to your organization, they have the option to designate it to be used in specific way or for a specific program.

Whats the Big Deal About Fund Accounting?
The accounting principles that have been established for not-for-profits require that revenues and expenses be classified by restriction, funding source and program.

Fund Accounting necessitates that you have:
• A separate set of books for each grant, with its own balance sheet and net asset balances to ensure that your funding resources can be
reported separately and are not commingled.
• The ability to track and report budget and actual financial information to satisfy each funding source’s unique reporting requirements
including cross or multi fiscal year reporting.
• The ability to allocate the expenses you incur across multiple grants or programs including indirect cost pools for administration and facilities.

The fact that records need to be maintained by funding source does not mean that the financial reporting for the Board must be in that format. The Board may prefer to have reporting set up by account, department, program, location, or grant. If your accountant is not able to provide reports in that format consider seeking assistance from a consultant who is expert in your accounting software package.  You may need not be using the proper accounting software and may need to switch to a Nonprofit Accounting Software that can handle fund accounting.   Our firm can help you through this evaluation.

We Have to Show Pledges as Income?
This is one of the most confusing pans of not-for-profit accounting because it defies the intuitive logic of either recognizing income when it is received or matching it to the expenses incurred to perform the agreed program. In the mid- l 990’s, the Federal Accounting Standards Board (FASB) determined that nor-for-profits were not accurately representing their financial status when they had received commitments from donors or funders to provide sizeable donations or grants, but had not yet received those funds.

In simple terms, any firm commitment for funds (not just large ones) is to be presented as income received in the year committed – even if it will be paid to the organization the following year or in installments over several years. This means that you may show big income in one year and the big expenses associated with it the next year, making financial reports very difficult to understand. Cash Row reporting can be helpful in keeping a proper understanding of when the money is actually coming in. Look to your accountant or auditor for a full explanation and reporting that is understandable for management purposes.

How Do We Reduce the Likelihood of Theft or Fraud?
Experts say that there is nothing that businesses or not-for-profits can do to eliminate the risk of theft or fraud, bur there are steps that can reduce the likelihood.
• Have an annual audit by an outside accounting firm. If you are not doing that yet, consider having a couple skilled volunteers conduct
an internal audit.
• Review your internal control practices annually with your auditor. Internal controls separate the responsibilities of people receiving
money from chose recording receipts and the people dispersing money from chose approving disbursements.
• Ensure that the bank and investment statements are mailed, unopened, to someone disconnected from the hands-on accounting
function – in a large organization, this is the CFO or Chief Executive; in a very small organization, this could be the Board Treasurer
(or the Board Chair, if the Treasurer writes the checks).
• Consider outsourcing a portion of the accounting function so that a non-employee is reconciling bank statements or executing the transactions.
• Do credit and criminal history checks on prospective accounting employees.
• Look for unexplained changes in the standard of living of accounting employees.
• Consider doing annual credit checks on accounting/financial employees to identify personal crises that could impact their judgment
• Consider using an accounting system that has auditor controls built into the system to minimize the capability to commit and conceal fraud.
• Require your accounting staff members to take of at least one full week of vacation per year and rotate staff occasionally between
responsibilities.
• Provide adequate professional training to your accounting staff.
• Purchase Fidelity Bonds and other insurance on staff that handle funds.

Can We Lose Our Not-for-Profit Status if We Run a Business?
Yes, but it is very uncommon.
Not-for-Profits are given some very special privileges by the IRS – to accept tax deductible donations, nor pay property or income taxes, etc. It is not the intent of the IRS that a nor-for-profit would use their advantages to create unfair competition for the local business community.  The first adaptation that the IRS created was that not-for-profits must pay taxes on Unrelated Business Income (UBI) – they essentially put the not-for-profit on a level playing field with the business community.
Generally, income is considered unrelated if it is:
I) A Trade or Business,
2) Not Substantially Related to the Mission, and
3) Regularly Carried on – nor a weekend bazaar or once a year cookie sale.
Unrelated business income typically excludes Investment Income

Many people are afraid of paying UBI, bur it can be viewed as a good thing since you are making enough money to have taxes to pay. In reality, few organizations pay much UBI because indirect expenses of the organization can be appropriately allocated to absorb much of the “profit”.
Too much of a good thing? – If you have a successful business within your not-for-profit, at some point the IRS will begin to question whether you are a not-for-profit with a business on the side, or really a business under the cover of a not-for-profit.

Is It Appropriate to Have a Financial Reserve?
A common question presented by and to Boards of Directors relates to financial reserves.
“What about the people who will want or need your services five years from now, twenty years from now?”
Reserves can shield the organization from reductions or delays in funding or provide the flexibility to pursue a new opportunity. It is generally considered prudent to have at least several months of unrestricted funding in operating reserves to allow focus on services instead of extreme cash management.  One more factor is to define the expectations of your financial supporters. It is common wisdom that sizeable funding goes first to well-established and financially stable organizations – nor to organizations that will close if they don’t get it. If you are fortunate and your organization begins to accumulate a sizable reserve or even endowment, are your supporters the type to give more or to steer their support to
other organizations with lesser resources?  In uncertain economic rimes, organizations cannot sit on the edge of financial insolvency for very long. All it rakes is a couple grants or major donors that change plans, the loss of a critical staff person, a negative article in the newspaper – and the organization is history. And what will be the impact of your closure on the community and the people you serve?
Managing Risk and Disaster Recovery
So many activities fall into the Executive Director’s and financial staff’s “miscellaneous
duties” that important items can be overlooked. Some of these things can substantially impact the solvency or credibility of the organization.
T he Board might find it helpful to put together a reminder list that can be checked off each year to keep the Board apprised.
Some items will require more discussion and can be charged to a committee to explore. Ir might be wise to make risk management the topic for one board meeting, each year, especially if you are a hands-on service organization – invite your insurance
agent and attorney to join you.

Some finance and risk management issues to spend time on or include on your list:
• Directors and Officers Insurance
•Executive or key staff turnover, or serious illness/injury
•General Liability insurance – premises, vehicles, staff actions
•Property insurance – facility, vehicles, furniture, equipment, computers and software
• Special Liability Coverages – such as Professional, Improper Sexual Conduct, Volunteers, Volunteers/Staff use of own automobiles,
employee dishonesty or fraud.
• Workers Compensation
• Legal – HR, contracts and agreements
• Staff training on established risk reduction policies and procedures
• IRS and state paperwork to maintain nonprofit and corporate statuses
• Payroll tax payments
• Internal controls reviewed and updated
• Facility reviews with fire dept, insurance rep, etc
• Record keeping, retention, and backup – HR, Accounting, Funder, legal, insurance docs
• Emergency communications – staff, clients, media, funders – to prepare for an unfortunate program circumstance and also in case of disaster.
•Response to Natural Disaster
• Backup strategies for computer systems
• Resuming operations after a loss of facilities or computer systems
Most organizations find it helpful to identify a point person to lead the assembly of a disaster recovery strategy.
Staffing the Accounting or Financial Office
Several factors will determine the necessary staffing of the accounting and finance function of your organization.
Volume Total income is not a good measure if you have a large volume of transactions to process, even if much is “automated”, you will need staff to do the work, and to oversee and verify its accuracy.
Complexity Are you in a field that uses complex contracts and grant requirements or where specialized knowledge in real estate, financing, Medicare/Medicaid or risk management is routinely needed in day to day operations?

Variety Are all of your transactions similar, allowing you to train someone in a standard procedure or are you constantly faced with new questions and the need to create new ways of handling relationships, contracts, or transactions?
Partners What other organizations do you work with and what level of expertise do they have or expect of you? Can you expect your bookkeeper to keep up with their CFO? Or can your bookkeeper use their CFO as a resource?
Funders and Donors Do your funders or major donors expect access to a “financial professional” when they have questions about your organization? Though some of the rules are a little different, most of the functions of a not-for-profit accounting office parallel those of a business – payroll, payables, receivables, financial reporting, forecasting, cash management, etc.

Think of Staff in Six Groupings
Administrative Support Staff These are people who can follow well-defined procedures, such as processing payables or updating an accounting system, but do not have accounting training or a true understanding of how their work ties into the overall finance and accounting function.
Accounting and Data Entry Support Staff These people may have extensive accounting experience, but it may be in a limited area – such as payroll or accounts payable.
Bookkeepers These people usually have some accounting training and/or extensive experience. Often, there is overlap between the duties of a full charge bookkeeper in one organization and an accountant or controller in another.
Accounting or Financial Analyst This position often appears in larger accounting departments where they need a degreed or well-trained professional to handle particular reconciliations or provide forecasting or reporting support to the controller or CFO.
Accountant or Controller This is the in-charge accounting position that either pulls the books together every month or makes sure they come together. Most accounting department staff would report to this person.
Controller or CFO In larger organizations, this person will typically oversee the accounting area plus other areas like office management technology, facilities or human resources.

Because of the differences in operations and reporting needs of various organizations, it is difficult to suggest any “standard” staffing tied co revenue. At the same time, I would offer that it is unusual to see an experienced accountant in an organization smaller than $500,000 unless they also have other professional duties. It would also be unusual to see an organization with a budget over $1 million without
an experienced accountant or an outsourcing relationship that provides access to a qualified accountant on a regular basis.
Sharing Services or Outsourcing
As you might conclude from the information above, it is often difficult for small organizations to hire the people they really need to provide the level of financial support and expertise required to serve the organization, funders, and the board.
There are two alternatives to hiring full-time staff that organizations use with varying levels of success – Sharing Staff with other not-for-profits, and Outsourcing Services to a person or business with expertise in not-for-profit accounting. Both of these offer the possibility of improving internal controls and bringing more qualified staff.
Sharing Staff The advantages of sharing a staff person are that you get significant hours of a person, on-site, who brings the specialized skills that you need. The downside is that you must find another organization or two with compatible needs, a trusting relationship, and adequate budget/timing to bring the person on when you want them. You are also subject to staff turnover and retraining issues.
Outsourcing The advantages of outsourcing include gaining a higher level of expertise and more flexible capacity from the provider, a defined cost per month, the ability to start on your schedule, and a reduced likelihood of vendor turnover.
The disadvantages could include not having another person in the office to fill in for absence or work overflow from others, and a higher hourly rate than a typical employee.
Buying Nonprofit Financial Software
Most small not-for-profits begin their lives using one of the common small business accounting packages, looking for clever ways to change labels to make things work.  Quicken, QuickBooks, and Peachtree are three common packages and some now offer nonprofit editions that reduce the compromises involved.
For many not-for-profits, these packages can meet the routine recording and reporting needs. But as you begin to get grants from multiple sources, grants that cross your accounting year boundaries, or you get pledges or multi-year commitments – life starts to get more difficult and staff find themselves spending a lot of time exporting data to spreadsheets and telling the board that “our system won’t do reports that way”.
Often, when an organization reaches $500,000 or more in revenue, it starts to make sense to explore a specialized not-for-profit software package that has been designed to handle the challenges above plus ease your audit preparation and even prepare certain tax schedules.
Some of the most commonly used and best regarded packages are Abila MIP , AccuFund , and Araize.  Please contact us for help with your software evaluation.

Glossary of Terms – Finance and Accounting

A

Accounts payable

The amount owed to others for services or merchandise received by the organization.

Accounts receivable

The amount owed to the organization for services or merchandise provided to others. Referred to as grants receivable when the amount is related to a grant agreement.

Accrual-basis accounting

A system of financial recordkeeping in which transactions are recorded as expenses when they are incurred (i.e. when a bill is received for merchandise or services provided to the organization) and as income when it is earned (i.e. when services or merchandise is provided by the organization, or the organization receives a commitment of a contribution) rather than when cash is paid or received. The alternative is cash-basis accounting.

Accrued expense

Costs for services received by the organization that have accumulated, but are not yet due or payable.

Accrued interest

Interest costs that have accumulated, but are not yet due or payable.

Allocation

A method of accounting that divides expenses among different program, administrative, and fundraising categories based on a formula that recognizes the use of the resources such as use of the facility or staff time.

Allowance for doubtful accounts

An amount reflecting the portion of the accounts receivable which the organization reasonably believes it may not collect. The amount is often an estimate based on experience or trends in the industry.

Amortization

The repayment schedule for a loan or other obligation, usually as a constant amount each month that is paid first to the interest calculated on the principal balance, and then to reduce the principal balance.

Assets

What is owned by the organization.

Audit

A financial report that has been tested and verified for accuracy by a Certified Public Accountant (CPA) and prepared in accordance with Generally Accepted Accounting Principles. The most rigorous level of external financial statement preparation. An essential component of the audit is the Opinion Letter.

B

Balance sheet

A report showing the financial condition – Assets, Liabilities, and Net Assets – of the organization at a particu- lar moment in time. Also referred to as a Statement of Financial Position.

Balloon payment

The final payment of a loan when the amortization is longer than the maturity of the underlying note. This payment is usually larger than the regular periodic payment.

Board-designated funds

A condition stipulated by an organization’s board of directors on how an amount of money is to be used. A common type of board designation is for Operating Reserves. For accounting purposes, these funds are considered unrestricted because the condition was not specified by a donor.

Bridge loan

A short-term loan with a specific repayment source.

Building reserve

Funds set aside to pay for facility upkeep, upgrades, unexpected repairs that exceed money available through the regular budget, and replacement of fixtures and facility systems. Also known as a replacement reserve. Typically, these are unrestricted, but board-designated funds.

C

Capital campaign

A fundraising effort with a specific purpose and goals that is above and beyond the ongoing fundraising to support programs and operations for an organization. The purpose of the campaign is usually for a building project, special program, endowment, or reserves.

Capital expenditure

Payment of money to acquire fixed assets, such as a building or equipment

Capital improvement

A facility or equipment upgrade or enhancement that will have a life of more than one year, and that increas- es the value of an Asset. The cost of the improvement increases the value of an Asset rather than recognized as an expenses. See Capitalizing an asset.

Capitalizing an asset

Recording the cost of land, a building or equipment as fixed assets rather than as an expense when purchased.

Cash equivalents

Funds which can be quickly and easily converted to cash, such as bank accounts, money market funds or other investments which mature within 90 days.

Cash flow

The movement of cash into and out of an organization; or the difference between cash receipts and cash disbursements during a period of time.

Cash flow projection

A management tool used to predict incoming and outgoing cash during a specified period of time. Used to anticipate and plan for times of low and high cash balances.

Cash-basis accounting

A system of financial recordkeeping in which transactions are recorded when cash is received or spent. The advantage over accrual-basis accounting is its simplicity.

Change in net assets

The net results of total income minus total expenses for a period of time, which may be Positive or Negative. Also referred to as surplus or deficit. Commonly called profit or loss in the for-profit sector.

Chart of accounts

A list of all accounts used in accounting system, including assets, liabilities, income and expenses.

Collateral

An asset which is pledged to a lender until a loan is repaid. In case of default, the lender has the legal right to obtain or sell the collateral to repay the loan.

Committed grant

A contribution for which the organization has received a formal notification from the donor that an award will be made at a future date.

Compilation

A financial report that has been prepared by, but not reviewed or audited, by a Certified Public Accountant (CPA). The financial reports have not been tested or verified and the CPA states no opinion about the accura- cy of the statements. See audit and review.

Conditional promise to give

A commitment by a donor to make a contribution to the organization if a specific requirement is met. The agreement becomes binding once the requirement is met.

Contribution

A donation, gift or transfer of cash or other assets.

Current assets

Cash, investments, receivables, and other assets that can be expected to be available as cash within twelve months.

Current liabilities

Those liabilities due to be paid now or within the next twelve months.

Current portion of long term debt

The amount of the principal payments due and payable on loans within the next twelve months, if the original term of the loan is longer than one year.

D

Days Cash on Hand

A calculation of the number of days that an organization could continue to pay its operating expenses with current cash balances. It serves as a simple measure of the short-term financial stability of an organization.

Debt

An amount owed to a person or organization for money borrowed. Common types are Loans, Promissory Notes, Bonds, or borrowed funds.

Deferred revenue

Income for which payment has been received before it has been earned. It is reflected as a liability on the Balance Sheet until it is earned and can be recognized as income in a future accounting period.

Deficit

Expenses in excess of income; an operating loss or a negative Change in Net Assets.

Depreciation

The recognition, by recording an expense, of the decrease in value of a fixed asset over its expected physical

or economic life.

Direct costs

Those expenses which are used for a program area or cost center. Costs may be exclusively for that purpose or may be allocated between several uses.

E

Earned revenue

Income received for providing services or goods, rather than as a voluntary contribution.

Endowment

An amount of Assets owned by an organization that is invested with the intention to be held in perpetuity. The income and increases in value of the investments are available as income for program use and organizational purposes. Endowment funds received from a donor are Funds With Donor Restrictions and cannot be re-directed for other purposes. Endowment funds that are created by internal policy, they are Board-designated, or Quasi-Endowment. Endowments are subject to multiple accounting and legal rules.

F

Fiduciary duties

A legal obligation to act in the best interest of another entity or person. In the nonprofit sector, members of  the board of directors have a fiduciary duty to act in the best interest of the organization including in activities related to the funds and other assets owned by the nonprofit.

Financial Accounting Standards Board (FASB)

The national governing board which sets the accounting standards known as Generally Accepted Accounting Principles (GAAP).

Fiscal sponsor

The relationship created when a nonprofit, tax-exempt organization accepts grants and other contributions on behalf of a project or group that does not have its own tax-exempt status, and accepts the responsibility to oversee the use of funds.

Fixed assets

An asset that has a relatively long useful life, usually several years or more, such as equipment, furniture, buildings and land.

Functional expenses

Categories of expense delineated by the type of expense: program services, management & general, and fundraising. Required for IRS form 990 and audited financial statements. Often reflect the use of allocations.

Fund accounting

A system of accounting based on separating information into groups which reflect organizational divisions or donor-imposed restrictions.

Funds with donor restrictions (formerly Permanently or Temporarily restricted funds)

Funds with donor-imposed restrictions that can be satisfied by the passage of a defined period of time or by performing defined activities. These funds may be invested to produce a stream of income that can be spent. See Endowment.

Funds without donor restrictions (formerly Unrestricted funds)

Contributions given without the donor placing any restrictions or limitations as to their use.

G

General ledger

Accounting system tool for recording all transactions

Generally Accepted Accounting Principles (GAAP)

The set of norms and standards of nonprofit accounting practices established by the Financial Accounting Standards Board (FASB) to help ensure the accuracy and consistency of financial records and reports. Used for internal and external financial reporting, including audits.

Grants

Contributed assets given by an individual or another organization with no reciprocal receipt of services of goods. Sometimes are given with a legal restriction imposed upon its use.

I

In-kind contribution

A contribution made of goods or services rather than cash.

Income statement

A financial report that summarizes income and expenses and resulting surplus or deficit for a given period of time. Also known as the statement of activities.

Internal controls

The system of practices, procedures and policies intended to safeguard the assets of the organization from fraud or error and ensure accurate recordkeeping.

Inventory

The cost of finished goods held for sale by an organization, or the raw materials and works-in-process that will become finished goods. Recorded as an asset until the item is sold.

Investment

A general term to describe financial Assets owned by an organization. The category is broad and may include stocks, bonds, and other financial instruments. Investments are subject to numerous accounting rules and standards.

IRS 990

The standard federal reporting requirement for nonprofit organizations and private foundations. The majority of nonprofits are required to submit an annual information return to the Internal Revenue Service. The specific version is determined by the type of nonprofit, organization size, and activities.

L

Leasehold improvements

Remodeling, renovation, and upgrades to leased space to suit the tenants’ needs. The cost of improvements may be paid for by the landlord or by the tenant. When paid by the nonprofit tenant, the cost of improvements becomes an asset and is depreciated over the term of the lease

Liabilities

What the organization owes to others, including accounts payable, debts, mortgages and other obligations to pay.

Liquid net assets

The amount of unrestricted net assets that is not invested in property and equipment. This amount is the true amount of unrestricted net assets available as a cushion for unexpected problems or opportunities and to support operations. See net assets.

Liquidity

A measure of how much cash and assets that can be easily converted to cash (such as short-term investments) an organization has available for use in the immediate or near future.

Long-term debt/liabilities

An obligation to pay a loan or other obligation with a maturity or due date of more than one year.

M

Management and general expenses

Expenses that are used for the purpose of planning and managing the organization as a whole rather than for programs or fundraising. Expenses may include all or part of the cost of executive staff , finance, human resources, board of directors, and general promotion and communications. A type of functional expense that frequently reflects the use of allocations.

Mortgage

Legal agreement entered into by a borrower granting a lender a lien on a real estate asset collateral for the repayment of a loan.

N

Net assets

The difference between the organization’s total assets and its total liabilities on the balance sheet indicating the net financial worth for the organization. Net assets is the accumulation of the difference between cumulative income less cumulative expenses over the life of the organization. Divided into net assets with donor restrictions and net assets without donor restrictions.

Net assets released from restrictions

The accounting transaction for the transfer of funds from net assets with donor restrictions to net assets without donor restrictions after satisfying donor-imposed stipulations for the use of the funds.

Net fixed assets

The value of land, buildings, equipment and other fixed assets owned by the organization after the deduction of the accumulated depreciation of those assets.

Notes payable

The amount an organization owes to others for loans.

Notes receivable

The amount an organization is owed for loans made to others.

O

Occupancy expense

All costs relating to the rent, utilities, insurance, assessments, and maintenance of the organization’s locations for programs and offices.

Operating expense

General term for expenses incurred for all the activities of the organization.

Operating reserve

An unrestricted fund balance set aside by the organization’s board to stabilize an organization’s finances by providing cash as a cushion for planned or unplanned future expense or losses.

Overhead

The costs that cannot be identified with a program activity but are needed for the general administration of the organization. This expense is often distributed among programs based on a formula.

P

Pass-through funds

Funds received by an organization that must be spent on behalf of, or passed through to a secondary recipient. Examples include re-granted funds and direct payments to beneficiaries.

Pledge

A formal commitment, generally in writing, to make a contribution of a specific amount.

Prepaid expense

An expense that is paid before use of the good or service, such as insurance paid in advance.

Principal

The amount of money that is borrowed and that the borrower must pay back to the lender. The interest, or price of borrowing, is added to the principal.

Profit and loss statement

See Income Statement or Statement of Activities.

Program service revenue

Income earned from providing one or more program services. It may be paid by the direct user of the service or through a contract with a third party such as an insurance company or government agency.

Promissory note

See Note Payable.

Property and equipment

The Asset value of the physical items an organization owns such as buildings and improvements, equipment, and furniture that will be used for more than one year. Often called fixed assets.

R

Ratios

A tool to analyze and assess the financial condition of an organization by converting financial information into standard ratios. By using standard calculations, financial information can be compared more easily to historical or industry information.

Receivables

See accounts receivable or notes receivable.

Refinance

To replace one loan with another, usually in order to extend the maturity, change the payment amount, or to consolidate several loans.

 

Release from restrictions

The accounting transaction used to transfer funds with donor restrictions into an organization’s unrestricted accounts when the restriction has been satisfied (such as when a special project is initiated).

Reserves

An amount set aside by the Board to be used for needs that are outside of the regular annual budget. Re- serves may be designated for operating, building, opportunity, or other purposes.

Restricted funds

Contributions which are designated by the donor for a specific use. See also funds with donor restrictions.

Revenue

Income earned from services performed or merchandise sold (as distinct from support, or contributed income).

Review

A financial report that has been prepared by a Certified Public Accountant (CPA) that has been subject to some testing and verification. A Review is not prepared with the same rigor and standards as an Audit and does not include an opinion letter. See audit and compilation.

Royalty

A payment made to an organization by another party for the use of an asset, often an Intellectual Property Asset such as a creative or scientific work. A form of Income for the owner of the asset, and an expense for the user.

S

Secured loan

A loan for which something of value is pledged in the case that repayment cannot be made.

Security agreement

A legal document executed by a borrower granting a lender the right to take a specified asset in case the borrower defaults on a loan.

Short term debt/liability

A loan which is issued with a final payment date of one year or less.

Statement of activities

One of the primary financial reports for an organizations, reporting the income, expenses, and change in net assets for a period of time. See income statement.

Statement of cash flows

A financial report component summarizing the sources and uses of cash for a period of time. The Statement of Cash Flows is a historical report and is different in form and use from a cash flow projections. See cash flow.

Statement of financial position

One of the primary financial reports for an organization, reporting the assets, liabilities, and net assets as of a specific date. See Balance Sheet.

Support

Income from voluntary contributions and grants (as distinct from revenue, or earned income).

Surplus

Income in excess of expenses; an operating profit or a positive Change in Net Assets.

T

Technical assistance

Help and advice provided on a specialized subject matter.

U

Unconditional promise to give

A pledge to make a contribution of cash or another asset without requiring the organization to meet any condition prior to receiving the contribution.

Unrealized gain or loss

The increase or decrease in value of an investment asset held by an organization but which has not been received through the sale of the asset.

Unsecured loan

A loan made without collateral.

W

Working capital

The portion of an organization’s assets which is not invested in fixed assets or obligated to pay current liabili- ties, but is available to fund day to day working needs.