Fundamentals of Nonprofit Financial Management Presented by Paula

Background Smith & Daley is a boutique nonprofit consulting partnership focused on financial management and strategy issues for small to mid-sized nonprofits, foundations, and the broader sector through research and analysis. What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Background What ‘Accidental’ Finance Geek? Why are you here? Which nonprofit are you working for? What are you doing there? Any experience with accounting or finance? What is your dream job in 10 years? W hat What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Why So Much Emphasis on Finance? Increase Your Professional “Value” Expertise & Passion for Programs is Not Enough Nonprofit Finance is Tricky Earning Potential and Versatility W hat What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Why So Much Emphasis on Finance? Nonprofits are businesses! Organizational Sustainability Accountability to Funders,

Nonprofit Sector Outlook The “New Normal” Government funding uncertainty at all levels Limited private fundraising capacity in many sub-sectors High fundraising competition W hat What ‘Accidental’ Finance Geek? Smith & Daley © 2011

The Basics Cash v. Accrual Accounting Internal v. External Financial Statements Audits, Reviews and Compilations What ‘Accidental’ Finance Geek? Smith & Daley © 2011 What ‘Accidental’ nance Geek? Smith & Daley © 2011

The Basics What ‘Accidental’ Finance Geek? 3 Key Statements in an Audit: Statement of Financial Position Statement of Activities Statement of Cash Flows Budgets Projections Smith & Daley © 2011 What ‘Accidental’ nance Geek? Smith & Daley © 2011

What ‘Accidental’ Finance Geek? Statement of Financial Position aka the “Balance Sheet” Gives overall report of financial health Reflects a “snapshot” in time Assets = what you own Liabilities = what you owe Assets-Liabilities = Net Assets (Net Worth) What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Statement of Financial Position Typical Assets Cash, Investments, Receivables & Deposits Property, Plant & Equipment Typical Liabilities Payables (money owed) to vendors or employees, lines of credit, deferred revenue, or mortgage loans‘Accidental’ Finance Geek? Smith & Daley © 2011

of Financial Position ’Statement Finance Geek? It’s important to understand what Net Assets are made of, and what’s been happening over time. Are they mostly liquid? Physical Assets? Have they been increasing or decreasing? Net Assets grow or contract depending what is happening with an organization’s operations. Deficits shrinking Net Assets (more vulnerable). Smith & Daley © 2011

Statement of Activities What ‘Accidental’ Finance Geek? aka Statement of Profit and Loss (P&L) or Statement of Income Reflects the activities for a period (month, quarter or year) Tracks revenue, expense and surplus/deficit Smith & Daley © 2011

Statement of Activities Nonprofit Accounting (FASB) requires organizations to classify revenue by level of restriction: unrestricted, temporarily restricted and permanently restricted. Only unrestricted revenue pays for operating expenses. What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Statement of Activities Temporary restrictions are imposed by a funder and are satisfied by completing a prescribed activity, or the lapse of time. For example, a foundation gives an organization a grant to support a counseling program, 50% in 2011 and 50% in 2012. What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Statement of Activities Permanently restricted revenue is also imposed by a donor, and is usually an endowment. Endowments are common for arts and education-related organizations. Only the interest from an endowment is considered unrestricted revenue. The “corpus” investment is never spent. Accidental’ Finance Geek? What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Statement of Activities Healthy organizations maintain cash reserves to protect against uncertainty, losses, and risk. Reserves can have specific uses: operating, capital, program development, etc. Board-designated reserves are a flexible alternative to endowments. What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Statement of Cash Flows What ‘Accidental’ Finance Geek? Reconciles the use of cash (in and out flows) during a period, around the following key categories: operating, financing and investing. Is inextricably connected to the Balance sheet (through cash position) and the Statement of Activities (esp. through the net surplus/deficit) What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Operating Budget What ‘Accidental’ Finance Geek? The financial representation of how an organization plans to generate and spend its money over a given period. Should reflect only unrestricted revenue and regular, day-to-day activities. What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Non-Operating Items Generally, non-recurring and unrelated to core business model -Purchase/Sale of capital items (equipment, property and land usually in excess of $5 k) -Investment gains and losses -Bequestsat ‘Accidental’ Finance Geek? Smith & Daley © 2011 What ‘Accidental’ Finance Geek? Smith & Daley © 2011

Sorting Out the Terms Why is it important to know the difference between operating v. non-operating, unrestricted v. restricted? ‘Accidental’ Finance Geek? -regular operating expenses are paid with unrestricted revenue -non-recurring activities, like big purchases, skew regular operations Smith & Daley © 2011

Final Thoughts What Finance If you ‘Accidental’ aren’t already, start Geek? finding ways What ‘Accidental’ Financecapacity! Geek? to improve your financial -Participate in budgeting (project or program) -Read your organization’s annual report, audit, Form 990 s or strategic plan -Hone your Excel guru skills -Join a committee or a Board Smith & Daley © 2011