Introduction to Financial Decision Making for Non-Profit Leaders

Introduction to
Financial Decision Making
for Non-Profits

San Fernando Valley
Community Leadership Development Program
Saturday, October 8, 2011

Agenda
 Commence
10:00a | Wendy Saunders
 Session Five (NFP Laws and Ethics) Review
10:05a | Wendy Saunders
 Financial Decision Making for Non-Profits; Emerging Leader’s Perspective
10:30a | Alan Lewis
 Break
11:00a
 Financial Decision Making for Non-Profits; Established Leader’s Perspective
11:15a | Roberto Barragan
 Closing Remarks
12:45p | Wendy Saunders
 Adjourn
1:00p | Wendy Saunders

CLDP | Session 5 | NFP Financial Decision Making
Slide 2

NFP Financial Decision Making;
Emerging Leader’s Perspective
Alan Lewis | 2011 SFV CLDP Vice-Chair

Presentation Objectives

 Provide an introduction to the key concepts, terms, and
considerations related to financial decision making for non-profit
board leaders.
 Establish an understanding of the importance of responsible and
sustainable accounting and financial practices for non-profits of all
sizes.
 Instill financial responsibility and stewardship in CLDP participants.
 Provide an array of resources to assist in decision making.

Slide 4

Overview
 Basic Principles
 Financial Issues for Board Members
 Key Terms
 Key Points for Consideration
 Avoiding Trouble
 Real Life: Mid Valley Family Y
 NFP Financial Decision Making Goals
 References

Slide 5

Basic Principles
 Who here has taken Accounting I and II?
 Responsibilities of Board and Committee Members
 Recap from Law and Ethics: Duty of Loyalty, Care, and Obedience
 FUNDRAISING: Fiduciary Responsibility
 Financial integrity, solvency, safeguard, and procedures to protect the organization

 Reading and Interpreting Financial Statements
 Audited vs. Unaudited Financials
 Accounting Standards (e.g. GAAP, FASB, GASB)

 Financial Stewardship / Governance
 Risk Management
 Diversification
 Good faith

 Implementation of Sarbanes-Oxley Section 404 (Audit of Internal Controls)

Slide 6

Financial Issues for Board Members

 Fundraising
 Planning and Budgeting
 Monitoring Revenue and Expenditures
 Available Cash and Reserves
 Ensuring Appropriate Actions
o Purpose restricted grants or contributions
o Federal or State funding
o Program funding

Slide 7

Key Terms
• Generally Accepted Accounting Principles (US-GAAP): A widely accepted set of rules, conventions, standards, and procedures for
reporting financial information, as established by the Financial Accounting Standards Board.
• Financial Accounting Standards Board (FASB): Independent board responsible for establishing and interpreting US-GAAP. Financial
Accounting Standards 116 and 117 govern the nonprofit sector. FAS 116 deals with contributions made and received while FAS 117
deals with financial statement format.
• Revenue: Payments for services, donations from individuals, foundations and corporations, support and contract payments from
government agencies, income from fundraising activities, and investments.
• Expenses: Represent the total cost of operating the organization, including payments made to employees and other parties, including
operating expenses, debt, principal payments, capital expenditures, non-cash expenses, fixed assets, and funds set aside each year for
future use.
• Assets: An item of current or future economic benefit to an organization. Examples include: cash, short-term investments, accounts
receivable, grants receivable, inventories, prepaid expenses, buildings, furniture, equipment, vehicles, and long-term investments.
• Liabilities: Items owed by an organization or claims against its assets. Examples: accounts payable, accrued salaries and benefits,
accrued payroll taxes, deferred revenue, lines of credit, construction loans, current portion of long-term debt, short-term notes
payable, and long-term debt.
• Financial Statements: Written reports that quantitatively describe the financial health of an organization. A complete financial
statement includes a balance sheet, an income statement, a statement of cash flows, and often a statement of functional expenses.
Financial statements are usually compiled on a monthly, quarterly and annual basis.

Slide 8

Key Terms (cont.)
 International Financial Reporting Standards  Due Diligence
(IFRS)
 Conflict of Interest
 Government Accounting Standards Board
 Internal Controls
(GASB)
 Budget
 Form 990
 Capital Campaign
 Grants
 Case Statement
 Membership
 Collateral
 Audit
 Compound Annual Growth Rate
 Income Statement
 Contributions
 Statement of Cash Flows
 Etl.
 Balance Sheet

Slide 9

Key Points for Consideration
 For Profit and Not-for Profit Accounting is Not Very Different
 Not for Profit Organizations must report Fundraising expense
 Financial Reports are prepared by Management
 A Healthy Non-profit organization makes money
 A Non-profit might budget a deficit
 There are three categories of endowment funds: Permanently restricted,
Temporarily restricted, and Quasi-endowment funds as designated by the
Board
 Financially oriented committees within non-profits generally include:
Finance, Audit, and/or Compensation.

Slide 10

Avoiding Trouble
 Attend board meetings
 Follow the procedures as outlined in the Articles of Incorporation and Bylaws
 Review meeting minutes and committee reports
 Promptly Disclose any conflicts of interest
 Ask that experts be retained when the board needs to take action when outside its experience
 Review financial statements
 Review IRS Form 990
 Insist on annual budgets, internal accounting controls, and frequent financial reports
 Review audit reports and management letters
 Foster an atmosphere that encourages staff to come forward with problems
 Insist on compliance with all applicable law
 Be leery of a one man show

Slide 11

Real Life: Mid Valley Family Y
 Former Mid Valley Board and current Tri-Y Finance Committee member ( >5 Years )
 Mid Valley Branch operating deficits went from $400k to $200k per year
( > trending towards $0 ) 
 Accrued liability with LA Metro over $2m
 Agreed to debt plan, wherein debt is “frozen”, until an asset sale, and no more direct financial support from
Metro

 Completed (first of its kind) three way merger between West, Mid, and East Valley Y’s
 Cash flow positive collectively with current and projected increasing cash surpluses
 Trending towards ability to qualify for capital campaign

 Aging facility with need for short and long-term renovations with possibility of an
extensive capital campaign for redevelopment
 Memberships are subsidized, which means with the addition of each new member
there is a greater need to raise money for membership scholarship fund
 Growing need within the community (urban branch)

Slide 12

Financial Decision Making Goals
 What is stewardship versus profitability?
 What is the importance of financial record keeping?
 What are financial statements?
 What is the difference between a for-profit and not-for-profit financial statement?
 What are state and federal reporting requirements (e.g. Form-990) for non-profits?
 What are a non-profits financial disclosure requirements to its stakeholders?
 How does financial decision making and legal compliance work together?
 What is a budget and how is it best prepared and followed?
 What can an NFP invest in versus a for-profit?
 What are the types of donations an NFP can accept (e.g. endowment, restricted)
 What financial indicators are important when determining a non-profits financial health?
 What is the role of a Treasurer versus a CFO in a non-profit?

Slide 13

References
 Nonprofit Finance Fund | Glossary of Financial Terms
http://nonprofitfinancefund.org/financial-terms

 Financial and Accounting Guide for Not-for-profit Organizations
http://books.google.com/books?id=I1iQByG15r0C&dq=non-
profit+financial+decision+making&printsec=frontcover&source=in&hl=en&ei=f4d1TPHNHJCisAP2joyhDQ&sa=X&oi=book_result&ct=result&resnum
=12&ved=0CD0Q6AEwCw#v=onepage&q&f=false

 Financial Responsibilities of Nonprofit Boards
http://books.google.com/books?id=USS8Bsl_g-wC&printsec=frontcover&dq=governance+non-
profit&hl=en&ei=qGuuTOTVF43QsAOg36D6Cw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CD4Q6AEwAzge#v=onepage&q&f=false

 A Desktop Guide for Nonprofit Directors, Officers, and Advisors
http://books.google.com/books?id=_vEMnYkV9yoC&pg=PA206&dq=governance+non-
profit&hl=en&ei=xWuuTLbeKIrEsAOwodS0DA&sa=X&oi=book_result&ct=result&resnum=6&ved=0CE8Q6AEwBTgy#v=onepage&q=governance%20
non-profit&f=false

 Financial Basics for Nonprofit Managers
http://books.google.com/books?id=-6TOB0oa7jsC&pg=PA151&dq=non-
profit+finance+terms&hl=en&ei=vHCuTLGfAo64sQOLzf3bDA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEUQ6AEwBA#v=onepage&q&f=f
alse

 Financial Management for Nonprofit Organizations
http://books.google.com/books?id=ywEEoO_CRvcC&pg=PA331&dq=non-
profit+finance+terms&hl=en&ei=vHCuTLGfAo64sQOLzf3bDA&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGEQ6AEwCQ#v=onepage&q=n
on-profit%20finance%20terms&f=false

Slide 14

Established Leader’s Perspective
Roberto Barragan | President, Valley Economic Development Center

San Fernando Valley

What is Stewardship v. Profitability?

 Stewardship: managing to breakeven
i.e., Maintenance, meeting payroll, keeping the doors open.

 Profitability: generating an annual surplus of
revenues minus expenses
i.e., surpluses, reserves, employee retention through merit increases
and bonuses.

Slide 16

What is the importance of Financial Record Keeping?

 Difference between existence and shutdown

 Financial recordkeeping is not just about recordkeeping, but about:
o Getting paid by government entities and surviving their audits

o Keeping track of cash flow needs and staying ahead of it

o Being able to report accurately to Boards

o Staying in compliance with state and federal tax authorities

o Being able to raise money from foundations and corporations in an
increasing watchful environment

Slide 17

What are Financial Statements?

• Statement of Financial Position
• Statement of Financial Activities
• Statement of Cash flows
• Comparative Profit and Loss Statement
• Summary of Cash Balances, Accounts
Receivables, Accounts Payables

Slide 18

What is the difference between for-profit and non-
profit financials statements?
 Unrestricted, Temporarily Restricted and Permanently
Restricted Assets
 Unrestricted: Donations, Fees for Service, Interest
Income, Dues
 Temporarily Restricted: Grants for specific activities and
programs that become unrestricted as activities/programs
are implemented
 Permanently Restricted: Buildings, endowments, non-
operating revenue activities: DON’T TOUCH!

Slide 19

What are a non-profits financial disclosure requirements to
its stakeholders?

• AUDITS: annual review performed by CPA of financial statements
with sufficient testing such that the CPA can certify their accuracy and
integrity
• Distribution to all funders and posting on the website
• Not discretionary, best practice period
• No asking for money if you have no audit
• Cost of doing business

Slide 20

How does Financial Decision Making and Compliance work
together?

 Make financial decisions so as to comply with the law and stay out
of jail

 Tax returns are required

 Payroll taxes are a must

 HR can kill an organization faster than cash flow

o Wrongful termination
o Sexual Harassment
o Non payment of wages

Slide 21

What is a budget and how is it best prepared and followed?

 Annual exercise in forecasting revenues and expenses.
 Should be based on committed and/or expected revenues, not on
optimistic fundraising goals; PROJECTED can be a bad word
 Should be balanced without reserves, reserves are for cash flow
problems and surprises
 We’re not the feds, we can’t print money; we’re not the state, we
can’t issue IOUs; and we’re not the city, so we can’t raise taxes

Slide 22

What is a budget and how is it best prepared and followed?
(cont.)

 On a monthly basis, statements should be prepared with variances
to budget
 Variances should be analyzed to determine if they are timing issues
or real differences in revenues and expenses
 On a quarterly basis, take action to deal with those variances, don’t
wait until the end of the year with some fundraising appeal
 Make the hard decisions early, or someone else will make them for
you

Slide 23

What can an NFP invest in v. a For-Profit?

• Anything!!!
(However, if its not related to mission, you may have to pay taxes:
other businesses, real estate (not for the non-profit)
• Good: Securities, like business activities, your own
building
• Bad: Businesses with reputational risk, whole portfolios
in individual stocks
• Remember liquidity and risk

Slide 24

What are the types of Donations an NFP can accept?

 Anything!!
 Again mission is the issue
 As well as reputational risk
 Real estate, bequests, endowments, vehicles, cash,
jewelry
 As long as it doesn’t cost you money to maintain, i.e.
animals, farms, land with no commercial value

Slide 25

What Financial Indicators are Important when determining
a Non-profits Health?

 Operating Results, Year to Year Monthly Net Income
 Unrestricted Profit and Loss, Revenue by Source
o Reimbursements
o Business Revenue
o Donations
 Liquidity Dashboard
o Cash days on Hand: cost/cash needed per day
o Unrestricted Cash balances
o Accounts Payable and Receivable (AR / AP)
 Sources and Uses of Funds w/ corresponding cash flows, LOCs,
reserves

Slide 26

What is the role of a Treasurer v. a CFO in a NFP?

• TREASURER: Board member with responsibility
to report financial results to Board of Directors
• CHIEF FINANCIAL OFFICER: Employee
responsible for accurate and responsible financial
reporting and cash flow management

Slide 27

Questions and Answers
Roberto Barragan | President, Valley Economic Development Center

San Fernando Valley

Introduction to Financial Decision Making for Non-Profit Leaders

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