Presented by: Bruce J. Toews, CPA, MBA, ABD Assoc. Professor of Accounting/Finance Walla Walla University September 17 & 19, 2013 Brought to you by: A Learning Center for Nonprofits Sponsored by: The Sherwood Trust & Walla Walla Community College
Schedule: • Start 11:30am • 1:30pm -- out of here CPE for CPAs (sign-in & out) Kudos to: • A Learning Center for Nonprofits, co- sponsored by the Sherwood Trust & Walla Walla Community College Introductions: your name, nonprofit, position, and any community announcements
1. A Challenging Time for Nonprofit Finances 2. Fostering Confidence in Your Financial Reports 3. A Re-cap of the Statement of Financial Position 4. Understanding the Statement of Activities and Functional Expenses 5. Interpreting the Statement of Cash Flows 6. Financial Metrics for Nonprofits
According to the 2013 Nonprofit Finance Fund’s annual survey of 6,000 nonprofits: For the first time in the survey’s history, more than half (52%) of nonprofits were unable to meet demand over the last year, and even more (54%) said they won’t be able to meet demand this year Last year, one in four nonprofits ran so close to the bone that it had less than 30-days operating cash-on-hand 42% of nonprofits said they would not have financial resources to thrive and be effective over the next 3 years.
Nonprofits are addressing these challenges by: • Diversifying sources of revenue • Seeking efficiency and cost reduction • Collaborating with other nonprofits • Embracing advocacy These actions require, among other things, better financial data analysis, which is a focus of our discussion today.
1. A Challenging Time for Nonprofits 2. Fostering Confidence in Your Financial Reports 3. A Re-cap of the Statement of Financial Position 4. Understanding the Statement of Activities and Functional Expenses 5. Interpreting the Statement of Cash Flows 6. Financial Metrics for Nonprofits
1. Federal requirements If a nonprofit expends $500,000 or more of federal funds annually, or participates in a Combined Federal Campaign > $100,000 2. Washington State requirements (eff. 1/1/10) Average Annual Gross Revenue over last 3 years Requirements Less than $1 million No state audit requirements Greater than $1 million up to $3 Form 990 prepared /reviewed by million CPA, or audited fin. stmt. Greater than $3 million * Audited fin. stmt. by CPA* * Not required if nonprofit receives < $500K cash contributions or gets a large, one-time windfall donation 3. Some grant makers and lenders require audits
Best practices call for some sort of independent evaluation to: 1. generate donor/constituent confidence 2. demonstrate compliance with proper standards for accounting and reporting 3. prevent or detect fraud, errors, and waste
OPTIONS: 1. CPA Audit or Examination 2. CPA Review 3. Non-CPA options 4. Internal steps to enhance accountability, absent an audit
Service Assurance Advantages/Disadvantages Financial Reasonable Most thorough form of evaluation, providing highest statement assurance level of credibility, but also costs the most. CPA audit performs tests & gathers supporting evidence; internal controls over finances are evaluated. Financial Limited Less thorough than an audit. CPA does minimal statement assurance testing but asks lots of questions and checks for review reasonableness. No evaluation of internal controls is done. At least half of the cost of an audit but less assurance provided. Financial No assurance CPA compiles financial statements in a proper statement format; CPA does not perform any tests and compilation provides no assurance about financial statements; CPA is only responsible for obvious, glaring errors
Internal evaluation by financially savvy board or constituency member • No established standards to follow; no broadly recognized meaning from such an attempt; therefore, credibility and payback are questionable. • NOTE: By law, only CPAs can perform financial statement audits and reviews. A CPA is prohibited by ethics rules from auditing/reviewing the financial statements of a nonprofit for which the CPA is also a board member.
1. Carefully prepare Form 990 and make readily available 2. Make sure you can answer “yes” to all accountability questions on Form 990 • Form 990 reviewed by board before filing? • Board minutes documented? FORM 990 THRESHOLD FORM • Gross receipts normally ≤ $50k 990-N Conflict of interest policy? Gross receipts > $50k & < $200k, 990-EZ • Whistleblower policy? and total assets < $500k or 990 Gross receipts ≥ $200k and/or total • Records retention policy? 990 assets ≥ $500k • Employee compensation policy? 3. Distribute a thoughtful and well-presented summary annual report
1. A Challenging Time for Nonprofit Finances 2. Fostering Confidence in Your Financial Reports 3. A Re-cap of the Statement of Financial Position 4. Understanding the Statement of Activities and Functional Expenses 5. Interpreting the Statement of Cash Flows 6. Financial Metrics for Nonprofits
Can also be called Balance Sheet or Statement of Net Assets, but these names are uncommon Snapshot of financial position at a point in time Assets = Liabilities + Net Assets $20k = $18k + $2k 100% = 90% + 10% Left side (assets) shows resources. Right-side shows who claims the resources, creditors (liabilities) and/or the nonprofit “owners” (net assets, formerly known as fund balance).
Tells us three important messages: 1. Solvency & viability (ability to continue to fulfill its mission over the long-term) 2. Liquidity (ability to pay bills in the short-term) 3. Resource Restrictions (purpose or timing constraints on the use of resources)
Intiman Theatre, Seattle Assets = Liabilities + Net Assets DTA $1M = $1.8M + -$.8M 100% = 180% + -80% 180% The debt-to-asset ratio (DTA) tells us what portion of the assets must be liquidated to pay all liabilities. The current DTA for small nonprofits who file Form 990-EZ averages around 14%. DTAs significantly higher than this might be of concern.
Tells us about three important things: 1. Solvency & viability (ability to continue to fulfill its mission over the long-term) 2. Liquidity (ability to pay bills in the short-term) 3. Resource Restrictions (purpose or timing constraints on the use of resources)
A Local Nonprofit Show liquidity by sequencing listing liquid assets first listing short- term liabilities first using current / non- current breakdown (current ratio $47.9k/$13.4k=3.6) showing unrestricted cash separately
Tells us about three important things: 1. Solvency & viability (ability to continue to fulfill its mission over the long-term) 2. Liquidity (ability to pay bills in the short-term) 3. Resource Restrictions (purpose or timing constraints on the use of resources)
1. A Challenging Time for Nonprofit Finances 2. Fostering Confidence in Your Financial Reports 3. A Re-cap of the Statement of Financial Position 4. Understanding the Statement of Activities and Functional Expenses 5. Interpreting the Statement of Cash Flows 6. Financial Metrics for Nonprofits
Provides information for evaluating the organization’s performance over a period of time Other names: Statement of Revenues, Expenses & Other Changes in Net Assets Statement of Activities and Other Changes in Net Assets Income Statement or Statement of Income & Expense (not recommended) Operating Statement (not recommended) Profit/Loss Statement (not recommended)
Common Elements: Revenues/Expenses - from ongoing central activities Gains/Losses – from peripheral or incidental activities Reclassifications – movements from one class of net assets to another
Activities are segregated into three classes: 1. Unrestricted OPTION 2 2. temporarily restricted UNRESTRICTED 3. permanently restricted Increase $X Decrease $X Two Format Options TEMP. RESTRICTED OPTION 1 Temp. Perm. Increase $X Unrest. Restr. Restr. TOTAL Decrease $X Increases $X $X $X $X PERM. RESTRICTED Decreases $X $X $X $X Increase $X Net $X $X $X $X Decrease $X TOTAL $X
YWCA of Yakima, FYE 6/30/12 Statement of Activities Format 1 Revenue Reclassification Expense
1. Unrestricted Activities: No donor-imposed restrictions, other than to support the general mission of the organization Normal operating activity falls in the unrestricted class ALL expenses are considered unrestricted activities Important Point: As used in accounting, “restrictions” can only be created by external donors. Internal restrictions do not exist – rather, these constraints are called board-designated
2. Temporarily Restricted Activities have a purpose restriction or time restriction placed on them by the donor Example of purpose restriction: donor gives $1m to a university to supplement accounting teacher salaries Examples of time restriction: 1) donor gives $1m to Little Theatre now but says funds can’t be used for 2 years OR (2) donor pledges to give $1m at a later time.
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