Kindle Version Available

Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:

http://amzn.to/2GF2E8W

 

No Audit Freak Out

One of the most common audits of a nonprofit organization is the one performed by an independent CPA firm, usually, every year. This work may be a requirement for many grantors who want assurance that the funds have been used properly. Auditors may ask detailed questions or require certain information that may not be readily accessible. However,  there is no need to panic – be prepared and understand the process, which tends to be the same every year. Some tips below are to help you deal with the audit, which is one of those processes that many organizations go through, not just yours.

Tip #1– Sometimes staff with not much experience conduct the audit,  so, try to help them and show them the way, or they may get lost and the audit may take longer. The idea here is to have a helpful, not a defensive attitude. It can be frustrating to have to do this every year with different audit staff, but it’s part of the game. The good news is that it’s common for a former team member in an audit to return the following year as a Sr. or Supervisor so that you won’t have to train auditor again.

Tip #2- Be sure to have all the reports and items mentioned on the audit list, often given to the client a few weeks before the audit. If you don’t have all, call the CPA firm and let them know. Maybe you have other reports or items that can be alternatives to what’s on the list. Your audit may also be postponed until you have all the documents. Most accounting firms schedule nonprofit audits a few months during the year, so you may have some flexibility there.

Tip #3– Hire temp workers or volunteers on an as-needed basis to get all the documentation done, prepare worksheets, and help with filing, copying, and other tasks. Some organizations also use temps to assist with the day-to-day activities while the accounting folks are busy with the auditors. Your accounting staff may not be able to do their regular jobs and at the same time give auditors the attention and information they need. So, help at the right time can lessen the stress. Usually, having temps do a specific task, such as entering invoices for payment, works the best because the work is repetitive and training time is minimum. If you’re lucky to have an accountant on your board or as a volunteer, you can give him or her more involved financial tasks.

Tip #4– Communicate often with the manager responsible for the audit to identify issues or bottlenecks. Sometimes auditors use too technical language that the nonprofit staff may not understand and panic. Or maybe there’s a problem in finding information or explanations for certain transactions that you may be familiar with. The goal is to have a quick, clean audit with no major issues or conflicts. The quicker you know of problems, the smoother the process will be.  Make a point to contact the manager at least once every few days.

Tip #5- Notify everyone in the organization of the upcoming audit, since auditors may need to talk to people in other areas of the nonprofit, such as programs and HR. Warn managers and staff that they may need to present certain things to the auditors, including showing them confidential HR and payroll files and reports. Since auditors usually request the same items and calculations, such as vacation accruals every year, the requests shouldn’t be that surprising. But it’s always good to let people know beforehand.

Other Considerations -Freaking out with questions asked by auditors makes no sense— usually, they follow a pre-set program that may not fit your organization 100%, so you can explain to them the situation in a respectful way and offer alternatives.  Ask the auditors what goals they’re trying to get at.  Maybe they are looking at mitigating a risk that doesn’t really apply to your nonprofit, so let them know about it. CCH – Wolters Kluwer Audit guides, for instance, are very popular with many CPA firms that use their audit programs to guide them through this process.  If you’re interested, you could buy the guides, even if it’s expensive.

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

Nonprofit Finance and Management Explained

The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out.  It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018.   For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.

Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.

Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories.  It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.

You can check the new edition at https://goo.gl/M563u9

Overhead Essentials

If the program is the heart of a nonprofit, overhead is its backbone. Overhead is known as general and administration costs and, in some circles, it includes fundraising as well. Since the definition of overhead may vary, you should be clear on what it means. For example, in government agencies, fundraising is usually not part of overhead, while other entities consider anything besides program costs, overhead.

Overhead rate on grants –Many grantors use “overhead rates” to reimburse nonprofits for administrative costs. This rate, a percentage, is usually calculated based on prior financial numbers and negotiated with grantors. The calculations can be complicated and detailed.

To decrease this complexity, the Federal government pays nonprofits a standard 10% overhead rate on their grants. This means that after reimbursing direct costs, it adds a 10% for overhead. If direct costs are $100, the reimbursement will be $110. This setup may be fine for smaller organizations, but not for larger ones that may negotiate a higher rate. The idea is for the overhead rate to cover costs that cannot be allocated easily to a program, like an electric bill for a building that houses many programs.

This rate should be reviewed every year to make sure that indeed the overhead rate is at least equal to actual overhead costs. If the rate of 10% reflects $100,000, but the actual overhead costs are $120,000, then the organization may need to negotiate a higher rate with the grantor for the next fiscal year.

Overhead requirement on grants and gifts–Another reason overhead is important is that it must be part of every grant proposal or gift. Some nonprofits have funds restricted for certain programs only with nothing much left over for overhead, forcing many to fundraise for overhead mostly. It’s a strange situation where an organization may have money to fund research programs, but cannot pay its phone bill and other basic needs. Quite real and disconcerting situation.

To avoid this issue, nonprofits have started to require a percentage for overhead to be included in the gift or grant or they cannot accept it. I have seen a large nonprofit say no to a large gift because of this issue.

Overhead should NOT be zero –Overhead exists for a reason and if it shows as zero on financial statements or tax forms, you have a problem.  It could be an accounting error in classification or not understanding what overhead is. Whether fundraising is included or not, there should be something allocated to overhead in items like insurance policies, salaries or supplies. Even if all employees are unpaid,  expenses exist that cannot be specifically assigned to a certain program and are part of overhead. While it’s understandable the wish to keep overhead costs low, it’s not realistic to keep it at zero.

The first thing to think about when someone mentions overhead is to understand what it means. That is very important to make sure everyone is talking about the same thing. The overhead definition and calculation may vary among grantors and even government agencies. So, ask questions about it, don’t assume anything and don’t forget about it in proposals.

 

Check out the book”Nonprofit Finance: A Practical Guide- Second Edition First edition nominated for a McAdam Book Award.

Nonprofit Budgets Explained

Budgets are financial guidelines to make sure the organizations are going in the right direction. Like any other business, nonprofits need to plan ahead using budgets, often based on prior financial data and expectations for the future. This process, done a few months before the new year starts, involves managers and board members, to make sure the budget is reasonable and attainable.

There are many ways to start the budgeting process. Many organizations develop budgets based on income first and then expenses, while others start with expenses and then work on the revenue — it depends on the nature of the organization. For example, when a nonprofit receives most of its income from grants, it’s easier to estimate income first and then work on expenses.

Budgeting is a group effort

In order to develop a good budget, you need to be realistic and detailed-oriented.  A lot of research is required, and not just financial, but programmatic as well — is the nonprofit going to expand or shrink certain programs?  Are there any plans for construction or another capital improvement?  You cannot do it in a bubble –you need a lot of information from the past and from the future, and that usually involves many meetings and discussions.

Use prior financial reports

The first step to create a budget is to print out current revenue and expense detailed report by account and use that as your basis for the future. For example, if you see rent expense of $1,000 a month, then you should budget for this amount for the following year unless you know that the rent will increase or decrease in the near future. Look at each account and try to forecast the best you can about the following year. This type of work is often done during the last months of the prior year so that any trends or new information is included in the budget.

Consider major changes and grants

Although budgets are usually done once a year and then the numbers remain static, there are instances where budgets are changed and re-approved by the Board during the year. This may happen when a nonprofit loses or gains major funding by surprise, making the original budget obsolete.

Nonprofits receiving government funds incorporate grant budgets as their own. It doesn’t make sense to use multiple budgets — it creates confusion.  Organizations also need to consider government cuts and how that would affect operations.  As a rule, budgeting for a bit more revenue than expenses, allowing for cuts and unexpected expenses is a sensible approach. It’s always good to have a bit of a financial cushion.

Budget follow up is a must

Once budget numbers are approved by the Board and entered in the accounting system, the next step is to get actual vs. budget reports starting with the first month of the new year. Be sure to look at budget variances for the month and year-to-date. If you only look at monthly numbers, you may miss variances that may be small on a month-by-month basis, but significant for the year. For instance, if you see that your revenue is down $10,000 this month, it may not mean much, but if you compare year-to-date actual to budget numbers, you may have a $100,000 hole in the budget that needs to be corrected by using funds from prior years or by cutting down expenses.

Note that many nonprofits count on restricted funds to operate and that’s when confusion may start up. When developing an operating budget, differentiate between restricted revenues and others and be sure that donor documentation supports the decision to use restricted funds. You cannot unilaterally decide to use restricted funds — the donor must have given express permission for the money to be used a certain way.

More than one budget

Some organizations have separate budgets for capital expenditures to be used in major construction or another major project, which can be a sensible budget approach. Keep the operating budget separate and review both, looking for discrepancies and double counting. For instance, you may receive funds to construct a school and that should go towards the capital budget only — not towards operations. In some cases, the same funding may show up in two different budgets by mistake. Look out for those that can create a major problem.

Keep good documentation

As discussions are done and decisions are made regarding the budgets, keep good records that are always important when looking at budget vs. actual reports. If numbers are not going according to plan, it’s crucial to look at the reasons for the budget amounts. For example, if expenses for postage are way over budget, maybe the budget numbers didn’t account for a new campaign or for all campaign expenses.  This can help budgets be more accurate in the future.  Documentation can also help management in analyzing the financial reports to identify areas of real problem.

>>>BEWARE  Accounting or the financial department folks should NOT prepare the budget by themselves —- they need to contact others within the organization to finalize the budget process.
Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award

Grant Management Ideas

When a nonprofit receives grants, either from government entities or foundations, management needs to keep records well organized for questions or reviews. This can be tricky in the case of multiple funders with their own reporting and compliance issues. Even smaller funders may want to know what happened to their money and require some reporting, even if informal.  Showing disorganization and lack of controls may discourage donors to keep on giving, spelling disaster to nonprofits.

Below are some ideas that are likely to help you in this process.

  • Set up a summary sheet for each grant with reporting dates and other crucial information, such as education requirement of staff covered on each grant that is updated for each new grant and is reviewed every week to make sure nothing falls through the cracks. This could be done on paper or online, but make sure others within the organization have access to this information easily in case people go on vacations or leave the nonprofit. A template could be created so that all summary sheets look alike, making it easy to find information.
  • Make sure the accounting system captures revenues and expenses on each grant. You could identify grants through the chart of accounts by reserving a couple of digits towards specific grants or through “classes” or another method specific to your software. You may also need to train your accounts receivable and payable staff to recognize grant funds coming in and out, so they can code them properly. If not, you will have a nightmarish time providing reports to grantors and other interested parties.
  • Develop a good filing system. Be sure to download and print all OMB Circulars and other documentation relevant to grant control, including notes on meetings and phone conversations. Keep them filed and accessible at all times. You can make a summary listing of all non-allowable costs that you are likely to have and keep it handy.
  • Establish a budget for the organization based on grant budgets. Every grant-funded project should have its own budget numbers entered in your accounting system.
  • Review reports on each project monthly to identify errors and monitor financial compliance.  The Board and upper management usually receive summary reports, but other managers should review financial reports by grant source.
  • Review documentation on journal entries, accounting entries, associated with grants. Each expense and revenue should be justified with proper documentation. If you see a number that doesn’t make sense, ask to see the backup paperwork related to the number.

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award