| FREQUENTLY ASKED QUESTIONS: FINANCIAL MANAGEMENT
What
is financial management? Financial management for a nonprofit is a combination of several critical functions:
Stewardship of the organization's assets
Assurance of adequate resources
Development and approval of an annual budget
Current and year to date financial reports
Assurance the organization is prepared for the annual audit functions.
The primary oversight should be done by a board appointed Finance Committee and the selection
of a Treasurer. Combined with a capable financial staff person the organization then has the
necessary tools to take on the task of creating and sustaining a financial management system.
What
is the role of a Finance Committee? The role of a finance committee is to help the board focus on fiduciary duties, recommend
financial policies, help develop and review the budget, take the first look at financial statements,
oversee the audit process (unless there is a separate audit committee), draft internal control
policies, draft investment policies, and hire/oversee performance of an investment manager.
Overall, a finance committee is separate from the board of a nonprofit and focuses solely on the
financial aspects of the organization.
No matter how small or large the nonprofit, it is best practice that there be a Finance Committee
that reports to the board of directors. This committee should consist of board members and/or
outside persons with financial expertise. Those staff members with financial/accounting
responsibilities may assist and support the committee, but ought not to be voting members.
Some guidelines for the committee include:
Assurance of segregation of financial oversight from managerial duties
Creation of policies for check signing, expense reimbursement, credit card usage,
discretionary funds, petty cash, access to confidential documents
Recommendation to the board of directors of the engagement of an outside auditor who
reviews processes and procedures
Guidance for improving internal controls, accuracy of financial statements and budgeting
What is the
role of the Treasurer and what are the position's duties?
The role of the treasurer including some requisite skills and duties includes:
An understanding of nonprofit accounting
The Treasurer is a volunteer and member of the board while the Chief Financial Officer
(CFO) is an employee and officer of the organization
Many nonprofit organizations name the CFO as assistant treasurer to accommodate the
regular need for signatures, etc
May serve as chair of the finance committee
Utilizing the finance committee, manages the board's regular review and actions required
to fulfill budget oversight and other fiduciary responsibilities
Assures that understandable financial reports are presented to the board on a timely basis
Assists the CEO with budget preparation involving the finance committee and board in
the process of approval
Recommends to the Finance Committee the engagement an appropriate independent
auditor; reviews the audit with the Finance or Audit Committee and presents findings and
recommendations to the board
Who sets the
standards for financial practice and reporting? First, it is important to note that accounting is not a science with permanently fixed rules. It is a
dynamic field dedicated to providing accountability of resources and principles governing its
practice. Therefore standards of accountability and methods of reporting change over time.
Financial accounting standards are set by a few organizations.
Financial Accounting Standards Board (FASB). It establishes basic accounting principles
and issues frequent statements on general accounting guidelines. Visit its website at
http://www.fasb.org
American Institute for CPA's (AICPA). It develops accounting rules that apply to FASBreleased
statements. Visit its website at http://www.aicpa.org
Generally Accepted Accounting Principles (GAAP) is a compilation of opinions and
statements from the above organizations. They define principles used to account for the
financial activity of nonprofits. This standard is used by auditors, the IRS, many financial
institutions, and others to interpret financial activity of an organization. GAAP rules are
constantly changing
What types
of reports should an organization be using?
a) Statement of financial position, otherwise known as a balance sheet, reports assets,
liabilities, and net worth by fund balances. A statement of position should include:
Assets
- Cash & equivalents
- Invested funds
- Capital items (land, buildings, equipment)
Liabilities
- Accounts payable
- Debt payments
- Benefits payable
Equity/Net Assets (Assets less Liabilities)
- Unrestricted
- Board designated funds
- Undesignated funds
- Temporarily restricted
- Permanently restricted
- Endowment
- = Total Equity/Net Assets
The organization's financial position should be reviewed by the board of directors and
management on a regular basis. Some of the questions the board should be asking include:
- Does a comparison of our position at this point in time to prior year-end show growing
strength or weakness? What are the changes?
- What is the trend in our accounts receivable (A/R). Is there sufficient allowance for bad
debt? Are the A/R increasing and what does an analysis of aging of A/R show?
- What are our liquid assets?
- What is the valuation of our fixed assets?
- What is the state of our current debt?
- What is the state of our current accounts payable?
- What is owed in benefits?
- Is our endowment growing?
b) Statement of activity tracks gains and losses to show whether the past period was healthy
and also shows actual operations in relation to the budget. This report includes income by fund
and by source, expenses by both function and natural classification, and a comparison to both
prior periods and to prior budgets. This will show the surplus or deficit for the current period. In
addition the statement of activities should show the same year to date information.
Some questions boards of directors and management should ask related to a statement of activity
are:
What are the components of our income? What of each are restricted in some manner?
What of each are transfers from the temporarily restricted fund and why?
Are we earning interest on our funds and what are their uses?
How do they compare to prior year and to budget?
How do our expenses compare to last year and to budget?
Are the variances within specific parameters approved by the board?
Do the explanations of variances make sense? Are there warnings? Bases for celebration?
What are management's concerns?
c) Cash Flow Statement reports on the availability of cash for operations. This statement
provides a key indicator of the ability of the nonprofit to meet its current cash flow needs as well
as projecting those needs for the year.
Some questions that should accompany a statement of cash flow are:
Is our cash increasing or decreasing over time?
How many days of cash are in hand? (Normal daily expense for running the
organization divided by the amount of unrestricted cash.)
Are there
key ratios or 'standards' for tracking finances for nonprofits? Key ratios are mathematical calculations that provide important indicators of an organization’s
financial health. For example many organizations indicate they need to maintain a 2:1 "cash
ratio" (cash and equivalents/current liabilities). Other common ratios to track are the net
operating ratio (net surplus/total revenue) and the program expense ration (program
expenses/total expenses). However, there are no established "correct" key ratios or standards.
These ratios should be determined by each organization and reported regularly to the board of
directors with indications of changes in the ratios. Tracking ratios over a period of time will
provide the board of directors and management important information about the organization’s
financial trends and needs. There are a number of nonprofit watchdog organizations that can
help provide information regarding important ratios. They include: BBB Wise Giving Alliance;
Guidestar; ePhilanthropy Foundation, Guidestar, United Way and the American Institute of
Philanthropy.
Why is it
important to establish a budget for the organization? The budget is the organization's financial plan for the year. It includes the anticipated fiscal cost
of providing programs and services over a specific period of time. The budget is the board of
director's fiscal policy for that year and should be approved by the board prior to the time period
covered by the plan. It provides the primary control mechanism relative to anticipated income
and committed expenses. Management can make necessary decisions, within the budget, to
maintain a healthy organization after carefully analyzing income and expenses.
A budget should be a requirement for any nonprofit regardless of size. For the start up
organization it might be no more complicated than a family budget using cash as the basis for its
control and reporting, but as the organization grows in size and complexity of programs offered
it is critical that it move to the accrual method of accounting.
How does an
organization move from simple accounting to more sophisticated
financial management described above? This is one of the most challenging steps for the growing nonprofit. Hiring an experienced
skilled nonprofit accountant to develop and transition to such a system is often beyond the
financial means of an organization. The first step would be to recruit one or two persons having
such knowledge as volunteers to the board of directors. They along with the CEO should plan
the development of the financial management system as one would plan for a new program. One
source of assistance might be another strong nonprofit in the community. That is especially true
if you can find another nonprofit having a similar mission and array of programs. Consult with a
medium to large accounting firm that has nonprofit accounting/audit as part of its practice. There
are also many publications and books available. (See Resources, Section 10) The key is to
approach this strategically rather than quickly hire a person who you hope will do the job.
How public
should the finances of a nonprofit be? Central to a nonprofit's creditability is public trust and therefore its finances should be
transparent and available not only to the board in the form of regular statements described above
but also to the public in the form of an annual report. Every board member must have full access
to financial reports and continued service on the board should be dependent upon getting timely
credible reports of the organizations financial position. In addition, the Federal government has
stepped in requiring more openness of nonprofit finances through the requirement of filing an
annual report entitled Internal Revenue Service - Form 990. Once filed, this Form becomes a
public record accessible to the general public on Guidestar.org. and to anyone who asks.
If I suspect "irregularities" in the financial statements what should I do? First, raise your questions with the chief financial officer to determine if you can obtain an
explanation that is credible and responds satisfactorily to your questions. If not, the next stop
should be the Executive Director. If his/her response is not satisfactory, then discuss the issue
with the treasurer and the chair/president of the board of directors. Assuming you do not get
answers that satisfy your concerns, you may decide to do one of two things. First, if you are
simply uncomfortable and do not believe something inappropriate and unethical is occurring,
you might determine you can no long serve on the board. Second, if you believe there is
something wrong you can report it to the Arizona Attorney General’s office. (In some states the
responsible public official is the Secretary of State.)
Related
Resources
There are many resources on financial management available both in bookstores and on the
Internet. Among them are:
Publications:
- Blazek, Jody, CPA. 2000 Financial Planning for Nonprofit Organizations. John Wiley & Sons, Inc., New York.
- Gross, Malvern J. Jr., McCarthy, John H., Shelman, Nancy E., 2005. Financial and Accounting Guide for Not-For-Profit Organizations, 7th ed. John Wiley & Sons, Inc., New York..
- Hankin, Jo Ann, Seider, Alan, Zietlow, John, 1998. Financial Management for Nonprofit Organizations. John Wiley & Sons, Inc., New York.
- Label, Wayne A., 2006. Accounting for Non-Accountants.
First edition, Sourcebooks, Inc., Naperville, Illinois
Websites:
(This
list of questions regarding Advocacy and Lobbying has been developed
by the many persons and organizations seeking assistance from the ASU
Lodestar Center. We invite you to add your questions and reactions through
the "Ask the Nonprofit Specialist" section of the center's website so
that we might improve and expand these FAQ.)
Please note that websites frequently change
and while we endeavor to keep links current, some might not
work. When you encounter such a problem you can help us by
sending an e-mail to robert.duea@asu.edu so that we might
investigate and make changes to our information and links.
Copyright © 2010
Arizona Board of Regents for and on behalf of the ASU Lodestar
Center for Philanthropy and Nonprofit Innovation, College
of Public Programs, Arizona State University. All rights
reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form
or by any means, electronic, mechanical, photocopying,
recording or otherwise, without the express written permission
of the ASU Lodestar Center, except for brief quotations in
critical reviews.
Last updated: 05/10/2010
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