Budgeting Preparing Financial Statements Institute for ...

Budgeting & Preparing Financial Statements Institute for Organizational Management Northeast Institute – Villanova University July 29, 2003 Robert B. Waller Jr., CAE President-Association Headquarters, Inc. Robert B. Waller Jr., CAE Bachelors Degree in Business Administration – Castleton State College Certified Association Executive (CAE) Graduate of the University of Delaware Institute for Organizational Management Over 16 years experience serving non-profit organizations President/COO Association Headquarters Past President of the New Jersey Society of Association Executives (NJSAE) Served on Board of Regents for Delaware Institute Current Board Member: Kids in Distressed Situations 1st Candle/ SIDS Alliance International Association of Association Management Companies (IAAMC) President of the International Consumer Product Health and Safety Organization (ICPHSO) REFERENCE MATERIAL Budgeting & Financial Management Handbook Model Accounting and Financial Policies & Procedures Handbook Essential Accounting, Tax, and Reporting Requirements LEARNING OBJECTIVES Understanding key terms Importance of the Chart of Accounts Budget Preparation How to read Financial Statements Importance of Cash Flow Statements Financial Policies/Procedures ONE of the Top 3 Reasons Executives Lose Their Jobs… Poor Financial Management KEY TERMS AUDIT A series of procedures followed by an experienced professional accountant to test, on a selective basis, transactions and internal controls, all with a view of forming an opinion on the fairness of the presentation of the financial statements. An audit is NOT an examination of every record. Only recorded transactions can be tested. STATEMENT of ACTIVITIES (formerly Statement of Revenue and Expenses)-shows the organization’s financial activity from the beginning to the end of the year. There are two sections: revenue, expenses and non-expendable additions; and change in net assets. STATEMENT OF FINANCIAL POSITION (formerly Balance Sheet)-summarizes financial makeup of the organization at a point in time, where the capital comes from. Shows assets and liabilities and provides a snapshot of the organization. STATEMENT OF CASH FLOWS (formerly statement of changes in financial position)-shows where the organization received and spent in cash. KEY TERMS CHART OF ACCOUNTS A system for organizing financial data, a listing of all the accounts being used by the organization. Numbers are assigned to each account to facilitate account identification. CASH-BASIS ACCOUNTING recognizes revenues when cash is received & expenses when cash is expended; ACCRUAL-BASIC ACCOUNTING recognizes revenues when earned & expenses when incurred. DIRECTORS & OFFICERS LIABILITY INSURANCE management or governance errors & omissions coverage that provides help in the event that a director or officer is accused of mismanagement of the organization. Provides a source of funds to cover legal costs, judgment fees, & settlement fees associated with certain types of lawsuits naming board members as individuals. KEY TERMS PROPERTY & CASUALTY INSURANCE covers building and the content of buildings as well as accidental bodily injury and personal injury or accidental property damage to another’s property. DUES STRUCTURE the entire dues framework, including the dues base, dues rate and the way in which members determine the specific amount of dues owed to the association. DUES BASE a description of the units or entities on which dues are measured. i.e., units of equipment, sales volume, flat rate. DUES RATE the specific amount of money assessed. A rate may be set in brackets, on a sliding scale, as a percentage, fixed or flat. DOES “NOT-FOR-PROFIT” MEAN YOU CAN’T MAKE A PROFIT? Do you know your IRS tax status? Why is it important? NOT-FOR-PROFIT TAX EXEMPT ORGANIZATIONS 501c 3 Public Charities/Private Foundations 501c 4 Social Welfare Organizations 501c 5 Labor/Agriculture/Horticulture/Unions 501c 6 Business Leagues/Trade & Professional Associations/Chambers WHY IS IT IMPORTANT TO KNOW YOUR ORGANIZATIONS TAX STATUS? Are contributions deductible? Can your organization lobby? Exempt from Federal Unemployment Tax Act (FUTA)? Can your organization get favorable postal rates? Are contributions deductible? 501 c 3 – YES 501 c 4 – NO 501 c 5 - NO 501 c 6 – May be deductible as a business expense WHY IS IT IMPORTANT TO KNOW YOUR ORGANIZATIONS TAX STATUS? Are contributions deductible? Can your organization lobby? Exempt from Federal Unemployment Tax Act (FUTA)? Can your organization get favorable postal rates? Can your organization lobby? 501 c 3 – NO 501 c 4 – YES 501 c 5 - YES 501 c 6 – YES WHY IS IT IMPORTANT TO KNOW YOUR ORGANIZATIONS TAX STATUS? Are contributions deductible? Can your organization lobby? Exempt from Federal Unemployment Tax Act (FUTA)? Can your organization get favorable postal rates? Exempt from FUTA? 501 c 3 – YES 501 c 4 – NO 501 c 5 - NO 501 c 6 – NO WHY IS IT IMPORTANT TO KNOW YOUR ORGANIZATIONS TAX STATUS? Are contributions deductible? Can your organization lobby? Exempt from Federal Unemployment Tax Act (FUTA)? Can your organization get favorable postal rates? Can your organization get favorable postal rates? 501 c 3 – YES 501 c 4 – LESS FAVORABLE 501 c 5 - LESS FAVORABLE 501 c 6 – LESS FAVORABLE COMMON DUES BASES: Sales Income Profits Assets Number of Employees or Members Payroll Number of Staff Hours Units of Production Units of Equipment Plants or Business Establishments Flat Rate Voluntary Dues Combination Advantages of Accrual Basis of Accounting ACCURACY Advantages of Cash Basis of Accounting SIMPLICITY BASIC TYPES OF BUDGETS Operating – Basic type of budget Cash – Derived from the operating budget to determine when budgeted revenue items will be received and expenses paid Capital – made for long-term assets like land, building or equipment WHAT IS UBIT – WHY IS IT IMPORTANT? UBIT- Unrelated Business Income Tax “Income derived from a regularly conducted trade or business activity that is not related to the tax exempt purpose of the organization.” CASH FLOW STATEMENTS Why are they Important? DOES AN ORGANIZATION NEED INTERNAL CONTROLS? FOUR FACTORS CONDUSIVE TO GOOD INTERNAL FINANCIAL CONTROLS 1. Clear lines of authority 2. Clear definition and acceptance of responsibility 3. Authority commensurate with responsibility 4.Proper Training Why is Segregation of Duties Important? WHY IS SEGREGATION OF DUTIES IMPORTANT? SEGREGATION IS THE HEART OF ANY INTERNAL CONTROL SYSTEM No individual should control all four essential aspects of any transaction: 1. INITIATION 2. AUTHORIZATION 3. ASSET CUSTODY 4. RECORDING Do you have a Financial Policy and Procedures Manual? Things to include in a Financial Policy/Procedures Manual Access to Records by Members–varies by state–Know what your state allows! Audit Committee – Who? Chart of Accounts Check signing procedures – Who? Back up? Check authorization procedures – Who? Computer back up file procedures – Who? How often? Contract Signing Authority Credit Cards/Calling Cards – Who? –Use restrictions? Things to include in a Financial Policy/Procedures Manual Cont. Document Shredding Procedures Employee Bonding requirements Federal ID Number Financial statement preparation and distribution – Who? – When? Insurance – Requirements? – Who maintains policies? Purchase Orders – Procedures? Who authorizes? Salaries/Benefits – Who has access to this information? Travel advances/expenses – clear guidelines? Year end audit/review Does your Organization have a “Reserve Policy/Surplus Guidelines”? Audit vs. Review Compilation THAT IS THE QUESTION? Audit vs. Review Compilation AUDIT : goal of forming an opinion of the fairness of the presentation of financial statements. Types of opinions: 1. Unqualified – clean bill of health 2. Qualified – suggests that there is a material problem with one or more aspects of statements 3. Adverse- financial statements do not conform with GAAP & are not presented fairly Audit vs. Review Compilation REVIEW: provides limited assurance of the accuracy of the financial statements COMPILATION: CPA does not apply any auditing standards. Ensured that statements are presented in proper financial formats. Provides no assurances on the accuracy of the information. Association Headquarters, Inc. Professional Management of Voluntary Organizations Robert B. Waller Jr., CAE President-Association Headquarters, Inc.