Non Profit Organization- Financial Management Tools - PDF

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					       Financial Management
Budgeting Basics
For Non-financial Executives
Presented by
Chiquita T. Tuttle, MBA
PROCEED Consultant
January 2008
   Purpose of this Training
To present the fundamentals and practical
aspects of fiscal management for non
financial managers.
To provide basic budgeting information
and terminology as tools for further
    Building your Budget & Using Budgets
            as a Management Tool

Pre Training Assessment – checking your
current knowledge
Glossary of Terms
Who should be involved in the budgeting
Type of Revenues and Expenses
  Pre Training Assessment
An opportunity for you to check your
knowledge against what you already know
and what you will learn during this

Assessment tool – 5 minute to complete
     Building your Budget & Using Budgets
             as a Management Tool

Identify financial reports

Understanding budget variances

Fiscal Management System
Know the differences between for-Profit
and NonProfit Organizations
Describe the roles and responsibilities of
the Board of Directors, the executive
director and program managers in fiscal

Describe the linkage between financial and
strategic planning

State the basics principles of internal
   Additional Information
Differentiate Goals and Objectives
Understand the types of Expenses and
Define Vision and Mission
Define a Strategic Plan
Understand the value of Dashboard
    Additional Discussion
Understand accounting glossary of terms
Explain cash flow and the importance of cash
Explain the importance and need for audits
Describe the functions of a budget
Describe the important elements of an
agencies financial reports
 Understand assets, liabilities and variances
      Additional Discussion
Describe the importance and value of
including financial information for practical
decision making
    Financial Management
Successful community based organizations
can attribute their success to employing
15 key components that support
organizational effectiveness
Organizational Effectiveness Model
 Board Development
 Faith-Based Leadership Development
 Fiscal Management
 HIV Prevention Community Planning
 Human Resources
 Leadership Development
Organizational Effectiveness Model
 Needs Assessment
 Program Development
 Program Evaluation
 Starting a NonProfit
 Strategic Planning
 Surviving an Audit
 Technology Development
 Volunteer Management
  Why are budgets important?

A budget is a statement of the financial
costs of an organization for a definite
period of time based on estimates of
expenses during the period and proposals
for funding them.
        Rules of Budgeting
Any budget or plan is ONLY as good as the time,
effort and information people put into it.
Good budget practices should foster
collaboration and exchange of information
among the budget team participants
No budget or plan is perfect because no one can
predict the future
In order to reach the goals, budgets must be
monitored and changed as time goes on.
        Rules of Budgeting
Garbage in. Garbage out.

No budget is perfect.

Monitor and change.
     Monitoring the Budget
Budgets are used to monitor performance
Financial reports are used to identify
variances from the budget and possible
Program and unit managers SHOULD
receive reports on actual versus budgeted
expenses and income for their areas of
     Components of a Fiscal
      Management System
Financial Planning
The process of identifying the resources
that are needed to implement the
strategic plan.
A financial plan identifies revenues and
Covers time period of 2 – 5 years
    Components of a Fiscal
     Management System
 System for developing, approving and
 managing the budget

 Each program /department develops a budget

 The CFO is responsible for monitoring
 revenues and expenses and variances for
 each departmental budget.
     Components of a Fiscal
      Management System

  Ensures that the organization has sufficient cash
  to meet its needs.

  Bank statements are reconciled and account
  balances are reviewed to assure accuracy
    Components of a Fiscal
     Management System

 Conforms to fiscal policies and procedures
 approved by the board or governing body.

 A Chart of accounts matches the revenues
 and expenses by funding source,
 organizational units and/or sites.
    Components of a Fiscal
     Management System

 Operations of compensation of employees

   Time cards documentation, advances, withholding
   taxes and employer taxes
    Components of a Fiscal
     Management System

 A system used to manage the amounts owed
 to the organization by its customers. This
 usually includes billing to third party payers
 such as Medicare and Medicaid.
    Components of a Fiscal
     Management System

 Controls the buying of and accounting for
 assets and equipment
 Depreciation , which is the decline in the
 value of an asset over time, may be tracked
 in this system
 Periodic inventory of assets should be
    Components of a Fiscal
     Management System
General management

 Ensures compliance with requirements of
 grants and or contracts

 Grants normally specify line item controls,
 performance measures, deliverables and
 reporting requirements.
The Difference Between For-Profit
   & Nonprofit Organizations
Corporation that has been granted tax
exempt status by the Internal Revenue Service.

One of the differences between FPOs and NPOs
is that shareholders provide equity for
profit while donors provide equity through
donations. However, both can, and in most
cases should, gain equity through operations.
The Difference Between For-Profit
   & Nonprofit Organizations
The major functional difference between FPOs and NPOs
is what can be done with the profit gained through

FPOs can pay dividends with the profits generated
through their operations.

NPOs cannot distribute dividends to their members.
Rather, the equity NPOs generate must be put back into
their programs. In other words, NPOs can generate
profits or surplus, and those that do so are in a position
to provide their communities
with more stable services.
          For-profit Organizations (FPOs)

                                       For Profit                        Nonprofit

   Tax Exempted Status                      No                          Tax-exempted

                                       Shareholders                       Donors
Sources of Capital / Revenue
                               Operation of the Organization    Operation of the Organization
                                                                   Charitable Service to the
      Usual Purpose             Increase shareholder value

When Operation Generates        Shareholders may Receive         No Dividends Paid; Earnings
         Earnings                         dividends               directed to charitable purposes

Usual Term for Positive Net                                    Increase in Fund Balance or Net
          Earnings                                                          Asset; Gain

Usual Term for Negative Net                                    Decrease in Fund Balance or Net
          Earnings                                                         Assets; Loss
 Roles in fiscal Management
The board of directors and its
subcommittees has a responsibility for the
public trust because the NPO is tax
exempt. The board has responsibility for
fiscal oversight
 Roles in fiscal Management
Establishing policies that govern the
resources of the NPO

Approving and monitoring the budget

Selecting and engaging the auditor and
receiving the report of the auditor
      Types of Revenues
Earned Income
Donated Goods and Services
Investment Income
       Types of Expenses
Program/Project vs. Agency Expenses
Allowed and un-allowed expenses
Capitalized vs. operating expenses
Direct program expenses
  Direct services
  Direct admin
Indirect expenses
In-kind and donated good
        Unallowed Costs
             OMB Circular A122

Entertainment costs
Alcoholic beverages
Interest Expense
Bad Debts
Legal Costs
   Capitalized vs Operating
Operating expenses are everyday costs of
keeping your program going. Expensed in
the period incurred. e.g., salaries

Capitalized expenses are depreciated over
time and are carried on the balance sheet.
Only depreciation is expensed in the
operating statement. e.g., vehicles
   Direct and Indirect Costs

Direct Costs: Traced directly to program
or activity.
Indirect Costs: All other costs.
Costs incurred for the same purpose in
like circumstances must be treated
consistently as either direct or indirect
OMB A-122 Guidance
    OMB A-122 Guidance Direct
Allowable Direct Costs for Personnel: “Salaries, wages,
  director's and executive committee member's fees,
  incentive awards, fringe benefits, pension plan costs,
  allowances for off-site pay, incentive pay, location
  allowances, hardship pay, and cost of living differentials.
  Vacation, holiday, sick leave pay, and other paid
  absences are included in salaries and wages and are
  claimed on grants, contracts, and other agreements as
  part of the normal cost for salaries and wages. Fringe
  benefits are specifically identified to each employee and
  are charged individually as direct costs. Allowable
  benefits include: FICA, Retirement, Group Insurance,
  Worker’s Compensation, and Unemployment Insurance.”
     Fundraising Expenses

Fundraising Expenses are neither Direct or
Indirect Costs
Fundraising Expenses are tracked
Fundraising Expenses CANNOT
be charged to a federal grant
      The CFO’ Challenge
The challenge and opportunity for the
nonprofit chief financial officer (CFO) is to
learn how to make numbers come alive for
those on the frontline of the organization,
and help them embrace numbers as a
critical step on the path to achieving the
mission of the organization.
     Financial Intimidation
There are several reasons why it can be
difficult to get non-financial staff to pay
attention to the numbers:
Individuals may be intimidated by financial
Some organizational cultures do not
embrace financial information.
Staff within nonprofit organizations may
lack financial literacy.
     Financial Intimidation
 “In the nonprofit world, people tend to
have expertise in issues such as youth
development, education, or the
environment, and may have no experience
with financial matters” (David Stolow- January 2008 )
   Dashboard Reporting—
A process through which an organization
selects certain indicators of performance
for the organization as a whole and for
each department and then tracks these by
color (red = act now, yellow = monitor,
green = celebrate) on a regular basis
     Dashboard Reporting
The dashboard method captures the
organization’s most critical financial
indicators in a few memorable and easy to
follow metrics that anyone in the
organization can understand.
Dashboard Example
    What Is Strategic Planning?

 Strategic planning can be used to
 determine mission, vision, values, goals,
 objectives, roles and responsibilities.

Strategic planning is a management tool,
  used for one purpose only:
      √to help an organization do a better
   What Is Strategic Planning?

√to focus its energy, ensure the members of
the organization are working toward the same
goals, and assess and adjust the organization’s
direction in response to a changing environment.

In short, strategic planning is a disciplined effort
to produce fundamental decisions and actions
that shape and guide what an organization is,
what it does and why it does it, with a focus on
the future. (Adapted from John M. Bryson’s
Strategic Planning in Public and Nonprofit
     What is strategic Planning?
Step 1: Information gathering and analysis
  1a: External assessment
  1b: Internal assessment
  1c: Market assessment
   What Is Strategic Planning?

✓ Step 2: Identification of critical issues
facing the organization

✓ Step 3: Development of a strategic
vision statement that sets the future
direction for the agency
   What Is Strategic Planning?

✓ Step 4: Mission statement review/revision

✓ Step 5: Development of strategic goals
✓ Step 6: Formulation of strategies for each

✓ Step 7: Preparation for operational planning
based on the strategic plan (developing annual
            Vision and Mission

The vision of an organization is usually the
brainchild of the founder and the organization’s
initial directors. It’s the change or ultimate
perfection an organization can imagine that
would solve its reason for existence.

The mission statement is a descriptive statement
or guiding principle by which your organization
is run that indicates why and how you have
chosen to operate as an organization. It should
be succinct, concise and compelling.
          Organizational Goals
            and Objectives

In order to describe your project, you
must first start out with the goals and
objectives —
What you want to ultimately accomplish
(your goal) and what you must do
specifically to achieve that goal (your
Goals and S.M.A.R.T. Objectives

✓ A goal is a broad statement that
describes what your program will
✓ An objective is a specific statement that
describes a particular, expected program
✓ Useful objectives are SMART:

Financial Planning and Budgeting
Financial planning is the development and
implementation of coordinated plans for
the achievement of the enterprise’s overall
financial objectives
A Strategic plan identifies goals,
Financial plans identifies objectives
Financial objectives usually relate to
improvements in the organizational
financial position or increased profitability.
        Financial Objectives
Maintaining a specified cash reserve
Maintaining a set of percentages of
program services, management and
general or fundraising costs
Maintaining a level of pay for staff to
attract skilled employees
Entering into a joint venture
Limiting Medicaid revenues
        What comes first?
Strategic Planning should come BEFORE
financial planning

The financial plan identifies the resources
that are needed to implement the
strategic plan
        Financial Reports
Financial reports, usually produced on a
monthly basis, gives managers the
opportunity to review heir organization’s
financial position
        Balance Sheet
The statement of financial
position presents the
organizations financial position
(i.e., The value or worth of the
organization at a given time)
Consolidated Activity Statement
 Presents the overall organization’s
 performance for the report period
Activity Statement by Cost Center

Presents the performance of a
cost center for the report period

This could be a service center,
program or area
  Statement of Cash Flows
Shows an organization’s cash
receipts and payments
    Statement of Activities
Profit & Loss Statement

  Summary of a company’s revenues
  and expenses for an accounting
  period – annually, monthly,
     Statement of Activities
Elements of the statement of activities
√Revenues from providing services,
fundraising, investments or other activities
of the organization
√Expenses incurred in the operation of
the organization
     Statement of Activities
√ Gains or increases in net assets

√ Losses or decreases in net assets
Additional Financial Statements
 Cash Flow – shows cash receipts and
 payments over a period of time set up by
 principal categories and uses
 Functional Expenses –
 (1) program services / activities carried
 out to fulfill organization’s mission or
(2) supporting services/fundraising,
 management & membership development
Interpreting Financial Statements
Describes the FINANCIAL HEALTH of the
Measures the organization’s efficiency
Evaluates the adequacy of financial
Identifies financial trends
          What to Look For
Surplus or Deficit
Budget to Actual for Revenue and Expenses
Vertical Analysis – line items % of revenue or
Horizontal Analysis – compares line items to
total with prior periods (current vs prior year)
Ratio of administrative expenses- expenses
associated with each program
Current ratio – ability to cover debt

Budgeting Basics
For Non-financial Executives
   Purpose of this Training
To present the fundamentals and practical
aspects of fiscal management for non
financial managers.
To provide basic budgeting information
and terminology as tools for further

Describe the linkage between financial and
strategic planning

State the basics principles of internal

Fiscal Management System
Know the differences between for-Profit
and NonProfit Organizations
Describe the roles and responsibilities of
the Board of Directors, the executive
director and program managers in fiscal

Describe the linkage between financial and
strategic planning

State the basics principles of internal
  Chiquita T. Tuttle, MBA

    Thank you for your
participation and attendance

       Have a Great Day!

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