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Financial Management

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Title: Financial Management


1
Financial Management
  • For small community- and faith-based non-profit
    organizations

2
Financial Management for Non-Profits
  • Dedicated non-profit organizations are not, by
    definition, money-making ventures. However, even
    though money isnt the object, it is still
    important for every non-profit to follow certain
    guidelines concerning the financial management of
    the organization. The basic accounting system
    should include the following components chart of
    accounts, general ledger, budget, reporting and
    documentation system, and appropriate internal
    controls. It is also important to have the
    ability to properly manage grants, and to be
    cognizant of funders individual financial
    requirements, particularly when receiving
    government grants.

3
The Accounting System
  • Before considering the elements of an accounting
    system, an organization must first decide whether
    to use a cash-based or accrual-based system. In a
    cash-based system, revenues are recorded only
    when they are received and expenses recorded only
    when they are paid. Conversely, in an
    accrual-based system, revenues and expenses are
    recorded when they are first earned or incurred,
    regardless of when money is actually exchanged.
  • It is recommended that an accounting system be
    accrual-based, particularly if an organization is
    planning on applying for foundation or government
    funds, as this is the generally accepted system
    among accounting professionals.

4
The Accounting System Chart of Accounts
  • The chart of accounts is a detailed listing of
    all of the accounts, or records of each business
    transaction, of an organization. It is used to
    keep track of the income and expenses of the
    organization.
  • Each account is assigned a number and divided
    into one of five categories Net Assets, Assets,
    Revenues, Liabilities, and Expenses. The standard
    order for accounting categories on the chart of
    accounts is
  • Assets
  • Liabilities
  • Net Assets (the balance remaining after financial
    obligations are subtracted from Assets)
  • Continued

5
The Accounting System Chart of
Accounts Continued
  • The chart of accounts should correlate to the
    categories in the budget so that they can be
    easily compared. Separate charts may be kept for
    separate programs or sites, or they may be
    combined on the same chart.
  • It is best to keep the chart of accounts as
    simple as possible and to revise it over time as
    needed. Accounting software, such as QuickBooks,
    can be especially helpful and time-saving,
    particularly with detailed accounts. (Note
    QuickBooks is not designed to handle grant
    accounting. It is best to consult with a public
    accounting firm for such guidance.)

6
The Accounting System Other Elements
  • General Ledger An accounting book into which all
    of the organizations accounts are entered and
    organized numerically. The ledger lists all
    transactions within that account for the time
    period the ledger covers. It doesnt cover the
    detailed descriptions that are listed in the
    chart of accounts. In fact, the chart of accounts
    serves as a sort of table of contents for the
    general ledger.
  • Journals The journal is a chronological record
    of all transactions. Each entry should include
    its correlating account number and a brief
    description of the transaction.
  • Continued

7
The Accounting System Other Elements Con
tinued
  • Checkbook Most of an organizations transactions
    are made through the checkbook, with which
    receipts are deposited and cash disbursements are
    made. For a very small organization, the
    checkbook can serve as a combined general ledger
    and journal, and reports may be prepared directly
    from it.
  • Accounting Procedures Manual The accounting
    procedures manual is very important for the
    organization. It is a record of all of an
    organizations financial policies and procedures
    and should be kept up-to-date and on hand all
    throughout the life of the organization.

8
Accounting Cycle and Maintenance
  • Trial Balance
  • The trial balance is a procedure that seeks to
    ensure that the general ledger is properly
    balanced (i.e. debits equal credits). If
    accounting is done manually, a trial balance
    should be completed on a monthly basis. A
    computerized accounting system will update the
    trial balance every time a transaction is
    entered.
  • Bank Reconciliation
  • Once a month, a bank reconciliation should be
    performed. This procedure ensures that the
    organizations calculated balance equals the
    balance according to the banks calculations.

9
Reporting and Documentation
  • As stated on the previous slide, it is very
    important to keep proper documentation of all
    financial activities in the chart of accounts,
    general ledger, and journals, as well as records
    or personnel wages and a document detailing the
    organizations financial practices. It is also
    important that all bills, invoices, packing
    slips, time sheets, etc. be kept in official
    files.

10
Reporting and Documentation Required Documents
  • Balance Sheet/Statement of Financial Position
    This document is filled out at the end of each
    period and lists the organizations assets
    (current, fixed, and net) and liabilities
    (current and long-term).
  • Income Statement/Statement of Activities This is
    a report of the organizations revenues,
    expenses, and change in net assets over a fiscal
    year. The income statement will denote whether
    the organization realized a profit or incurred a
    loss for the period.
  • Continued

11
Reporting and Documentation Required
Documents Continued
  • Statement of Cash Flows This report is usually
    prepared by an auditor at the request of the
    organization. It provides information on the flow
    of cash in and out of the organization.
  • Annual Form 990 This is the federal tax return
    for tax-exempt organizations, available online at
    http//www.irs.gov/pub/irs-pdf/f990.pdf. The 990
    is due each year on May 15 and includes
    information on the previous years finances.
  • Other documents as required by state. (Consult a
    Certified Public Accountant or tax advisor.)

12
Reporting and Documentation
  • Tax Reporting
  • An employer must remit personnel income tax to
    the IRS on a monthly basis. State and local
    remittance requirements and schedules may vary.
    Check with the states department of revenue and
    local officials to determine state and local
    requirements.
  • Reporting Charitable Contributions
  • When receiving monetary contributions, an
    organization should provide the third party
    contributor with a written confirmation of the
    donation for tax purposes, state the name of the
    organization and donor and the value of the
    gift.
  • For in-kind donations (goods or services rather
    than money), the gift must be valued by the
    contributor, not the organization, and the stated
    value should be confirmed by documentation
    supporting the claimed value in order to ensure
    tax deduction from the IRS.

13
Budget
  • The budget process should begin two to three
    months before the start of the fiscal year and
    should include the input of staff (both financial
    and program), board members, and the executive
    director. The board finance committee should
    oversee the construction and execution of the
    budget.

14
The Budget Process
  • Review the previous years results. What was the
    cost per unit of service?
  • Develop new goals and objectives for the coming
    year.
  • Estimate the cost of the new objectives based on
    the previous years results. Dont forget to
    include indirect costs (incidental costs not
    closely attached to programs and goalse.g.
    administrative costs) along with direct costs
    (closely associated with the program e.g. staff
    salaries) and to adjust any costs that will be
    changing in the coming year.
  • Next, budget projected income. Estimate revenues,
    including grants, donations, etc.
  • Compare the projected revenue with the projected
    expenses. The organization may decide that it is
    appropriate to incur a deficit or realize a
    surplus for the year instead of breaking
    completely even.
  • Finally, the board must approve the budget and
    continue to review it on a monthly basis.

15
Budget Notes
  • The categories and labels for the budget should
    correlate with those used on the chart of
    accounts.
  • It may be helpful to prepare separate monthly
    budgets to break down the year into smaller, more
    manageable sections. Finally, remember that the
    budget should be realistic, consistent with the
    organizations objectives, cost-effective, and
    flexible.

16
Auditing
  • An organization may or may not decide to obtain
    an audited financial statement depending on the
    size and revenue of the organization, as well as
    the boards expertise regarding financial
    management. These statements can range from more
    or less expensive and/or comprehensive. If an
    organization is applying for government funds, it
    should obtain an audited financial statement.

17
Internal Controls
  • Financial internal controls should be in place
    for the operating, accounting, and compliance
    departments regarding payroll, cash collection
    and disbursement, safeguarding fixed assets, etc.
    Making sure the financial management of the
    organization is operating properly is the
    responsibility of the entire organization, not
    just the accounting department.

18
Internal Controls Segregation of Duties
  • Financial duties should be segregated so that no
    one staff member handles any transaction entirely
    on their own from start to finish. For example,
    different members may sign checks, authorize
    payments, record transactions, or reconcile bank
    statements. This may be more difficult for a very
    small organization. If this is the case, a staff
    member may sign the checks for transactions and a
    board member (such as the treasurer) may review
    the statements and checks on a monthly basis.

19
General Rules for Cash Management
  • Purchases should all fall within the established
    budget guidelines and restrictions. Large
    purchases which lie outside the scope of the
    budget should be approved by the board.
  • All cash disbursements should include
    documentation.
  • Never withdraw cash from an ATM.
  • Restricted funds (such as donations or grant
    money) may only be borrowed against if the donor
    permits the action and must be replaced within
    the fiscal/grant year.
  • The number of check signers in the organization
    should be as minimal as possible while still
    allowing the organization to function
    efficiently.
  • Large purchases should have more than one
    signature on the check.

20
Grant Management Accounting Requirements
  • Accounting requirements differ according to each
    individual funder, but here are some general
    guidelines to follow
  • Account for each award or grant separately
  • Federal and non-federal match funds should be
    tracked separately
  • In-kind donations should be tracked as both
    revenues and expenses
  • Identify costs by program year and budget
    category
  • Differentiate between direct and indirect costs

21
Grant Management Financial Responsibilities of
Grantees
  • When preparing a grant proposal, an organization
    should keep in mind the following
    responsibilities
  • Budget for the entire life of the grant,
    including all allowable costs, the agreed upon
    indirect cost rate, and increases in the cost of
    living
  • Address all matching requirements
  • Focus on sustainability
  • If applying for federal funds, an organization
    must also seek a solid base of non-federal funds
  • Pay special attention to specific requirements of
    each individual grant

22
Government Grants
  • When managing a government grant, certain
    additional guidelines must be followed. These
    guidelines, called Circulars, are published by
    the Office of Management and Budget. Different
    Circulars, apply for educational institutions,
    non-profit organizations, and government
    organizations.
  • For a listing of the OMB Circulars, visit
    http//www.whitehouse.gov/omb/circulars/index.html
    .

23
Final Note
  • This guide is only a brief overview of the
    financial management systems that should be in
    place for a non-profit organization. The best way
    to obtain sound financial advice is to recruit a
    few board members with extensive knowledge of
    financial systems, or to hire a public accounting
    firm for consultation. This can be done
    relatively inexpensively for many non-profits and
    the time and trouble saved by such a partnership
    will likely pay for itself.

24
2. Written Policies and Procedures
1. Regulatory Requirements
10. Internal Controls
3. Documentation of Expenses
4. Managing Cash
9. Reporting
8. Matching Requirements and In-Kind
Contributions

5. Efficient Accounting System
6. Budget Controls
7. Time and Activity Documentation
25
Additional Resources
  • Alliance Online Financial Management
    http//www.allianceonline.org/FAQ/financial_manage
    ment
  • Developing Quality Grant Proposals White
    House website www.whitehouse.gov/government/fbci/d
    eveloping-quality-grants-200510.pdf
  • Financial Accounting Standards Board
    http//www.fasb.org/st/
  • Free Management Library Basic Guide to
    Non-Profit Financial Management
    http//www.managementhelp.org/finance/np_fnce/np_f
    nce.htm
  • Generally Accepted Accounting Principles
    http//www.fasab.gov/accepted.html
  • OMB Circulars http//www.whitehouse.gov/omb/circu
    lars/a122/a122_2004.html
  • Sarbanes-Oxley Financial and Accounting
    Disclosure Information http//www.sarbanes-oxley.c
    om
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