Board and Staff Roles in Financial Management

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Board and Staff Roles in Financial Management
Neighborhood Partnership Fund April 19, 2007 Kay
Sohl Technical Assistance for Community Services
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Board Financial Oversight

• What are you looking for?
• What are signs of financial health and effective
  financial management?

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Key Financial Goals

• Use resources to fulfill mission
• Liquidity cash when you need it
• Solvency positive net worth
• Compliance with restrictions

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Board and Management Financial Oversight
Challenges????
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Financial Challenges

• Complex budgeting
• Accounting challenges
• Financial reporting
• Risks and opportunities

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Multiple Lines of Business

• Real estate development
• Property management
• Asset management
• Tenant services
• Community economic development
• Other

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Financial Planning

• Multi-function annual budget
• Real estate development budgets
• Property management projections
• Grant and contract budgets

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Planning for Multiple Entities

• Operations and development within primary
  nonprofit
• Single asset entities
• Low Income Housing Tax Credit (LIHTC) projects

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Accounting Challenges

• Cost center structure
• Tracking restrictions
• Multiple entities
• Dependence on work of outside entities

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More Accounting Challenges

• GAAP accounting
• Accrual accounting in a cash focused world

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Financial Reporting

• Internal users
• Executive Director, construction, program, and
  asset managers
• Board of Directors
• External users
• Lenders, investors, funders, IRS

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Controls and Compliance

• Preventing fraud and error
• Identifying compliance requirements
• Internal and external audit

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Risks and Opportunities???
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Risks

• Not enough cash
• Cost overruns in development
• Development and lease-up delays
• Ineffective asset management
• Non-compliance
• Poor accounting
• Poor quality construction

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Opportunities

• Real estate development
• Programs and partnerships
• Recruit/retain great staff
• Funders, donors, community trust

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Financial Management Goals

• Manage risks
• Identify and maximize opportunities
• Enhance sustainability and resiliency

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Financial Management Tools

• Budgets
• Cash flow projections
• Accounting
• Reporting
• Fiscal controls

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Operating Budget

• All sources and uses of cash during the fiscal
  year
• Deals with non-cash items including depreciation
  and in-kind contributions
• Reflects impact of borrowing and investment in
  assets

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Operating Budget- continued

• Cost centers for management, fund raising, and
  program functions
• Sub-cost centers for each project in development,
  operating property
• Revenues associated with cost centers

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Development Budget

• All costs of acquisition, rehab or new
  construction
• All sources of funds- including debt,
  investments, contributions

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Cash Flow Projection

• Monthly or weekly
• Separate operations from development
• Impact of multiple entities on cash position
• Distinguish restricted/unrestricted cash

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Accounting Policies

• Generally Accepted Accounting Principles
• Accrual accounting
• Treatment of restricted contributions
• In-kind contributions

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Multi-entity Accounting Policies

• Relationship of sponsor nonprofit to projects
  owned by separate entities
• Disclosure versus consolidation
• Equity method for investment in for-profit
  entities

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Required Financial Statements

• Balance Sheet
• Assets, Liabilities, and Net Assets
• Unrestricted, Temporarily Restricted, and
  Permanently Restricted Net Assets
• Comparative two points in time

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Required Financial Statements

• Statement of Activities
• Revenues and Expenses for specified time period
• Distinguish program, management, and fund raising
  expenses
• Distinguish unrestricted, temporarily restricted,
  and permanently restricted income

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Statement of Activities

• Compares Revenues and Expenses to budget
• Presents current month and year-to-date
• Presents release from Temporarily Restricted to
  Unrestricted when restrictions are met

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Required Financial Statements

• Statement of Cash Flows
• Explains increase or decrease in cash over time
• Distinguishes cash from operating activities,
  investing, and financing activities

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Required for Voluntary Health and Welfare
Nonprofits

• Statement of Functional Expenses
• Matrix format
• Rows are line items salaries, rent, etc.
• Columns are functions management, fund raising,
  programs

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Property Cash Flow Statements

• Cash received
• Rents
• Fees and other income
• Cash expendedoperating expenses
• Cash used for debt service

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Property Profit and Loss Statement

• Accrual basis revenues and expenses
• Includes depreciation
• Does not include borrowing or asset acquisition
  or improvement
• Reflected in audited financial statements

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Impact of Profits and Losses

• Directly owned properties
• Homeownership programs
• Nonprofit single asset entities- 202 and 811
  projects, LIHPRA properties
• LIHTC partnerships or Llc

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Directly owned rentals

• Revenues and expenses are included in
  organizational revenues and expenses
• Profit or loss directly impacts net income and
  net assets

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Homeownership Sales

• Grant funding creates apparent profit in year
  received unless sale completed in same fiscal
  year
• Home sale may create apparent loss if sold below
  full amount invested in acquisition/construction

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Single Asset Entities

• Consolidation of financial statements of sponsor
  nonprofit and sponsored project required if
  sponsor has control and economic relationship
• In consolidated statements, profits or losses of
  sponsored project impact net income and net
  assets of sponsor entity

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LIHTC Projects

• Nonprofit has 1 or less ownership but functions
  as general partner
• Portion of Developers Fee may be Deferred-
  resulting in a receivable on nonprofits books
• Nonprofits may also advance cash to project,
  resulting in Note Receivable on nonprofits books

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LIHTC Projects - Continued

• Equity method of accounting results in profits or
  losses of LIHTC project impacting sponsor
  nonprofit net income and net assets generally
  low
• Nonprofit may be required to contribute cash if
  project has insufficient cash to service debt or
  meet operating expenses

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LIHTC Projects - continued

• Nonprofit general partner responsible for
  compliance
• For profit partners are at risk for losing tax
  credits if project not managed properly

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Property Performance Indicators

• Occupancy/vacancy rates
• Turn over time
• Aged receivables
• Cash flow
• Revenue and expense compared to budget

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Board Role in Financial Oversight?
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Board Role

• Approve comprehensive annual budget
• Review monthly financial statements
• Establish finance committee for in-depth analysis
  of financial issues and selection of auditor
• Board or finance committee meet with auditors

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Executive Director Role

• Hire and retain qualified financial management
  staff
• Require timely preparation of useful monthly
  financial statements
• Review financial statements for reasonableness
• Investigate unexpected results
• Recommend strategies to Board

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Executive Director - continued

• Insist upon adequate financial information from
  outsourced property management firms
• Review development pro formas carefully
• Ensure effective asset management
• Understand all funding and loan agreements and
  ensure compliance
• Work closely with the auditor

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Your Next Steps?