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

1. Review the previous years results. What was the
   cost per unit of service?
2. Develop new goals and objectives for the coming
   year.
3. 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.
4. Next, budget projected income. Estimate revenues,
   including grants, donations, etc.
5. 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.
6. 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.

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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
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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