Nonprofit Financial Statements
What Every Executive Director Must Know
Today’s Lesson Plan
1. Introductions 2. Financial Reporting Overview 3. 4 Financial Reports every Executive Director Must Know 4. Presenting to Your Board & Funders 5. Wrap Up * Please Submit Questions Thru GoToWebinar Question Tool Copyright 2013 Jitasa - Confidential - For Internal Use Only
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Lesson Topic 1 of 5 : Introductions
Meet Your Instructors Host
Ron Kwak, Director of Strategy & Marketing, Jitasa Ron has over a decade of business process consulting, marketing, and business strategy experience across for-profit and nonprofit sectors. He holds a B.A. in Math & Economics from Northwestern University and an MBA from Kellogg School of Management Ron lives out his spirit of serving others through Zimele USA a nonprofit he founded that empowers women in South Africa via microsavings and microbusiness programs.
Instructor
Jeff Russell, CEO & Founder of Jitasa Jeff has over a decade of consulting, client management and back office experience running service centers handling $250M worth of transactions each year. Jeff also served as the Executive Director for an international development nonprofit, The Momentum Group.
Jeff is a Georgia Tech Industrial Engineer with a Yale MBA.
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Lesson Topic 1 of 5 : Introductions
Jitasa is the first and largest national accounting services provider exclusively focused on the nonprofit sector We are currently serving 200+ nonprofits…
Arts & Humanities
Health & Medicine
Religious / Churches
Education
Human Services
Youth Development
Environment
International Affairs
Associations / Foundations
…from federations to start ups in every sector
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Lesson Topic 2 of 5: Financial Reporting Overview
Inseparability of Financial & Program Understanding
“For nonprofits, financial sustainability &
program sustainability cannot be separated”
Jeanne Bell CEO of Compasspoint Copyright 2013 Jitasa - Confidential - For Internal Use Only
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Lesson Topic 2 of 5: Financial Reporting Overview
The Path to Financial Understanding Reports Designed to Your Audience internal reporting
(monthly basis)
Executive Director should understand finances focus on cash flow management review spending across all categories ensure giving trends are on target
board reporting
(quarterly basis)
higher level reporting with supporting detail
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Lesson Topic 2 of 5: Financial Reporting Overview
The Path to Financial Understanding Jitasa’s Approach
Build
Build a best practice accounting foundation
Run
Run consistently
Analyze
Provide reporting insights to drive decision making
The investment in a solid finance accounting infrastructure will help you achieve your mission!
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Lesson Topic 2 of 5: Financial Reporting Overview
The Path to Financial Understanding Prerequisites for Reliable & Insightful Reporting key to useful financial statements is accurate and reliable financial data.
reliability is important, so run reports on a regular schedule.
accuracy is important. your reports are only as good as your data entry, i.e. bookkeeping. garbage in = garbage out
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Lesson Topic 2 of 5: Financial Reporting Overview
The Path to Financial Understanding Prerequisites for Reliable & Insightful Reporting
1.
Accurately Capture & Index Transactions
2.
Capture Necessary Layers
3.
Analyze Financials – Different Views by Need
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Lesson Topic 2 of 5: Financial Reporting Overview
Step 1. Accurately Capture & Index Transactions Important to capture each transactions and baseline / standard detail Basic Transaction Details Transaction Type: Revenue or Expense Timing Amount Revenue Transaction Revenue: Donor Expense Transaction Expense: Vendor Expense: Account Code
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Lesson Topic 2 of 5: Financial Reporting Overview
Step 2. Layering Capture additional information needed for reporting / filings Basic Transaction Details Transaction Type: Revenue or Expense Timing Amount Revenue Transaction Revenue: Donor Expense Transaction Expense: Vendor Expense: Account Code Additional Layers Associated Program(s) Associated Grant
Program Grant / Donor
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Lesson Topic 2 of 5: Financial Reporting Overview
Step 3. Analyze Financials – Different Views by Need Expense Tracking
Program 1
Program 3
Expenses
Program 2
Program 4
By Year
Grant / Donor 1 FY 2013
Grant / Donor 2 Grant / Donor 3
Grant / Funder Reporting
Expense 1 Grant(s)
Expense 2 Expense 3
Grant / Donor 2
Grant / Donor 3
FY 2012 Grant / Donor 1 FY 2013
Program
Program Cost
Grant / Donor 1
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
The 4 Financial Reports every Executive Director Must Know
Produced on a Monthly Basis 1. Statement of Financial Position
(Balance Sheet)
2. Statement of Activities
(Profit & Loss)
3. Budget vs. Actuals Statement
4. Statement of Functional Expenses
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Introduction shows the financial state of an entity at a specified point in time equivalent to balance sheet in for-profit sector 3 main portions Assets Liabilities Net Assets (Equity) assets = liabilities + net assets
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Assets main line items cash accounts receivable contributions receivable other assets
fixed operating asset
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Liabilities main line items payables accrued liabilities
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Net Assets main line items unrestricted temporarily restricted permanently restricted
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Grant Tracking - The Basics
2 forms: revenues first or expenses first
varies by accounting system
Jitasa Webinar Grant Tracking 101
requires a 3rd attribute per transaction
ultimate goal is to pull a Statement of Financial Position per grant
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Key Metrics for Financial Analysis defensive interval i.e. cash on hand a measure of cash on hand if nonprofit were to cease receiving donations defensive interval =
cash + receivables + marketable securities average monthly operating expenses
debt ratio a measure of a nonprofit’s solvency (lower is better). debt ratio =
total liability total assets
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position Key Metrics for Financial Analysis accounts payable aging indicator a measure of a nonprofit’s financial health (i.e. ability to pay its bills) AP aging indicator =
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑥 12 𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
lower the indicator, faster the organization pays its bills best practice < 1
% funds unrestricted a measure of a nonprofit’s financial flexibility % funds unrestricted =
𝑢𝑛𝑟𝑒𝑠𝑡𝑟𝑖𝑐𝑡𝑒𝑑 𝑓𝑢𝑛𝑑𝑠 𝑡𝑜𝑡𝑎𝑙 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
higher the number, more cash freed up for overhead, etc
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Case Study Organizational Background Jitasa Justice is a human services nonprofit headquartered in the US with programs and operations in the US and overseas. Financial Goals Context Jitasa Justice has been in operations for 5 years and after successfully developing its program and operating model has plans for rapid expansion and growth. They are looking to understand how to better leverage their financial data and history as they make key strategic growth and day to day organizational decisions.
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 1 of 4: Statement of Financial Position
Situational Context In preparation for their annual strategic planning process, Jitasa Justice is preparing and examining their year end financials. Analysis of Key Metrics defensive interval debt/ asset ratio AP aging % funds unrestricted
Statement of Financial Position 1H 2012
3.96 months OPEX 0.46 1.81 months to pay bills 66%
Assessment / Conclusion healthy cash position
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 2 of 4: Statement of Activities Introduction funds earned (revenues) vs. funds spent (expenses) equivalent to profit & loss or income statement in for-profit sector revenues analyze each stream as a % of total revenue diversification sustainability of future revenue streams expenses analyze each stream as a % of total expenses identify major expenses further analysis from other statements
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 2 of 4: Statement of Activities Introduction contributions support earned revenues other revenues personnel related expenses non personnel related expenses non GAAP expenses
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 2 of 4: Statement of Activities Key Metrics for Financial Analysis change in net assets a measure of a nonprofit’s profitability or sustainability change in net assets = 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑝𝑒𝑟𝑖𝑜𝑑 2 − 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑝𝑒𝑟𝑖𝑜𝑑 1 savings indicator savings indicator =
𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
if savings indicator > 0, adds to net asset balance if savings indicator < 0, depletes net asset balance impact of savings indicator varies by organization best practice: have 3 - 6 months of unrestricted cash in bank
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 2 of 4: Statement of Activities
Statement of Activities Analysis of Key Metrics
1H 2012
revenue diversification sustainability
expenses identify major expenses need further analysis change in net assets positive savings indicator = .21
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 2 of 4: Statement of Activities
Analysis of Key Metrics
Statement of Activities 1H 2012
revenue trend year to year decline
1H 2012
1H 2011
expense trend year to year increase change in net assets year to year decline
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 3 of 4: Budget vs Actuals Introduction another layer of Statement of Activities plan vs reality review major discrepancies definition of “major” varies by organization review any line item with budget but no actuals
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 3 of 4: Budget vs Actuals Key Metrics for Financial Analysis (> $10,000) revenue > budget special events less diversification
Budget vs Actuals 1H 2012
expenses < budget contract service change in net assets > budget
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 3 of 4: Budget vs Actuals
Situational Context For 2013, Jitasa Justice received an ABC grant with expense reporting requirements. Below is financial report of their YTD progress against the ABC Grant.
Jitasa Justice ABC Grant
Donor: Federal Government TOTAL Actual Income 4500 Revenue from government grants Total Income
$
Budget 50,000 50,000
Expenses 7200 Salaries & related expenses 7500 Contract service expenses 8100 Nonpersonnel expenses 8300 Travel & meetings expenses 8500 Other expenses 8700 Program Expenses Total Expenses
$
3,557 277 253 209 63 50,453 54,812
Net Income
$
(4,812)
Variance
$
75,000 75,000
$
17,298 2,119 1,249 1,154 2,494 49,141 73,455
$
13,741 1,842 996 945 2,431 (1,312) 18,643
$
1,545
$
(6,357)
$
% of Budget
(25,000) (25,000)
67% 67%
21% 13% 20% 18% 3% 103% 75% -311%
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 4 of 4: Statement of Functional Expenses detailed expense analysis breakout expenses into 3 general categories programs administration fundraising track each program and special event separately
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 4 of 4: Statement of Functional Expenses Introduction measurement of a nonprofit’s efficiency known as net income in for-profit sector world
key ratio % programs vs (% admin+% fundraising) 80/20 rule
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 4 of 4: Statement of Functional Expenses Financial Comparison Examples
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 4 of 4: Statement of Functional Expenses Allocation of Expenses methodology must be documented, reasonable and consistent most popular method based on employee time approved by Executive Director and auditor examples of possible allocated expenses salaries rent office expenses
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 4 of 4: Statement of Functional Expenses
Situational Context In preparation for their annual strategic planning process, Jitasa Justice is examining their year end snapshot of their Functional Expenses to examine their allocation of spend.
Statement of Functional Expenses 1H 2012
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Report 4 of 4: Statement of Functional Expenses
Statement of Functional Expenses 1H 2012
Analysis of Key Metrics detailed overhead analysis; can problem be corrected in 2H09? allocated expense methodology extenuating, one-time circumstances
Assessment / Conclusion below best practice benchmark (80%)
assess allocation methodology re-allocate vs accept Copyright 2013 Jitasa - Confidential - For Internal Use Only
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Lesson Topic 3 of 5: 4 Financial Reports Every Executive Director Must Know
Additional Financial Monthly Reporting
program analysis event analysis
budget vs forecast donor analysis
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Lesson Topic 4 of 5: Presenting to Your Board & Funders
Presenting to Your Board and Funders Best Practice Tips 1. focus before flow
2. keep it simple
3. send a preview
4. prepare & relax
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Lesson Topic 4 of 5: Presenting to Your Board & Funders
Presenting to Your Board and Funders Best Practice Tip 1: Focus Before Flow 1. What is the story you want to communicate? First get the heart of the story straight What is the purpose of the discussion? Is there a decision you are trying to reach? 2. Write out the flow for your story Write an outline / story board
Context is important. Know your audience, where they are coming from, & WIFM 3. Build Your PowerPoint Slides Write your outline across the slide headers One idea / message per slide
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Lesson Topic 4 of 5: Presenting to Your Board & Funders
Presenting to Your Board and Funders Best Practice Tip 2: Keep It Simple 1. Start with an Agenda & Executive Summary
2. Do NOT copy entire Excel spreadsheets onto your slide Instead use summary charts and graphs to tell your financial stories Bring life to numbers: use of key performance metrics / ratios with trends and benchmarks Put the detailed financials in the appendix
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Lesson Topic 4 of 5: Presenting to Your Board & Funders
Presenting to Your Board and Funders Best Practice Tip 2: Keep It Simple 1. Start with an Agenda & Executive Summary
2. Do NOT copy entire Excel spreadsheets onto your slide
Instead use summary charts and graphs to tell your financial stories Bring life to numbers: use of key performance metrics / ratios with trends and benchmarks Put the detailed financials in the appendix
3. Simplify and Educate Nonprofit accounting is very different from for-profit accounting, you may need to educate / translate concepts i.e. Balance Sheet = Statement of Financial Position
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Lesson Topic 4 of 5: Presenting to Your Board & Funders
Presenting to Your Board and Funders Best Practice Tips 3 & 4 Send a Preview Send the board packet at least a week before your board meeting
Tee up agenda items and highlight critical decisions / desired outcomes Provide background reading (homework) to make the best use of meeting time
Prepare & Relax Less about remembering do’s and don’ts of public speaking / giving a presentation More about preparing a good story and knowing the story / talking points > Relax!
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Lesson Topic 4 of 5: Presenting to Your Board & Funders
Presentation Book Recommendations
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Lesson Topic 5 of 5: Wrap Up
Who We Are
Our Two Passions 1. Love for Numbers
2. ‘ The Spirit of Serving Others’
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Lesson Topic 5 of 5: Wrap Up
Why We Exist
We do what we do best so you can do what you do best
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Lesson Topic 5 of 5: Wrap Up
Our Solutions
BOOKS & ACCOUNTING
FINANCIAL ANALYSIS
ONSITE CONSULTING
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Lesson Topic 5 of 5: Wrap Up
Educational Resources Additional Webinar Topics Nonprofit Financial Statements for Executive Directors Grant Tracking 101 The Power of Financial Analysis for Decision Making Performance Management to Drive Fundraising
Educational Updates Regulatory Updates: IRS, State, and Payroll / Tax
Year End: What To Know Best Practice Tips & Deep Dives
www.jitasa.is/university
www.jitasa.is/blog
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Lesson Topic 5 of 5: Wrap Up
Questions & Contact Information
Ron Kwak, Director of Strategy & Marketing, Jitasa (e)
[email protected] (o) 208-287-4777
Jeff Russell, CEO & Founder, Jitasa (e)
[email protected] (o) 208-287-4777
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Lesson Topic 5 of 5: Wrap Up
Closing Thoughts
strong financial management is essential any nonprofit’s success
engage your board’s finance members
at a minimum, develop a basic understanding of key F&A terms
build, run, analyze = financial success
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