Nonprofit Financial Statements for Executive Directors - Jitasa [PDF]

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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

2

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.

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

4

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

6

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!

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 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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

8

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

12

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

13

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

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

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

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

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

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

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

19

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

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

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.

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

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

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

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

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

Report 2 of 4: Statement of Activities Introduction contributions support earned revenues other revenues personnel related expenses non personnel related expenses non GAAP expenses

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

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

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

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

26

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

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

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

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

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

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

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%

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

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

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

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

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

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

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

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

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

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

38

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

40

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

41

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!

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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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44

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

Copyright 2013 Jitasa - Confidential - For Internal Use Only

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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

www.jitasa.is Copyright 2013 Jitasa - Confidential - For Internal Use Only

48

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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