NMP 605Financial Decision Making for Nonprofits

NMP 650 E-Portfolio #1 Gertrude White 11/7/2013

A nonprofit organization performs a “social good” and with no single profit takers .

The Board of Directors are responsible for the actions and decisions of the nonprofit in

service of the mission that works towards social good. The Board makes decisions about the

organization through set policies and procedures and are fiduciaries of the organization

(responsible for the financial and all other actions and decisions of the nonprofit).

Issues of concern for financial decision making are

Management of the mission and money

Accountability

Fiscal imperative to follow the money

Management tools

Impact on mission

The roots are adherence to the principles of the Sarbanes-Oxley Act, policies and procedures, the liquidity target, full cost pricing, budgets and variance reports, financial statements (cash flow, activity and financial position, the annual audit and adherence to FASB and GAAP practices.

Important elements of good financial management and decision making is imagined as a tree (see next slide)

The trunk of the tree is the Hedgehog Principle (Collins, 2001) that includes the right people in the right position performing the right jobs, facing the facts (even when difficult), a disciplined approach (reporting transparently, in compliance with outside standards such as the GAAP guidelines and the IRS requirements), and quick analysis (that assess the likelihood of uncertain events impacting the nonprofit).

The leaves of the tree are the optimal organizational stack that includes unrestricted funds production, capital assets, endowment, and costs such as employee benefits, program services costs.

The nurturing weather is management of risks, liabilities and employee benefits – all carrying unknown potential debt to the organization.

The sun represents leadership, when at level 5 the leader “builds endring greatness through a paradoxical blend of personal humility and professional will” (Collins, 2001, p.20).

Other resources are good use of technology, current and potential supporters and the needs of those served by the mission.

From NMP 605 Week 1 Presentation 1

Budgets are projections of expected revenues and expensesThree types of budgets

Operating budgetCapital budgetCash budget

Financial reportscreated with set frequency quarterly, monthly weekly or “on the spot”Generate data to use with ratios for assessmentStatement of Activities – “The statement of activities presents the increases and decreases …of the net assets over a period of time” (Ruppel 2007, 46).Statement of Cash Flow gives a statement of receipts and disbursements of cash that

includeoperation activitiesinvesting activitiesfinancing activitiesand shows the organizations ability to meet its cash needsStatement of Financial Position- a “snap shot” of the current condition of the nonprofitappropriate, timely acknowledgement of gifts.

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Elements necessary for proper accounting

The uncertainty of risk requires that thought be given to the possible

consequences of decisions and weighing the pros and cons of the possible

outcomes

and

Creation of contingency plans to protect the nonprofit when an undesirable

outcome occurs.

Tools to help assess the risks and benefits follow in the next slide

Tools for diagnostic purposesBalanced scorecardVinfen’s balanced scorecardSWOT analysisThree dimensional portfolioQuick Analysis

Tools for diagnosing the financial healthFinancial Statement AnalysisIndependent Auditor’s ReportComparative Financial StatementsFinancial Expense RatiosProgram expense to total expense ratioManagement to general expense ratioFund-raising expense to total expense ratioContribution revenues to fund-raising expenses ratio

Financial ratios evaluate the state of the organization and its financial health and are used by funders, donors and those issuing credit.

Each evaluation and assessment tool is useful in identifying specific areas that the

Executive Director, the Board of Directors and outside funders may require. Critical to

using the reports for maintain a strong nonprofit is a cushion of liquidity or a liquidity

target in the event of an unforeseen expense or shortfall in funding. Ultimately, the funding

is to serve the mission, vision and goals of the organization, but good management of the

funds, the generally accepted accounting principles and accepted practices of the

Financial Accounting Standards Board will help the Executive Director and Board

maintain a strong nonprofit.

Included with the actions of the decision makers are policies, procedures and

recordkeeping that create sound financial management practices

Statement of Activities – “The statement of activities presents the increases and decreases …

of the net assets over a period of time” (Ruppel 2007, 46).

Statement of Cash Flow gives a statement of receipts and disbursements of cash that include

operation activities

investing activities

financing activities

and shows the organizations ability to meet its cash needs

Statement of Financial Position- a “snap shot” of the current condition of the nonprofit

FINANCIAL STATEMENTS

Reporting the financial health of the organization is essential!

Each nonprofit must file a form 990 with the Internal Revenue Service. The different forms for

filing are:

990 N for small tax-exempt nonprofits

990 PF for Private Foundations or Non-exempt Charitable Trust

Form 990 and the accompanying schedules based on related items that are reported for other

nonprofits.

Additionally, nonprofits must make the From 990s available to the public upon request.

Another essential report is an independent audit performed by an independent from the

organization accountant.

The leadership of a nonprofit needs to know (how to) read financial statements, understand the structure of donations, restricted and unrestricted,

expenses, revenues assets and liabilities.Understand the method of accounting – accrual or cash basisUnderstand fund accountingThe impact of a strategic plan on financesKnow the history and process for acquiring financial support through donations, grants and

the governmentKnow the process of donation acknowledgementUnderstand and oversee liquidity management by considering risks, and uncontrollable cost

such as employee benefits and program expenses.Joint and individual cost allocationThe basics of working with affiliated organizationsThe effect on the nonprofit when Unrelated Business Income is generated (and how to report)related party disclosures, other accounting areasFamiliarity with GAAP and FASBand make decisions.

In summary, financial decision making for nonprofits must useaccurate informationappropriate reportsanalysis to ensure accuracyaccountabilitythe flexibility to cope with unforeseen issues that may impact the financial health of the

organization while using the resources and funds designated for the mission for that purpose.

In an effort to serve the public trust, the nonprofit must reduce expenditures, increase funding sources and act responsibly with regard to the requirements of funding and related reports.The organization is able to move beyond being a “good organization” to a “great organization when the leadership looks objectively at the business and culture of the nonprofit, considering allocation of funding towards mission promotion and is able to ask the hard questions. When the organization is willing to take steps towards growth, the right people in the right jobs with the right skills can work together and move beyond actions that sustain into actions that foster growth and innovation.

Resources:

Behn, R. D., & Vaupel, J. W. (n.d.). Quick Analysis for Busy Decision Makers.

In R. D. Behn, & J. W. Vaupel, Quick Analysis for Busy Decision Makers (pp.

chapters 1-4). New York: Basic Books.

Brinkerhoff, P. C. (2009). Mission-Based Management Leading Your Not-for-

Profit. In P. C. Brinkerhoff. Hoboken: John Wiley & Sons, Inc.

Collins, J. (2001). Good to Great. In J. Collins, Good to Great (pp. 90-117).

New York: HarperCollins.

Zietlow, J., Hankin, J. A., & Seidner, A. (2007). Financial Management for

Nonprofit Organizations, Policies and Practices. In J. Zietlow, J. A. Hankin, &

A. Seigner, Financial Management for Nonprofit Organizations, Policies and

Practices (pp. 1-347). Hoboken: John Wiley & Sons, Inc.