understanding & using financial statements (as business tools for nonprofits)

8/3/2019 Understanding & Using Financial Statements (As Business Tools for Nonprofits)

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Understanding & Using Financial Statements

(As Business Tools for Nonprofits)

J. Scott Denlinger, CPADirector, CBIZ MHM, LLCBethesda, Maryland


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Overview How to read financial statements.

Some key indicators and ratios.

Financial statements are a tool for runningyour business.

Building and maintaining cash reserves.

DONT BE AFRAID TO ASK QUESTIONS!


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Why Review Financial Statements? Assess the current financial health of the organization

(may be better than you think)

Assists in gauging of viability of new programs and

services

Helps to identify issues before they become seriousproblems

More important than ever given current economicconditions


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Cash vs. Accrual Basis Accounting Cash recognizing revenues as you

receive them and expenses as you pay

them

Accrual recognizing revenues as youearn them and expenses as you incur

them rather than at the time of cash flow


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Statement of Financial Position Nonprofit equivalent of the Balance

Sheet

Tells you what you own (assets), whatyou owe (liability) and what you haveleftover (net assets)


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CURRENT ASSETS

Cash and cash equivalents $ 540,052

Promises to give 277,987

Receivables 127,250

Prepaid expenses 59,379

TOTAL CURRENT ASSETS $ 1,004,668

INVESTMENTS 981,770

PROPERTY AND EQUIPMENT, at cost, less $25,844 of

accumulated depreciation and amortization 15,293

OTHER ASSETS

Promises to give 494,470

26,053

520,523

TOTAL ASSETS $ 2,522,254

CURRENT LIABILITIES

Accounts payable and accrued expenses $ 277,769

Deferred membership dues 453,496

Deferred rent liability 4,532

TOTAL CURRENT LIABILITIES $ 735,797

NET ASSETS

Unrestricted 997,049

Temporarily restricted 289,408

Permanently restricted 500,000

1,786,457

TOTAL LIABILITIES AND NET ASSETS $ 2,522,254

A S S E T S

L I A B I L I T I E S

N E T A S S E T S

Deposits


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Receivables Receivables primarily earned revenue Promises to Give

Restricted

Unrestricted Key issues:

Split out long-term receivables (dont kid

yourself) Allowance for bad debts (donors intentmay not equal donors ability)


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Prepaid Expenses Prepayments for future goods or services

(meeting space deposits, etc.)

Useful in matching revenues with expenses(conferences, trade shows, etc.)

Key issues:

Dont forget to expense them later Dont worry about the small stuff


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Property and Equipment Key Issues:

Establish a capitalization policy ($500?,$1,000?, more?)

Maintain fixed asset listing on Excel orother program

Use good descriptions could save you

personal property taxes) Keep depreciation simple straight-line


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Investments Key Issues:

Need an investment policy

Dont forget unrealized gains and losses especially in current economy!

Review performance monthly


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Other Assets Long-term receivables

Multi-year pledges

Deposits Recording can help serve as a reminder


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CURRENT ASSETS

Cash and cash equivalents $ 540,052

Promises to give 277,987Receivables 127,250


TOTAL CURRENT ASSETS $ 1,004,668

INVESTMENTS 981,770

PROPERTY AND EQUIPMENT, at cost, less $25,844 of

accumulated depreciation and amortization 15,293

OTHER ASSETS

Promises to give 494,470 26,053520,523

TOTAL ASSETS $ 2,522,254

A S S E T S

Deposits


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Accounts Payable/Accrued Expenses Keep on top of this

Know what you owe

Consider recording estimates if youdont have the invoice yet (contractors,

large expense reports, etc.)

Avoid surprises


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Deferred Revenue Member dues, conference registration, etc.

Assist in matching revenues and expenses

Key issues: Member dues vs. Contributions

Maintain good schedules

Dont worry about the small stuff


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Net Assets Unrestricted

Temporarily Restricted

Permanently Restricted

Board Designation vs. Restriction


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CURRENT LIABILITIES

Accounts payable and accrued expenses $ 277,769Deferred membership dues 453,496

Deferred rent liability 4,532

TOTAL CURRENT LIABILITIES $ 735,797

NET ASSETS

Unrestricted 997,049

Temporarily restricted 289,408

Permanently restricted 500,0001,786,457

TOTAL LIABILITIES AND NET ASSETS $ 2,522,254

L I A B I L I T I E S

N E T A S S E T S


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Shows organizations ability to meet short-term obligations.

Your current ratio helps you determine if you have enough working capitalto meet your short-term financial obligations.

A general rule of thumb is to have a current ratio of at least 1.0.

A current ratio under two may indicate an inability to pay current financialobligations with a measure of safety.

Current ratio:

Current AssetsCurrent Liabilities

Ratios


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More stringent test of your ability to meet current obligations.Used by banks and management. Should not be less that 1.0.

*Quick Assets generally means Current Assets minus Inventory andPrepaid Expenses.

Quick Assets*

Current Liabilities

Quick ratio:Ratios


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Quick Ratio 1.42 1.27Current Ratio 2.97 2.36

PublicCharities

TradeAssociations

IndustryBenchmarksRatios


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TOTAL CURRENT ASSETS 1,004,668$= 1.37

TOTAL CURRENT LIABILITIES 735,797$

Sample Ratio


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TOTAL CURRENT ASSETS 1,004,668$LESS: Prepaid expenses 59,379

TOTAL QUICK ASSETS 945,289$= 1.28

TOTAL CURRENT LIABILITIES 735,797$

Sample Ratio


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Use Templates As Tools!

Current ratio [A/B] Working capital [A-B]

Quick ratio [(A-C)/B] Debt-to-equity ratio [(G+H)/F]

Cash ratio [D/B] Debt ratio [(G+H)/E]

% of ASSETS % of ASSETS

Current assets Current liabilities

Cash and cash equivalents [D] - Loans payable and current portion long-term debt [H] -

Short-term investments - Accounts payable and accrued expenses -Accounts receivable [I] - Income taxes payable -

Inventories [C] - Accrued retirement and profit-sharing contributions -

Deferred income taxes -

Prepaid expenses and other current assets -

Total current assets [A] $ - - Total current liabilities [B] $ - -

Fixed assets Other liabilities

Property, plant and equipment at cost - Long-term debt [G] -

Less accumulated depreciation - Accrued retirement costs -

Total fixed assets $ - - Deferred income taxes -Deferred credits and other liabilities -

Other assets

Long-term cash investments -

Equity investments -

Deferred income taxes -

Other assets -

Total other assets $ - - Total other liabilities $ - -

Total assets [E] $ - - Total liabilities $ - -

Total owners' equity [F] $ - -

Total liabilities + owners' equity $ - -

YOUR Balance Sheet For the Period Ending [End Date]

ASSETS LIABILITIES & OWNERS' EQUITY

-

-

-

-$

Stated in 000s

-

-

Many Excel templates are available online, likethis one available from Microsoft at

http://office.microsoft.com/[templates]
http://office.microsoft.com/http://office.microsoft.com/


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Statement of Activities

Nonprofit equivalent of the Income Statement

Shows how the organization performed duringthe period

Change in Net Assets is nonprofit equivalent

of Net Income

Nonprofits are measured differently

Negative change in net assets isnt necessarily

bad


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REVENUE AND SUPPORTGrants and contributions $ 1,209,176 $ 441,269 $ 1,650,445

Conferences 1,137,432 - 1,137,432Publications 1,222,682 - 1,222,682Rental income 67,943 - 67,943Investment income 35,482 - 35,482Miscellaneous income 5,914 - 5,914Net assets released from restrictions: - -

Satisfaction of purpose restrictions 324,615 (324,615) -TOTAL REVENUE AND SUPPORT $ 4,003,244 $ 116,654 $ 4,119,898

EXPENSESProgram services:

Research 2,125,836 - 2,125,836Student Services 136,920 - 136,920Government Affairs 167,976 - 167,976Communications 261,630 - 261,630Conferences 250,971 - 250,971

Total program services 2,943,333 - 2,943,333

Management and general 602,073 - 602,073Fundraising 412,639 412,639

TOTAL EXPENSES 3,958,045 - 3,958,045

CHANGE IN NET ASSETS 45,199 116,654 161,853

TotalTemporarily

Unrestricted Restricted

Statement of Activities


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Revenue Considerations

Contributions/Grants

Membership Dues

Special Events

Investment Income

Unrelated Business Income Tax (UBIT)


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Restricted vs. Unrestricted

Unrestricted

Provides more flexibility Can be more difficult to raise

Restricted Can engage donors more than unrestricted

No disputes over usage

Potential for being painted into a corner


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Corporate grants One can lead to more

Can be unreliable long-term

Foundation grants Can be more reliable than corporate

May have more reporting requirements

Government grants Need proper controls in place

State grants may be risky

Single Audit considerations for federal grants


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Membership Dues

More predictable less dynamic

Raising dues rates

Determining proper dues rates

Cost of soliciting new members (direct mail,telephone solicitation, new member kits,etc)

Cost of retaining the member (newsletters, othermember benefits)

Dues rates should cover costs per member


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Membership Dues

Additional Considerations

Tiered dues structure

Based on Benefits Based on Size

Student memberships


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Special Events

Can provide visibility

Large upfront costs

How confident are you regarding therevenue?

Consider lower cost alternatives

Consider partnering


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Investment Income

Record reinvested interest anddividends

Dont forget to record unrealized gainsand losses (especially in todays

economy)

Know what have!


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UnrelatedBusiness Income Tax (UBIT)

Represents taxable income

Reportable on Form 990T

Considerations:

Advertising in magazines or newsletters

Corporate sponsorship


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AIPBenchmark

Operating Efficiency:

Program related expenses 75%Total expenses

Indicates percentage of each dollar spent on programs.

Ratios


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AIPBenchmark

Fundraising Efficiency:

Fundraising Expenses Ideally 25%

Related Contributions (no more than 35%)

A measure of the cost of raising money.

Ratios


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Operating Efficiency

Program services 2,943,333$

Management and general 602,073Fundraising 412,639

Total Expenses 3,958,045$

Program services 2,943,333$= 74%

Total Expenses 3,958,045$

Sample Ratio


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Fundraising Efficiency

Fundraising expenses 412,639$

= 25%

Grants and contributions 1,650,445$

Sample Ratio


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Cash Flow Statement

Equally important, but frequently ignored

Reconciles change in net assets tochange in cash

Answers the question: We made money

- where did it go?


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CASH FLOWS FROM OPERATING ACTIVITIES

Change in net assets $ 161,853

Adjustments to reconcile change in net assets to net cash

flows from operating activities

Depreciation and amortization 5,144

Net unrealized and realized gains on investments (3,058)

(Increase) decrease in operating assets

Receivables (107,401)


Increase (decrease) in operating liabilities

Accounts payable and accrued expenses (127,530)

Deferred revenue (39,195)NET CASH FLOWS FROM OPERATING ACTIVITIES $ (61,978)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of investments (281,871)

Proceeds from sales of investments 450,000

NET CASH FLOWS FROM INVESTING ACTIVITIES 168,129

CASH FLOWS FROM FINANCING ACTIVITIESRepayments on line of credit (50,000)

NET CASH FLOWS FROM INVESTING ACTIVITIES (50,000)

NET DECREASE IN CASH 56,151

CASH, BEGINNING OF YEAR 483,901

CASH, END OF YEAR $ 540,052

Cash Flow Statement


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Statement of Cash Flows

Cash Flows from Operations

Shows cash provided by (or used in)

operations Ideally this number should be positive

Items which affect operating cash flow

Depreciation Collection of receivables

Paying of accounts payable


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Cash Flows from Investment

Shows cash provided by (or used in)investing activities

Items which affect investing cash flow

Buying and selling marketable securities

Buying and selling of property and equipment

Not bad if this number is negative

Similar to your personal finances


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Cash Flows from Financing

Shows cash provided by (or used in) financingactivities

Items which affect financing cash flow Bank loans

Lines of credit

Equipment leases Not bad if this number is negative

Similar to your personal finances



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CASH FLOWS FROM OPERATING ACTIVITIES

Change in net assets $ 161,853Adjustments to reconcile change in net assets to net cash

flows from operating activitiesDepreciation and amortization 5,144

Net unrealized and realized gains on investments (3,058)(Increase) decrease in operating assets

Receivables (107,401)Prepaid expenses 48,209

Increase (decrease) in operating liabilitiesAccounts payable and accrued expenses (127,530)

Deferred revenue (39,195)NET CASH FLOWS FROM OPERATING ACTIVITIES $ (61,978)

Cash Flow Statement


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CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of investments (281,871)Proceeds from sales of investments 450,000

NET CASH FLOWS FROM INVESTING ACTIVITIES 168,129

CASH FLOWS FROM FINANCING ACTIVITIESRepayments on line of credit (50,000)

NET CASH FLOWS FROM INVESTING ACTIVITIES (50,000)

NET DECREASE IN CASH 56,151

CASH, BEGINNING OF YEAR 483,901

CASH, END OF YEAR $ 540,052

Cash Flow Statement


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Specializedsoftwareprograms

can help yougoal seek

and considerwhat if

scenarios.


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What is an appropriate level of operatingreserves?

Using the Statement of Cash Flows to evaluatecash flow performance.

Preparing cash budgets and cash projections

Building and maintaining an appropriate level ofoperating reserves

Operating Reserves


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How do you calculate operating reserves?

Unrestricted net assets Fixed assets =

Operating reserve

Total expenses Depreciation = Operatingexpenses

Operating reserve divided by operatingexpenses

Operating Reserves


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Unrestricted net assets 997,049$Less: Fixed assets 15,293Operating reserve 981,756$

Total expenses 3,958,045$

Less: Depreciation expense 5,144Operating expenses 3,952,901$

Operating reserve 981,756$= 25%

Operating expenses 3,952,901$

This means 25% (or 3 months) of their annual expenses

Sample Calculation


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What is an appropriate level?

Minimum of 25%, or 3 months, of operatingexpenses

Other factors to consider:

Type of organization

Types and diversity of revenue streams

Peaks and valleys in expenses How susceptible the organization is to economic

downturns

Large outlays of cash projected in future?

Operating Reserves


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Type of Organization

Type of revenue stream

How predictable is it?

Grant driven (Recurring or non-recurring?)

Membership dues

Special Events

Less predictable higher reserve


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Diversity of Revenue Streams

How dependent are you upon one or afew donors?

How reliable are those donors?

Less diversity higher reserve


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Peaks and Valleys in Expenses

Quarterly or annual publications?

Annual conference or fundraiser?

Less predictable higher reserve


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Susceptibility to economic downturns

Dependent upon contributions

Individual, Corporate, Foundation

Dependent upon membership dues

How strong is the industry (small business,oil, medical, etc.)

More susceptible higher reserve


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Large Outlays of Cash Projected

Upgrading computers or database

Implementation of new program or

service

Moving to larger facility

Trade show or conference Expanding membership base


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Your Board should be involved in these discussions:

Operating Reserves

Determine how your organization will define operating

reserves

Include Prepaid expenses, Deposits, etc?

Determine what level your organization wants to

maintain

Determining the appropriate level for your organization


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Your Board should be involved in these discussions:

Operating Reserves -Determining the appropriate level for your organization

Establish a minimum level that must be kept intact and

how it will be replenished if used Develop a policy as to how the reserves will be

invested

Safety no big risk

Establish how often the reserves will be evaluated(monthly?, quarterly?)

Financial statements, investment statements


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Use operating budget as a starting point

Convert accrual basis items to cash basis

Back out noncash expense (depreciation andamortization)

Add in non-expense outlays, such as loan repaymentsor equipment purchases

Add in line items for additions to operating or otherreserves

Budgets & Projections

Preparing cash budgets and cash projections

TEXTBOX

XYX Organization


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BOXWHITE

Adjustments

SUPPORT AND REVENUE CASH INFLOWSContributions $ 1,404,125 $ 36,000 a Contributions $ 1,440,125

Interest and dividend income 52,525 2,932 a Interest and dividend income 55,457

TOTAL SUPPORT AND REVENUE 1,456,650 38,932 TOTAL CASH INFLOWS 1,495,582

EXPENSES CASH OUTFLOWS

Administrative fees 7,200 Administrative fees 7,200

Board expenses 1,050 Board expenses 1,050Cleaning 26,706 Cleaning 26,706Commission - rentals 4,752 (4,752) a Commission - rentals -

Depreciation 80,436 (80,436) b Depreciation -

Insurance 9,023 2,904 a Insurance 11,927Miscellaneous expenses 173 (4) a Miscellaneous expenses 169

Office expense 1,300 Office expense 1,300Personnel expenses 1,005,455 Personnel expenses 1,005,455

Property taxes 97,250 Property taxes 97,250

150,000 c Transfer to reserve 150,000

28,477 c Purchases of property and equipment 28,477

39,618 c Repayment of notes payable 39,618Repairs and maintenance 32,042 3,934 a Repairs and maintenance 35,976

Security 2,701 Security 2,701

Trash and hauling 4,683 Trash and hauling 4,683Travel 551 Travel 551

Utilities 51,503 Utilities 51,503

TOTAL EXPENSES 1,324,825 139,741 TOTAL CASH OUTFLOWS 1,464,566

CHANGE IN NET ASSETS 131,825 NET CASH FLOWS $ 31,016

a Adjustments to reverse out accruals

b Elimination of non-cash expenses

c Inclusion of cash outflows not recognized as expenses

Cash Flow Budget Worksheet

Year ending December 31, 20XX

TEXTBOX

XYX Organization


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BOXWHITE

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total

BEGINNING CASH 150,469$ 117,249$ 189$ 365,117$ 150,469$

CASH INFLOWS

Contributions 250,125 166,286 774,000 249,714 1,440,125

Interest and dividend income 13,864 13,864 13,864 13,864 55,457

TOTAL CASH INFLOWS 263,989 180,150 787,864 263,578 1,495,582

CASH OUTFLOWS

Administrative fees 1,800 1,800 1,800 1,800 7,200

Board expenses 263 263 263 263 1,050

Cleaning 6,677 6,677 6,677 6,677 26,706Insurance 2,982 2,982 2,982 2,982 11,927

Miscellaneous expenses 42 42 42 42 169

Office expense 325 325 325 325 1,300

Personnel expenses 251,364 251,364 251,364 251,364 1,005,455

Property taxes - - 97,250 - 97,250

Transfer to reserve - - - 150,000 150,000

Purchases of property and equipment - - 28,477 - 28,477

Repayment of notes payable 9,905 9,905 9,905 9,905 39,618

Repairs and maintenance 8,994 8,994 8,994 8,994 35,976Security 675 675 675 675 2,701

Trash and hauling 1,171 1,171 1,171 1,171 4,683

Travel 138 138 138 138 551

Utilities 12,876 12,876 12,876 12,876 51,503

TOTAL CASH OUTFLOWS 297,210 297,210 422,937 447,210 1,464,566

NET CASH FLOWS (33,221) (117,060) 364,928 (183,632) 31,016

ENDING CASH 117,249$ 189$ 365,117$ 181,485$ 181,485$

Quarterly Cash Flow Budget Worksheet

Year ending December 31, 20XX


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Monthly fixed costs:

Rent & Utilities

Payroll & Benefits

Loan/equipment lease paymentsOther monthly costs

Breakeven cash flow refers to the nondiscretionary costs

that you must cover each month - it is the amount of cash

you must have on hand (not revenue on the books).

Breakeven Cash Flow


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Building and maintaining an appropriatelevel of operating reserves - additionalconsiderations:

What types of reserves (emergency,expansion, equipment, etc.)

Determine time frame for building upreserves

Operating Reserves


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To borrow or not to borrow

Lines of credit

How will the organization pay it back? Specific purpose vs Operating expenses

Trade show, fundraiser

How confident are you regarding revenues

Term Loans How will the organization pay it back?

Consider building an intermediate reserve

Operating Reserves


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Donors Staff

Board Desire to fulfill mission

Importance of communication!Effective communication can help navigate obstacles.

Potential Obstacles


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Doesnt energize donors

Reserves can be viewed as waste orabuse

Communicate need for long-term reserves

Communication with Donors(recognizing/navigating obstacles)


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May not be understand finances

May be viewed as robbing programs

Communicate need for long-term reserves

Engage certain staff in budget process

Communication with Staff(recognizing/navigating obstacles)


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Same issues as both donors and staff

Importance of monthly/quarterlyreview of financial statements

Communicate need for long-termreserves

Communication with Board(recognizing/navigating obstacles)


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If you have questions . . .

J. Scott Denlinger, CPA,Director and Practice LeadOutsourced Financial Services

Scott has more than 20years experience inaccounting, tax, consultingand auditing.

Mr. Denlinger designs and manages outsourced

CFO and accounting engagements serving both for-

profit and nonprofit organizations. He also performs

CFO duties for several organizations, assisting in

the preparation of internal financial statements and

presentation to their Boards. With his extensive

auditing experience, Mr. Denlinger is able to assist

our outsourcing clients in preparing for their year-

end audits. Combining his communication skills and

ability to translate difficult accounting concepts into

laymens terms, as well as his penchant for

teaching, Mr. Denlinger is frequently asked to lead

seminars and workshops by various organizations

on a broad range of financial management and

reporting topics. He is a member of the MACPA

Government and Nonprofit Conference Committee

and serves on the Board of Family and Children

Services of Central Maryland.

CBIZ MHM, LLC Bethesda, MD(301) 951-3636

[email protected]

Contact:

understanding & using financial statements (as business tools for nonprofits)

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