• financial management is a form of applied economics that informs, guides and provides decision-making tools for leaders in mission-driven, service oriented organizations.
• it is imperative that you develop your personal and professional skills so that you have the ability to position an NPO/NGO for long-term growth to meet human and/or societal needs, financial stability, service sustainability and, above all, mission accomplishment.
• NPOs/NGOs must compete increasingly with the for-profit corporations for financing their efforts
• Actual financial goals, both short- and long-term, should dominate the financial management of the organization
• Definition: Transparency is the intentional practice of providing complete accessibility for every NPO/NGO organizational stakeholder in all internal and external reporting, governance and operational decision-making and the formal compilation of historical, current and forecasted data (SRH & Associates, 2008).
• The Sarbanes-Oxley Act was signed into law on July 30, 2002. Its purpose was to rebuild public trust in America’s corporate sector after the corporate and accounting scandals of Enron, Tyco and others.
• Role of an NPO/NGO Financial Manager/Leader:
• it is still your primary accountability to lead, guide, direct and be integrally involved with your NPO’s/NGO’s financial management.

• Readings

     

  Chapters 1, 2 and 3
• In 200 words or less, please provide an accurate description of “fund accounting.” Why might “fund accounting” construct a barrier for financial transparency in a grassroots NPO/NGO?
• In 200 words or less, please define “liquidity” in an NPO/NGO. Why is understanding “liquidity” important for the board of directors, administrative leaders, and program managers in an NPO/NGO?
• • In 200 words or less, what were the key financial objectives reported by survey respondents in the Lilly Study? If you had been a survey respondent, would you have added any different financial objective of your own?
   
• You are a leader in a teenage youth-oriented NPO in the U.S. In 200 words or less, what principal financial strategy would you employ to insure mission-focus in that organization?
• In Weeks 5 and 6, you are required to actually conduct interviews with NPO/NGO leaders/professionals. These interviews may NOT be   conducted via email – they must be done in person or by telephone.
• set up your interviews no later than at the beginning of Week Two!
• Three Year Financial Sustainability Report.
• submit your choice of an organization about which you will base your work on this assignment to your course facilitator no later than Wednesday Midnight MST of the second week of this course.
• include those skills and tools from each week’s work in this final paper.
• Assignment:
    Please write a 1-2 page analysis of your personal and professional fears about engaging the responsibilities of financial management and leadership in an NPO/NGO. Due Sunday Midnight MST of Week One.

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• Week 1- Financial Management in a Mission-Driven, Service-Oriented Organization
• financial management is a form of applied economics that informs, guides and provides decision-making tools for leaders in mission-driven, service oriented
• Actual financial goals, both short- and long-term, should dominate the financial management of the organization.
• it is still your primary accountability to lead, guide, direct and be integrally involved with your NPO’s/NGO’s financial management.
• Please post your initial response to discussion questions by Wednesday. Reply to at least two other postings by Saturday.
• barrier for financial transparency
• understanding “liquidity”
• key financial objectives
• what principal financial strategy

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• Number of Nonprofit Organizations in the United States, 1996 - 2006

• Sound Nonprofit Financial Management for a Sound Nights Sleep
• many have less expertise in this area than they would like.
• sound financial management is linked with every function of the nonprofit and is essential for organizational success.
• Macro Level Oversight
• First, look at the "kind" of money your nonprofit organization has available to provide programs.
• foundation and government funding may restrict the type and amount of advocacy your organization can do. Unrestricted funds from individual donors provide more opportunities for advocacy. Similarly, most grants and even government contracts don't cover all program costs.
• Your nonprofit needs a mix of private and public grant money and other sources of funding to deliver the financially healthy,
• Sound financial management also requires that you broaden your focus beyond having a fund balance large enough to finance cash flow (typically, three to 12 months of operating expenses).
• Lastly at the macro level, make sure you understand your balance sheet, known as the Statement of Financial Position in the nonprofit sector.
• • Short/Long-term cash-flow needs 
  • An ability to fund expansion 
  • Funds needed for future equipment maintenance 
  • The soundness of your cash-management strategy (or if you need one!) 
  • Future debt payment requirements  
• Operational Level Oversight

• On a more operational level, are you "in the mix" when it comes to financial systems and information? Can you get details from your finance professionals in a format that you can understand? Would you be embarrassed if anything in your expenditure or salary base made the day’s headlines?   

  Know what's going on. Look at the details, systems, and checks and balances. Make sure you can defend your budget to your board, supporters and colleagues.  
• Budgeting for Programs
• Financial reports must clearly show the restricted and unrestricted funds. This is critical for knowing what can and cannot be changed if the budget should require adjustment.
• Do your financial statements pass the “logic test”? If, for example, you have a government contract that requires certain services be performed by a specific staff member, do the financials show a portion of that person’s salary apportioned to those contract funds?
• To make sure your nonprofit organization is financially healthy, you need to know the details, ask questions, demand answers and understand the big picture.

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• APA Research Style Crib Sheet

• STRUCTURE OF GENERAL LEDGER ACCOUNTS
• In addition to the four-digit account number, certain general ledger accounts require four-digit subsidiary numbers.  Some four-digit subsidiary numbers signify the funds involved in interfund and intrafund transactions. 
• Other general ledger accounts also require four-digit subsidiary numbers.  These four-digit subsidiary numbers signify the Accounts Receivable, Due From Other Funds and Other Long-Term Debt accounts involved in the transactions. 

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• Balance sheet
• balance sheet or statement of financial position is a summary of a person's or organization's balances
• Assets, liabilities and ownership equity are listed as of a specific date
• the only statement which applies to a single point in time.
• The difference between the assets and the liabilities is known as equity or the net assets or the net worth
• assets equals liabilities plus net worth
• This is how a balance sheet is presented, with assets in one section and liabilities and net worth in the other section. The sum of these two sections must be equal; they must "balance."

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• Under SFAS No. 116, unconditional donations are recognized as restricted or unrestricted support (revenue), at the time of the donation or pledge, at fair value. If restricted, the donation may be deemed permanently restricted or temporarily restricted.
• permanently restricted donation would be when the organization receives an endowment gift where the principal cannot be spent
• A cash donation also can be an increase in temporarily restricted net assets or an increase in unrestricted net assets based on a donation agreement
• If a donor does not dictate the use of a donation, the donation is unrestricted.

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• in the form of gifts, grants, bequests, promises to give, or donations of services, materials, or facilities.
• One of the most unique features of not-for-profit organizations is their frequent receipt of voluntary contributions for support.
• contributions pose some of the most complex and challenging accounting, reporting, and auditing issues in not-for-profit organization engagements
• SFAS No. 116, Accounting for Contributions Received and Contributions Made.

• SFAS No. 116 distinguishes conditions from restrictions as follows:

   

  A donor-imposed restriction limits the use of donated assets; however, a condition creates a barrier that must be overcome before assets transferred or promised become contributions received or made.

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• <!-- // main content goes in this cell -->      <!-- content -->  

  Summary of Statement No. 116
• This Statement establishes accounting standards for contributions and applies to all entities that receive or make contributions.
• contributions received, including unconditional promises to give, are recognized as revenues in the period received at their fair values
• This Statement requires not-for-profit organizations to distinguish between contributions received that increase permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets.
• It also requires recognition of the expiration of donor-imposed restrictions in the period in which the restrictions expire.
• This Statement is effective for financial statements issued for fiscal years beginning after December 15, 1994, except for not-for-profit organizations with less than $5 million in total assets and less than $1 million in annual expenses.

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• First of all, the auditor should be aware that GAAS and GAS are primarily oriented toward financial reporting (i.e., a financial statement audit/attestation), while a single audit is oriented more toward federal programs. The objective of the GAAS and GAS is to render an opinion on the fairness of the financial reporting with generally accepted accounting principles (GAAP), which are promulgated by GASB, FASB, and FASAB. However, the objective of the single audit is to render an opinion on whether an auditee has complied with the laws and regulations applicable to major programs based on the requirements contained in the OMB Circular A-133.

• Which GAAP should NPOs apply
• Auditors who fail to recognize that an NPO applied the wrong GAAP hierarchy might improperly render an unqualified opinion on its financial statements, violating numerous auditing and professional ethics standards and possibly subjecting the auditor to professional or legal sanctions and financial liability.
• NPOs and their auditors must ask if the entity should implement FASB Statement no. 116, Accounting for Contributions Received and Contributions Made, and Statement no. 117, Financial Statements of Not-for-Profit Organizations.

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• Excel Dashboard Reports

• Financial Ratios
• Financial ratios are a valuable and easy way to interpret the numbers   found in statements. It can help to answer critical questions such as   whether the business is carrying excess debt or inventory, whether customers   are paying according to terms, whether the operating expenses are too   high and whether the company assets are being used properly to generate   income.
• When computing financial relationships, a good indication of the company's   financial strengths and weaknesses becomes clear. Examining these ratios   over time provides some insight as to how effectively the business is   being operated.
• Many industries compile average industry ratios each year. Average   industry ratios offer the small business owner a means of comparing   his or her company with others within the same industry. In this manner,   they provide yet another measurement of an individual company's strengths   or weaknesses.

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• Direct costs are those which are clearly and easily attributable to a specific program.
• Indirect costs are those which are not easily identifiable with a specific program, but which are, nonetheless, necessary to the operation of the program. These costs are shared among programs and, in some cases, among functions (program, management and general, and fundraising). The executive director's salary is a common example of an expense which benefits all programs and functions. Other indirect, or shared, costs may include rent, telephone, postage, printing and other expenses which benefit all programs and functions of an organization.
• Case-by-Case Allocation
  One method of allocating indirect costs is to determine a rate of actual usage for each program.
• Developing an Indirect Cost Rate
  The first step in determining an indirect cost rate is to separate all costs into two groups: direct and indirect costs. The indirect costs are aggregated into an indirect cost "pool" and then allocated to the programs based on a set proportion or rate.
• indirect cost rate based on the relationship between total indirect costs and total direct costs:

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• Financial Management

•  

  Federal Form 990 and the Statement of Financial Accounting Standards No.117 require nonprofits to report expenses by what is known as their functional classification. The two primary functional classifications are program services and supporting activities. Supporting activities are typically comprised of management and general activities, fundraising, and membership development.
• Program services are activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists.
• Supporting activities are all activities of a not-for-profit organization other than program services.
• Management and general activities include oversight, business management, general recordkeeping, budgeting, financing and related administrative activities, and all management and administration except for direct conduct of program services or fund-raising activities.
• Fund-raising activities include publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting special fund-raising events; preparing and distributing fund-raising manuals, instructions and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, government agencies and others.
• Membership-development activities include soliciting for prospective members and membership dues, membership relations and similar activities.
• this classification system was developed "to help donors, creditors, and others in assessing an organization s service efforts, including the costs of its services and how it uses resources...".
• NCIB recommends that at least 60 percent of annual expenses should be related to program services.
• For example, time spent by the executive director developing and overseeing programs can legitimately be considered a program services expense, yet some nonprofits will place the entire director's salary into the management and general activities function. Similarly, rent, utilities, insurance, supplies, and other expenses may be fairly divided among the various functional classifications and should not necessarily be considered exclusively management and general activities costs.
• The lack of standard allocation practices makes functional accounting a somewhat unreliable measure of nonprofit efficiency and effectiveness. Given the lack of clear guidelines, you will want to define for your own organization which expenses are legitimately programmatic and which are supportive. As long as your internal guidelines are reasonable and justifiable they are likely to be accepted by auditors and donors

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• The Statement of Functional Expense
• a non profit’s income statements (usually called the Statements of Revenue and Expense)
• the central goal of a non profit is to provide services

• The SFE divides a non profit’s expenses into three categories:

  1.Program Expenses: goods and services distributed to fulfill the purpose of the organization.

  2.Administrative expenses: costs of business management, record keeping, budgeting, and finance and other management and administrative activities.

  3.Fund raising expenses: costs of fund-raising campaigns and events.

• What the Watchdogs Say

   Because accounting rules are relatively lax, charitable watchdogs often recharacterize joint costs as fund raising expenses.
• Other Tests of Whether Your Favorite Non Profit Spends Too Much on Fund Raising

• 1.Do you have a 200 year supply of address labels provided by the charity?

  2.Do you receive three times as many phone calls from your charity asking for funds as you do calls from your friends and relatives?

  3.Does your charity request annual membership renewals two months after you paid your annual dues?

  4.Has your charity sold your name and address to 100 other non profits so now you receive 4 times as many direct mail solicitations as personal mail?

  5.Do you have to increase your anti-anxiety meds every time you receive a new “call to action” from your favorite advocacy group warning you that if you do not give them more money civilization as we know it will come to an end?  

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• organizational efficiency
• We use a set of financial ratios or performance categories to rate each of these two areas
• Organizational Efficiency
• Analyzing a charity's efficiency reveals how well it functions day to day
• They devote the majority of their spending to the programs and services they exist to provide
• They keep administrative costs within reasonable limits
• Charity Navigator analyzes four performance categories of organizational efficiency:  program expenses, administrative expenses, fundraising expenses, and fundraising efficiency.
• Program Expenses
  Charities exist to provide programs and services. They fulfill the expectations of givers when they allocate most of their budgets to providing programs. Charities fail givers expectations when their spending on programs is insufficient. To evaluate a charity's program expenses, we divide its program expenses by its total functional expenses. Charity Z spends $2.5 million on program expenses, compared with its overall operating budget of $3.5 million. Thus, Charity Z spends 71.4% on program expenses. We score a charity's program expenses using the conversion scale listed in
• Administrative Expenses
  As with successful organizations in any sector, effective charities must recruit, develop, and retain talented people. At the same time, they ensure that these administrative expenses remain reasonable and in line with the organization's total functional expenses. Here again, we calculate a charity's administrative expenses by comparing them to its total functional expenses. Charity Z spends $500,000 on administrative expenses, compared with $3.5 million in total functional expenses. Thus, Charity Z spends 14.3% on administrative expenses.
• Performance Category 3: Fundraising Expenses
  Charities spend money to raise money, but they do not exist to raise money. Givers support charities for their programs and services, not for their ability to raise money. Charities should ensure that fundraising expenses stay in line with the charity's total functional expenses. We evaluate a charity's spending on fundraising by comparing it with the charity's overall spending. That is, we divide a charity's fundraising expenses by its total functional expenses. Charity Z, which spends $500,000 on fundraising and $3.5 million in expenses overall, spends 14.3% on fundraising.
• Performance Category 4: Fundraising Efficiency
  Charities spend money to raise money. Effective charities must in part be efficient fundraisers, spending less to raise more. We calculate a charity's fundraising efficiency by determining how much it spends to generate $1 in charitable contributions. In other words, we divide a charity's fundraising expenses by the total contributions it receives as a result. For example, Charity Z, with fundraising expenses of $500,000 and total contributions of $3.4 million, has a fundraising efficiency of $0.147, which means it spends 14.7¢ to raise $1.
• When a charity runs a combined deficit over time, we adjust its efficiency score downward.
• If a charity spends less than a third of its budget on the programs and services it exists to provide, then we automatically give that charity a score of zero for organizational efficiency.
• Primary Revenue Growth and Program Expenses Growth
• growth means first, increasing their primary revenue, which includes contributions from corporations, foundations, individuals, and government grants; program service revenue, contracts and fees; and revenue from membership dues and fees. Second, growth means growing their programs and services.
• Charity Navigator analyzes a charity's average annual growth of primary revenue and program expenses over its three to five most recent fiscal years. In the past, we limited our evaluations to only three years of data, and thus measured growth over a standard 24 month interval² for all organizations.
• Working Capital Ratio
  Charities depend upon their reserves of liquid assets to survive downward economic trends and sustain their existing programs and services. If a charity has insufficient working capital, then it faces the difficult choice of eliminating programs or staff, amassing debts and liabilities, or dissolving.

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• Our Ratings Tables
• Program Expenses less than 33.3%
• Administrative Expenses

• Museums

  0% - 17.5%17.5% - 25%25% - 30%30% - 45%> 45%
• Museums:
  With expensive collections and property to maintain and expand, these charities encounter significantly above-average administration costs. Their median administrative expenses percentage is 15.9%, whereas the median among all charities is 9.6%.
• In response to these economic fluctuations, and in an effort to evaluate charities fairly, we normalized primary growth rates by adding 3.72% to each charity's growth rate.
• Working Capital Ratio

• Museums

  > 3.01.0 - 3.00.5 - 1.00 - 0.5< 0.0

• Summation Scores

  Rating:					0 Stars
  Organizational Efficiency Score	≥ 37.5	32.5 - 37.5	27.5 - 32.5	22.5 - 27.5	< 22.5
  Organizational Capacity Score	≥ 22.5	17.5 - 22.5	12.5 - 17.5	2.5 - 12.5	< 2.5
  Overall Score:	≥ 60	50 - 60	40 - 50	25 - 40	< 25

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