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Need-to-Know for 2017: Nonprofit Liquidity Information


It is hard to believe we've closed the door on 2016.
With the commotion of holidays and end-of-year requirements, some—particularly smaller nonprofits—may have forgotten about the latest Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), issued August 18, 2016, by the Financial Accounting Standards Board (FASB). Several changes to nonprofit financial reporting include:

  1. Improvements to the presentation and disclosures for net assets classes from the previous three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) to two classes (without donor restrictions and with donor restrictions).
  2. Allowing free choice between the direct method and indirect method in presenting cash flows.
  3. Providing better information about functional expenses and disclosures about how expenses are allocated to management and general.
  4. Augmenting disclosures on underwater endowment funds.
  5. Unifying the reporting of investment returns.
  6. Enhancements to information provided about the liquidity and availability of financial resources.

Nonprofit Finance Study Reveals Compliance, People, and Process Complexities

Nonprofit finance and accounting can be tricky business. First of all—serving as a responsible steward of money coming in from a multitude of sources with diverse demands is a huge challenge. Then, rules and regulations are in constant flux. Compliance is becoming increasingly complex and burdensome. Fraud is a potential risk lurking around every corner. And, oh yeah. There’s the seemingly never-ending stresses associated with audit planning and prep. 


Webinar Follow-up: How a Performance Dashboard Can Engage and Inform Your Board: One Nonprofit’s Story


The Q&A below is a follow up to address many of the questions raised by participants at the April 5th webinar presented by Friedman LLP Accountants and Advisors. Don't miss out: view the recording of the event and slides from the event.


It's Time for a Quick Financial Check-Up


The year is nearly one-sixth over. What shape are your organization’s finances in?


Capitalism

Only days after their debate at the Center for Effective Philanthropy conference, I got a chance to see Mathew Bishop continue his debate with Michael Edwards in Washington DC. The session was at the Hudson Institute, which likes dramatic titles to its events—this was one was called “Philanthrocapitalism: Savior or Emperor?” (A program last month was called “Apocalypse Now for Nonprofits?” and was about the financial crisis.)


The State of Nonprofit Transparency, 2008

When you think of GuideStar, what words come to mind? "Form 990"? "Database"? "Nonprofit information"? "Fabulous newsletter"?

Although all of those terms are appropriate (well, the first three certainly are), there's another that we hope occurs to you first: "Transparency."

GuideStar was founded to promote nonprofit transparency, to provide a central repository of nonprofit information that donors could use to guide their giving decisions. Although both our audience and the ways in which we deliver nonprofit information have expanded over the years, our belief in the importance of transparency has never wavered. In fact, transparency holds a key place in our mission statement: "To revolutionize philanthropy and nonprofit practice by providing information that advances transparency, enables users to make better decisions, and encourages charitable giving" (emphasis added).

That is why we are proud to announce the publication of The State of Nonprofit Transparency, 2008: Voluntary Disclosure Practices, the first-ever systematic review of the information nonprofits make available to the public on the Internet. We focused on disclosure via the Net because we believe it is the fundamental tool for achieving greater nonprofit transparency.

Selecting Accounting Software


Whether you're looking to upgrade your current system or to install accounting software for the first time, the steps to a successful transition from what you're doing now to more productive—and fun—days at work are in essence the same: determine what results you'd like to see (commonly called the "needs assessment" phase), research the available software options, and then select the best one that's within your budget.

Performing the Needs Assessment, or Describing the Perfect World

The ultimate purpose of accounting software is to report information in all the ways you need to see it. Most organizations "make do" at some level with inadequate output; the accountant or bookkeeper spends time at the end of each month and year combing through the general ledger for details or exporting data to Excel in order to create reports that the software can't or won't format properly.

In this phase of software selection, you get to dream. Leave the limitations of your current software behind and consider the reports that would make life easy, that you'd like to be able to produce with a few clicks of a mouse.

First, list all of the people and agencies you report to. Consider program managers, the executive director and other management staff, the board, the finance committee, the accounting department, the IRS, grantors and other funders, and your CPA auditor.

Next, look at the reports you produce now and design a new and improved version for each of them. Include any reports you can't create at all, drafting the layout you'd like.

Here are some questions to help you:

  • How many aspects of your organization will you want to use to sort your accounting data? Common ones, in addition to "accounts," are "activity" (you may call this one "function" or "program"), level of restriction, and grant. Your organization might need others, such as location or department.
  • Is your system set up to produce detailed budget-to-actual reports for managers of grants or programs and summarized reports for the board?
  • Did your auditor make journal entries last year? If so, was he or she making corrections you can prevent with better system design?
During this first phase, it's good to consider the other data management systems in your organization that you may want accounting to integrate with, such as fundraising or client management, so you can evaluate accounting packages from companies that market multiple products.

Other questions that aren't related to reporting but need answers before you go to the next step are:

  • How many people will use the software? How many of them will need to use it simultaneously?
  • What security or internal control difficulties would you like to solve?
  • What capacity limitations might your current hardware cause, and can you afford to upgrade?
  • Do you need to track payments due from clients, customers, or members?
  • Will you outsource your payroll to a service bureau?

Researching the Options, or Exploring the Unknown

Over the past few years, the accounting software industry has seen the same consolidation we've become accustomed to in the digital world at large, yet the number of options for software that is designed for nonprofits—or that claims to be—has increased as developers have seen business opportunities in the growing nonprofit field. Solutions are both simpler to use and more sophisticated in their output, and the range of prices has broadened at both the high and low ends.

I recommend having a general idea of how much your organization can spend while going into the research phase with a flexible attitude. To help you avoid sticker shock, software that might work for a nonprofit with a $2 million budget can cost as little as $200 for one user or as much as $20,000 for several users. On top of the purchase price, there will be installation and training costs that you will pay both directly to a third party and indirectly in the form of staff time.

With that in mind, let's look at software. Here are a few names to start with (editor's note: inclusion in this list does not indicate endorsement by GuideStar):

Sage Software has acquired several well-known, formerly independent brands, and two of them—MIP and PeachTree—are popular nonprofit applications. MIP was designed specifically for nonprofits from its very beginning over 20 years ago. PeachTree was written for small business and has had a version for nonprofits for several years. PeachTree is a less expensive, more limited product; MIP is sophisticated, flexible, and much more expensive.

CYMA and Cougar Mountain are both on the less expensive side and were modified for nonprofits from business applications.

Blackbaud is best known for its fundraising application, Raiser's Edge, and has had an accounting package, Financial Edge, for quite a few years. It's the most expensive of the products mentioned in this article.

If you want to look beyond these programs, ask other organizations' accountants what software they use and how well it works for them. It can be especially helpful to gather information from nonprofits whose services are similar to yours, whether or not you know the people there personally.

Consider how each type of software will work with your current hardware and operating system. Will you have the money to upgrade computers as well as purchase and install the software?

Once you've identified several packages that seem to fit your budget, try them out.

  • Download a trial version, post some transactions, and closely evaluate the program's ease of use and the reports it can produce.
  • Find out how many certified consultants there are in your area. Contact one or two and ask about their rates, how far into the future they're scheduled, how long a successful installation will take, how often the company charges for upgrades, how their annual maintenance plan works, and whether there's a user group in your area. You're trying to get a sense of how available the consultant will be and how much the software will continue to cost after it's up and running.
  • Determine whether the software can produce the reports you've designed.
You may find nonprofits similar to yours successfully using software that's not meant specifically for nonprofits. In my experience, such applications can work because of two features: they offer a segmented account structure, allowing you to set up as many segments as you need in order to produce the reports in your ideal world, and they can produce statements of activity that combine parts of more than one fiscal year, which means that producing a report on expenditures under a grant that has a different year than the organization's is no more difficult than producing a fiscal year report.

You'd be wise to look for those two features in the software that calls itself "nonprofit" as well.

Selecting the One That's within Your Budget, or Enjoying the Reality Check

These days, accounting software has been tested in the marketplace for many years, so it's hard to go completely wrong in your choice. If your current budget places too heavy a limit on what you'd like to do, consider postponing the conversion until the next budgeting cycle and apply for grants specific to improving accounting and reporting.

The last word to accountants and bookkeepers: although this process should involve other managers in the organization, don't let anyone who knows less about accounting software than you do make the decision for you.

Nancy Church, CPA, Not-for-Profit Accounting Help
© 2007, Nancy Church

Nancy Church is the founder of Not-for-Profit Accounting Help, a resource for nonprofit bookkeepers and financial managers. She has been licensed as a CPA in Oregon since 1987 and has 20 years' experience working with nonprofits as a board member and finance committee member, independent auditor, part-time accountant, director of finance and administration, and consultant to educational, community, and environmental organizations.

Beyond the Checkbook: Accounting Systems in Growing Organizations


Nothing makes me sadder than getting called in at year-end to help an organization with its accounting and reporting, only to discover entrenched systems that have created convoluted records and failed to protect the organization's assets. It can take hours to unravel transactions so that reports required by auditors or the IRS can be prepared.

To avoid this frustrating and expensive situation and to benefit from accurate and useful reporting all year long, here are some standards for transaction processing and accounting that your system should meet:

  • Ensure that cash and checks coming into the office are deposited in the organization's bank accounts
  • Ensure that money is spent appropriately
  • Ensure that consistent recording of transactions is easy
  • Account for temporarily restricted support separately from unrestricted support
  • Distinguish between employees and contractors
  • Ensure that salaries and taxes are paid in accordance with local, state, and federal laws
  • Monitor performance against your plan (that is, against budget)
  • Report to management, the board, funders, donors, and regulatory agencies on time and accurately
If you expect your organization to grow to the point where you're filing a 990-EZ, hiring employees, receiving grants, or charging program service fees, you'd be wise to set up your accounting processes and systems in advance of these benchmark events.

Incoming Cash and Checks

A basic principle of internal control—i.e., the steps you take to ensure that your organization's finances are handled properly—is that people who record and otherwise account for transactions should not execute or authorize them. Thus, your bookkeeper should not open the mail or accept money from clients or donors, and the person who does accept the money should not write checks for the organization. Any person accepting money should prepare receipts, and those receipts should be pre-numbered so that all of them can be accounted for. If you plan to accept cash and checks from individuals in person or through the mail, have receipts printed before the first payment arrives.

You'll need to document these transactions, but if you decide to copy checks or keep credit card numbers, treat them as confidential and make sure that they are kept secure, to protect your donors, clients, and members. Most banks offer a record-keeping service for a minimal fee: they provide a CD containing images of both the front and back of all checks you've deposited, so there's no longer a need to keep paper copies. Ask your bank about this service.

Ensuring That Money Is Spent Appropriately

The most common embezzlement method is to invent a vendor and submit invoices for services that were never authorized or performed or for goods that were never ordered or delivered.

Incoming invoices should go to the bookkeeper, who notes them in a log (in case they languish on the desk of someone who's not good at paying attention to paper) and routes them to the person who ordered the services or goods. That person then initials the invoice (indicating that the invoice is legitimate and presents the correct charges) and codes it for the bookkeeper—that is, specifies the account, program, and grant to which the expense should be assigned. The bookkeeper can then record the invoice and print a check.

Authorized check signers should receive not only the check but all the supporting documentation as well. Before they sign each check, they should—I'd love to say MUST but realistically can only say should—read the documentation carefully. Especially in small organizations, where other controls (such as a process to approve vendors) may be lacking, this step is critical for preventing misappropriation. If the person signing the checks has any doubts at all, he or she should consult the person who authorized the transaction. The person responsible for signing checks must be satisfied that an expenditure is in payment of a legitimate expense before signing a check.

Making Consistent Recording Easy

Nonprofit reporting is complex, and setting up a clear and logical accounting structure in the software you use is critical—you need to record transactions consistently. Natural accounts (e.g., salaries, rent, and travel) need to be logically separate from both activities (e.g., program services and fundraising) and grants. Too often, charts of accounts are designed with activities and natural accounts intermingled, leading to a list of accounts that's too long and includes logical dilemmas.

For example, you hold an event to increase your visibility in the community, and it results in an invoice for rental of a meeting space. If there's an account for "facility rental" and another for "outreach," which one should the manager choose when she's coding the invoice? She needs to be able to select both of them, and she can if "facility rental" is a natural account and "outreach" is an activity.

It's well worth hiring an accountant who's familiar with not-for-profit reporting to design your accounting system. You'll find that your bookkeeper makes fewer errors in the details and that your reports, both during the year and at year-end, are much easier to generate directly from your accounting system, without outside manipulation in a spreadsheet.

Accounting for Temporarily Restricted Support

It's thrilling when you get a sizable grant and can put a big check in the bank! If the grantor has placed any conditions on the grant, such as the period during which you can spend it or the kinds of things you can spend it on, you'll need to be able to track the satisfaction of those restrictions in your accounting system. This is true for temporarily restricted grants whether or not you receive cash in advance.

It's a sad day indeed when an executive director realizes that, although there's plenty of money in the bank, most of it is committed to running programs and therefore still restricted, while the unrestricted fund is actually in debt. Don't let this happen to you; build procedures into your monthly accounting that will enable separate reporting on unrestricted and temporarily restricted funds.

Distinguish between Employees and Contractors

State and federal laws set out guidelines for purchasing services from individuals; these guidelines distinguish between employees and contractors. It's especially tempting for small organizations, often in need of just a little bit of expertise or help when they're getting started, to call an employee a contractor. This mistake can be costly: even if the provider wants to be engaged as a contractor, the law holds sway, and the employer is the one who is fined.

You could be audited by your state employment department, your state department of revenue and taxation, or the IRS. The penalties and fines are stiff and could be high enough to threaten your organization.

The federal guidelines are available on the IRS' Web. Type "independent contractor" in the search field. You may also find good guidance on your state's Web site.

Pay Salaries and Taxes Accurately and on Time

You can choose between paying a bookkeeper to prepare payroll checks and payroll tax returns or hiring an outside service to do it. For most organizations, hiring a service is the better option because the service will guarantee timely filing of returns and timely depositing of your taxes for a minimal fee. Payroll is complex and, unless your bookkeeper is experienced with payroll, you'll get a higher degree of assurance for a lower price with a service.

You don't have to hire a national name; most cities and towns have at least one locally owned service that will do just as fine a job as a national firm.

Internal procedures should include requiring employees to complete and sign time sheets (or use a time clock) indicating the days and times they worked and which programs or activities their work related to.

Supervisors should review and sign the time sheets, authorizing the hours worked and payment of any overtime due or personal leave taken. From these records, the bookkeeper can prepare the payroll for the service to process.

Monitor Performance against Your Plan

Your annual budget is your plan, and your accounting system should be able to produce a report comparing the actual results for a specific period and your budget for that time, and it should be able to do this without exporting to Excel.

All managers should review this report in detail monthly. By that I mean that they should see a report with each natural account presented and each function shown separately. Before giving this information to the managers, the bookkeeper should review it and make sure that any variances are not due to accounting errors. Managers should ask themselves if variances between performance and plan make sense in light of what they know about operations.

In my experience, the most difficult part of instituting this procedure is getting managers to make time for it. The executive director's leadership can be critically important in establishing this habit.

Report to Supporters on Time and Accurately

For the most part, this will be easy if your accounting system is well designed; thoughtful, attentive review occurs monthly; and the development manager who's responsible for reporting to grantors communicates well with the bookkeeper.

If you find that reporting deadlines cause a flurry in your organization, then it's time to review your system.

Nancy Church, CPA, Not-for-Profit Accounting Help
© 2007, Nancy Church

Nancy Church is the founder of Not-for-Profit Accounting Help, a resource for nonprofit bookkeepers and financial managers. She has been licensed as a CPA in Oregon since 1987 and has 20 years' experience working with nonprofits as a board member and finance committee member, independent auditor, part-time accountant, director of finance and administration, and consultant to educational, community, and environmental organizations.

Insurance Advice for Start-up Nonprofits


Over the past several years, I have had an opportunity to work exclusively with nonprofit organizations and help them research a myriad of insurance options. Many of these newly formed nonprofits were looking for insurance for the first time. Hundreds of newly appointed executive directors and unfortunate board members saddled with this task always ended at the same place: "I need insurance, but I have absolutely no idea where to begin."

If this sounds at all familiar to you, please read on to learn how to organize a plan that is easy to understand and that can help you decide the difference between the "need" and "want" for insurance.

Let's set aside three categories for the basis of our discussion:

  • Statutory Insurance—Insurance that is required by law.
  • Contractual Insurance—Insurance that may not be required by law but may be required because of a contract.
  • Optional Insurance—Insurance that is important for the organization based on staff and operations but is discretionary.

Statutory Insurance

This is the kind of insurance that should go to the top of everyone's list. Many states require organizations to have certain types of insurance, and if you do not have it, you are in trouble with the law. Types of insurance that fall into this category are various mandated employee benefits such as worker's compensation, statutory disability, and unemployment benefits. If your nonprofit is an all-volunteer organization, you may not have this obligation. There may be other types of organizational insurance that apply, however, such as coverage for any vehicles the organization owns.

New nonprofits that have no employees or own no vehicles may have no statutory requirement for insurance.

Contractual Insurance

This is the type of insurance that, although not mandated by statute, may be required by some contract to which your organization is obligated. For example, many grant contracts have an insurance clause that must be satisfied in order for funding to flow. Another example may be insurance required by a lease that your organization signs to rent office space. We are also seeing many more instances where facilities are requiring proof of liability insurance before an organization can hold its meetings or events. Make sure that you know (or at least can estimate) your contractual requirements, as the lack of insurance in this instance may actually prevent your organization from moving forward with its mission or operations.

Optional Insurance

This is the hardest type of insurance to determine if you need (or even want). You may want to consult with an insurance professional to determine if you have risk in a certain area (such as professional liability, non-owned auto liability, or crime/employee dishonesty) and, if so, what type of coverage you need and how much it might cost. Since there are no guidelines or requirements to base your starting point, as there are with statutory or contractual insurance, you are left on your own to decide if you need it or how much you should buy.

Here's a tip: if you must choose between directors and officers insurance (D&O) and general liability insurance (GL), it's usually preferable to pick the general liability insurance.

Many times a new organization will use its very limited insurance budget to purchase a D&O policy, which defends the board against allegations of poor management. Shortly after purchasing this coverage, however, many organizations find that they need general liability insurance if they want to hold a fundraiser, rent an office, or apply for a grant. A GL policy addresses negligent acts that result in bodily injury; D&O insurance does not satisfy this contractual obligation. Because the organization has already diverted dollars to a D&O policy, it cannot afford GL insurance and cannot hold that event, rent that space, or land that grant. Although it is preferable to have both types of insurance, the lack of GL becomes a barrier to operations before the lack of D&O does. If you cannot afford both, please be aware of what insurance you want versus what insurance you need and buy accordingly.

By Peter Andrew, Council Services Plus
© 2006, Council Services Plus

Peter Andrew is president and CEO of Council Services Plus (CS Plus), an insurance brokerage headquartered in New York State. Dedicated to providing insurance and risk management services to nonprofit and nonprofit-related organizations, CS Plus is recognized by the Council of Community Services of New York State and the Louisiana Association of Nonprofit Organizations and is a supporting member of the National Council of Nonprofit Associations and the Alliance for Nonprofit Management. For more information, contact Peter Andrew at pandrew@councilservicesplus.com or (877) 501-4277, ext. 125.

To Audit Committee or Not to Audit Committee, That Is the Question(Along with "How?")


You've agreed to serve on a charity's board. You arrive at your first meeting ready to learn how to promote the organization's mission, pitch in with fundraising, and help recruit volunteers, only to find that what the board really needs to do is set up an audit committee. Great—the closest you've ever been to an auditor was when you passed the IRS building during a trip to Washington, D.C. And your fellow board members don't know much more about auditing than you do. What's a board member to do?

For one thing, relax. Help is available.