understanding & using financial statements (as business tools for nonprofits)
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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
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 26,053520,523
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
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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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Contributions/Grants
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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Contributions/Grants
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)
Prepaid expenses 48,209
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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Statement of Cash Flows
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
Statement of Cash Flows
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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
sdenlinger@cbiz.com
Contact:
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