habitat financial basics for non-financial...

Habitat for Humanity — Learning and Organizational Development – Learning Catalogue

HABITAT Financial BASICS for Non-Financial Managers

Frank Gorman Field Operations Manager

State Support Organizations

HFH OR/WA/HI Conference

Oct 24, 2015


Overview

• Basic Fiduciary Concepts

• Budgeting Process

• Financial Reports/Audits/IRS 990

• Categorization/Allocation of Costs

• Internal Controls

• Donor Restrictions


Fiscal Safeguards

Budgets

What’s a Board Member to Due?


Managing a non-profit is not rocket

science—but that doesn’t mean it’s

not complicated!


Businesses Under The Typical Affiliate’s Roof

Construction Company

Mortgage Lender

And Servicer

Non-profit Organization

Fund Raiser

Educator

And

Trainer

Real Estate Agent

Social Service

Networker

Developer Retail Store

Housing Advocate

Activities in red directly touch accounting and finance.


For-Profit versus Non-Profit Organizations What’s the Difference?

• “Non-profit” does not mean that you cannot make a profit

– Profit = excess of revenue over expenditures

– “Profits” are kept in the non-profit corporation and not distributed to shareholders. They are “plowed” back into the program work of the organization.

• Guiding force is the mission

– Problems with finances mean

problems accomplishing the mission


Duty of Care

• Fiduciary responsibility of the board of directors (aka Duty of Care), falls into three main areas:

– Overseeing the organization’s finances • Directors serve as the steward of organizational resources. Includes setting policy

in the area of financial management, approving and monitoring the budget, and contracting for an annual audit.

– Developing funds • Responsible for ensuring that the organization has the resources it needs to carry

out its work. The board is responsible for approving the fund development plan, making an individual contribution to the organization, and participating in fundraising activities.

– Ensuring sound risk management policies • Responsible for seeing that risks (flood, fire, malpractice, etc.) are identified and

steps taken to prevent or manage the impact of such occurrences.


Board Positions

• Board positions most closely associated with finance functions are:

– Treasurer – affiliate’s primary financial officer • Has overall responsibility for financial affairs on behalf of BOD • Manages, with the finance committee, the BOD review of and action taken

related to the board’s financial responsibilities • Ensures financial reports are made available to BOD on timely basis • Responsible for Federal and State filings for the corporation

– Finance committee • Oversees budgeting, financing and investment performance • Anticipates financial problems and provides guidance to the treasurer

– Audit committee (may be assumed by Finance Committee) • Selects auditor • Manages annual audit process

– Affiliates over $250,000 in revenue or $500,000 in assets are required to engage a CPA firm to conduct an annual formal independent audit


Financial Policies Overview

• All affiliates in the United States, regardless of size, are required to follow basic financial policies. These include: – Filing the appropriate IRS form annually (990, 990-EZ, 990-N )

• Annually send to a copy to HFHI [email protected]

– Maintaining formal written fiscal safeguards

– Distributing monthly written financial reports to the affiliate’s board of directors

– Complying with restricted donation terms

– Managing mortgage delinquencies consistently and fairly in accordance with board-approved policy

– Analyzing escrow accounts annually and adjusting payments accordingly

mailto:[email protected]


Other Policies and Procedures

• Records retention

• Home sale policy

- Transfer of title

• Late Payment Policy

- Application to escrow versus principal

- Late Fee


Budgets

HFHI Quality Assurance Checklist

Section 4. Finances #30

“Affiliate board reviews the most recent expense and revenue statement against the budget at least quarterly.”


Why Have a Budget

• Budget is a tool for planning and monitoring – Process of building the budget is planning

– Once adopted, it is a management tool

• Budget consists of two parts

– Expenses

• Reflection of the work an organization wants to get done

– Income

• How you are going to pay for all that wonderful work


Budget Process

Five Stages of Budget Process

• Define the plan

• Estimate costs

• Forecast income

• Strike balance

• Approve plan


Financial Reports

• Best practice financial statements – Statement of financial position – balance sheet

– Statement of activities – income and expense

– Statement of cash flow

– Comparison of budget to actual

– Mortgage delinquency report

– Possible additional –

• ReStore

• Special Events

• Property Status


Balance Sheet

Must Balance

• Assets – things of value to an organization

• Liabilities – claims of outsiders against those resources

• Net assets (net worth) – cumulative sum of all year-end pluses and minuses since the organization started

Assets = Liabilities + Net Worth

Assets Liabilities

+ Net Worth


Other Reports

• Income Statement (AKA Profit and Loss or P&L)

– Revenue minus expense = [hopefully] positive number

• Comparison of Budget to Actual often included as part of income statement

• Cash Flow Statement

– Flow of cash in and out of the organization

– Cash flow projections/needs vs. actual

• Delinquency Report


Mortgage Delinquencies

• Why is this a big issue? – Major asset of the affiliate

– Legal requirements for escrow management

– Professional mortgage servicing

– Board approved and enforced payment policy

• Mortgage Delinquency Report – Mortgages that are late and delinquent, broken down

into categories

– Confidential report

– Summary of collection attempts


Reporting Period: 12/31/14 Total Mortgages: 175

Delinquent # Mortgages

Delinquent

Arrearage % Delinquent

1-29 days 20 $8000 11.4%

30-59 days* 12 $9600 6.9%

60-89 days* 5 $6000 2.9%

90 plus days* 8 $12800 4.6%

Total This Month 45 $36,400 25.73% (14.4%)

Total Last Month

(173 mortgages)

40 $30200 23.1%

Total Same Month

Pr. Yr. (163 mortgages)

45 $31200 27.6%

Monthly Board Report

*For reporting purposes with the quarterly Affiliate Statistical Reports and for comparison with national statistics , your “delinquency rate” is based on delinquent payments that are 30 or more days late (14.4% shown above)

18


Another Tool—Financial Ratios

• Efficiency Ratio: Measures Flexibility for Growth – Formula:

Fund Raising Expenses + Management & General

Program Expenses

– Example: $85,105+ $137,578

$1,607,439

• What’s an acceptable ratio? • The lower the better

• BBB Guidelines under 30%; HFHI Affiliate of Distinction (AOD) standards 16% or lower

= 12%


• Survival Ratio: Measures days of cash on hand if no additional income were to be received.

– Formula: Unrestricted Cash

Average monthly operating costs

– Example: $178,649

$11,362

• How much cash reserve is too much?

= 15.7 months

Another Tool—Financial Ratios


Survival Ratio-FY15 Months Cash on Hand

0

5

10

15

20

25

End of FY14 Jul-Sep 14 Oct-Dec 14 Jan-Mar 15 Apr-Jun 15

Status Code Red: Less than 6 months Yellow: 7-12 months

Green: More than 12 months

Note: Increase due to release of $115,000 from restricted Funds in Quarter 2; Lower salary Quarter 4 due to staff departure


Financial Audits

• Throughout the year, the financial statements will be reviewed on an un-audited basis

• End of fiscal year, outside verification of information takes place in the form of an audit

– Compilation and reviews are not audits

– Auditor reports to board of directors

– HFHI requires audits if: • Revenue is > $250,000 per year, or assets > $500,000 (inc.

mortgages)

• Check laws in your states


IRS 990

• Non-profits must submit an annual tax return

• Due 15th of 5th month after end of accounting period

– Jun 30th end—due Nov 15th

– Dec 31st end—due May 15th

Type Annual Revenue Total Assets

Form 990 N “E-Card” < $50,000 n/a

Form 990 EZ < $200,000 And < $500,000

Form 990 > $200,000 Or > $500,000


IRS 990, continued

• And don’t forget….

– IRS has revoked a number of affiliate’s tax-exempt status

– Need to know what your state requires, as well

• Public, funders and charity rating services (GuideStar and Charity Navigator) use this information

• A copy should be sent HFHI

– [email protected] or [email protected]



IRS 990, continued

• Form has gone from almost exclusively financial to

include an examination of governance, mission,

policies and safeguards as well

• Yes/no questions for

– Review of 990 by board prior to filing

– Written policies for • Whistleblower

• Document retention

• Conflict of interest

• Procedures for determining compensation of key employees

• Public access to various documents


Categorization/Allocation

• Categorization of Expenses

– Program expenses

– Fund raising

– Management and General (aka Administration)


• Allocation of Expenses

– Reasonable

– Defensible

– Consistent

– Documented

Categorization/Allocation


Internal Controls

• Written fiscal safeguards – policies and procedures

– Protection of funds

– Limit access to affiliate assets

– Segregate duties

– Conflict of interest and nepotism

– Rotation of duties

– Cash controls

– Bank controls

– Purchase controls

– Payable controls


Donation Restrictions

• Designated/Restricted Donations

– Permanently restricted

– Temporarily restricted

• Event

• Time

– Donor designation

– BOD designated


UBIT – Unrelated Business Income Tax

• Levy on revenue from business not related to the affiliate’s charitable purposes

– Proceeds for tax-exempt purpose doesn’t make it unrelated

• Usually because of certain ReStore activity

– Purchased product. All revenue is taxed, not just that from purchased product

– General rule of thumb: Less than 15% of revenue from purchased product should not trigger UBIT


Resources

• My.Habitat

• KnowledgeCenter

• AOMs, sample documents, policies

• Affiliate Support Center

• 877-434-4435 or [email protected]

• Organization of nonprofits in your state

• Nonprofit financial ratios document from NP Assistance Fund • http://www.nonprofitsassistancefund.org/clientuploads/MNAF/NE

W_Resources/Nonprofit_Financial_Ratios.pdf


http://www.nonprofitsassistancefund.org/clientuploads/MNAF/NEW_Resources/Nonprofit_Financial_Ratios.pdf




Summary

• Basic understanding of financial reports, filing deadlines and budgeting process is important for any board member

• Financial ratios can be helpful in assessing the overall health and efficiency of the affiliate

• Important to have policy/procedures documented – Fiscal Controls/Internal Controls

– Mortgage Delinquency


Questions??


Total

ASSETS

Current Assets

Bank Accounts

1010 Huntington Bank Business 26,769.68

1012 Capacity Building Checking 71,180.10

1021 Huntington Money Market 83,631.49

1060 OHIP Key Total Treasury 205,916.59

Total Bank Accounts $ 387,497.86

Accounts Receivable

1210 Grants Receivable 0.00

Total Accounts Receivable $ 0.00

Other current assets

Total Other current assets $ 0.00

Total Current Assets $ 387,497.86

Other Assets

1600 OHIP Affiliate Loans

1601 Loans Receivable

1612.01 Summit County Loan 150,000.00

1612.02 Stark County Loan 100,000.00

1612.04 Cincinnati Loan 90,000.00

1612.05 Wood County Loan 16,000.00

1612.06 Belmont County Loan 140,000.00

1612.07 Tri State Loan 90,000.00

Total 1601 Loans Receivable $ 586,000.00

1699 Interest Receivable 4,520.00

Total 1600 OHIP Affiliate Loans $ 590,520.00

Total Other Assets $ 590,520.00

TOTAL ASSETS $ 978,017.86

LIABILITIES AND EQUITY

Liabilities

Other Current Liabilities

2100 Payroll Liabilities 10,711.76

2116 Deferred Revenue - FirstEnergy Conference Sponsership 15,000.00

2134 FE-Mahoning 12,500.00

Total 2117 FirstEnergy Grants $ 27,500.00

2600 OHIP Loan 750,000.00

2610 OHIP Interest Payable 7,500.00

Total 2600 OHIP Loan $ 757,500.00

Total Other Current Liabilities $ 795,711.76

Total Current Liabilities $ 795,711.76

Total Liabilities $ 795,711.76

Equity

3000 Opening Bal Equity 0.00

3001 Unrestricted Net Assets 285,150.33

3002 Temporarily Restricted Net Assets 7,988.77

3003 Retained Earnings -2,646.30

Net Income -108,186.70

Total Equity $ 182,306.10

TOTAL LIABILITIES AND EQUITY $ 978,017.86

Habitat for Humanity of OhioBalance SheetAs of June 30, 2015

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