top 10 nonprofit financial mistakes power point presentation

Top 10 Financial Mistakes Nonprofit Organizations Make

And Can AvoidMay 15, 2003

Presented By:

Angie Sivak

Tom Andrews

1. Submitting A Form 990 That Doesn’t “Sell” The Organization

• Form 990 is a public document

• Guidestar.org

• Increases public awareness and serves as a fundraising tool

Where Do Donors Look On A 990?

• Statement of Functional Expenses

• Statement of Program Service Accomplishments

How To Improve 990 Presentation:

• Don’t leave preparation just to the accountants/auditors

• Clearly explain the purpose of the organization and its recent accomplishments

• Attach promotional information to supplement statement of program service accomplishments

2. Understanding And Contracting Of Accounting Services And Other Outsourcing

• Reasons small organizations engage the services of an outside accountant.• Lack of funds to purchase software• Lack of personnel• Added controls

• Expectations of outside accountant vs. organization not always on the same page.

• Miscommunications of services to be performed can lead to problems.

•

Understanding And Contracting Of Accounting Services And Other Outsourcing

• Expectations of Organization

• Correct entry of accounting information• Find errors in coding and correct

• Cost allocations

• Monitoring restrictions by funders

• Reconciliation of bank statements – carefully reviewing transactions for proper signature/authorization


Expectations of Organization (cont.)

• Detect and inform of any unusual items• Cash flow problems• Unusual payments to employees or vendors• Manual paychecks with no payroll withholding• Issuing 1099’s• Employee vs. subcontractor issues

• Produce all necessary reports• By function• By grant


• Outside Accountant’s Understanding of Services to be Performed• Compilation service based on organizations

information provided• Focusing on monthly cash flow activity• Coding of transactions provided by organization

• Bank reconciliations• No special review of checking activity

• Produce reports requested by organization


• Problems Encountered due to Misunderstanding of Services to be Performed• Internal controls• Proper classification of accounting transactions• Implementation of generally accepted accounting

principles (GAAP)• Compliance with laws and regulations• Reporting requirements• Advice on cash flow and other organizational

funding


• Conclusion• Written understanding of detailed services to

be performed documenting organizations expectations

• Regularly consider if organization is blindly relying too heavily on outside accountant

• Remember the Executive Director and Board are ultimately responsible for financial management of organization

3. Not Using Budgets Effectively

• An important financial tool

• Can provide fiscal sanity to the organization

• A financial skill that improves the more its performed

Budgets Are Used For:

• Board oversight

• Goal focus

• Financial control

• Cash forecasting

Qualities Of An Effective Budget:

• Realistic

• Consistent

• Flexible

Common Budgeting Errors:

• Mathematical errors

• Overlooking expenses

• Overestimating forecasted revenues

• Failing to account for expected changes in activities

How To Improve The Budget Process:

• Get the right people involved

• Budget individual programs separately

• How are actual results following the current year’s budget?

• Prepare in an understandable format

• Monitor timely

• Amend when conditions substantially change

• Actual results need to be current

4. Tracking Expenditures Functionally And By Each Restrictive Source

• Organization needs to make determination of expenditures by function as required by laws, regulations and contract stipulations• SFAS 117 requires the reporting of information of

expenses by their functional classification:• Major classes of program services• Supporting services, including administrative, fundraising

and membership development

• Tracking expenditures of donor restricted contributions and reporting

• Form 990 requirement to break down expenditures by function

Tracking Expenditures Functionally And By Each Restrictive Source

• Does organization’s accounting software utilize breakdown of expenses by function and provide required reports

• If not, the necessary information will not be available for:• Meeting the minimal reporting requirements under SFAS

117 and IRS tax regulations• Preparing meaningful financial statements• Preparing accurate reports to donors• Budget to actual comparison for grants and contracts,

including necessary budget revisions• Necessary information will not be available for decision

making – you can’t manage what you can’t measure


• Lack of expenditures being tracked by function and restrictive sources can lead to:• Additional costs at year end to allocate costs

between functions and sources• Inaccurate reporting to outside agencies• Discontinuation of funding• Inability to revise budgets• Impaired decision making process by

management and Board


• Recording of information by function and grant is required and provides valuable information for daily decision making.

• Organization can avoid additional costs and other devastating consequences by utilizing its software to record each expenditure concurrently by function and restricted source.

Financial Reporting To Board

• The Board’s governing role of the organization includes review of interim and year end financial statements in order to:• Manage resources• Question and evaluate results• Look at the big picture

• In order to fulfill this role, the Board must receive accurate and timely financial information.


• Financial statements should be generated from the accounting software on a timely basis and should include, at a minimum:• Statement of Financial Position (Balance Sheet)• Statement of Activities (Income Statement)• Statement of Functional Expenses• Budget to actual reports for the organization in total

with all material variances explained• Budget to actual reports by program with all

material variances explained


• From these reports, the Board will be able to:• Determine if cash flow is adequate to meet the

immediate and future needs of the organization• Make informed decisions about the direction of the

organization and any immediate actions that need to be taken to continue operations and segments of operations

• Analyze the actual position of the organization compared to the budgeted numbers

• Make recommendations and take actions, if necessary, based on these reports

• Determine that financial records are being maintained timely.


• Financial information generated from outside the accounting software should be carefully scrutinized and supported by the software generated reports.

• Excel spreadsheets can be manipulated to provide misleading information or errors could exist in their formation.

• Misstated numbers presented to Board can cause bad decisions or actions.


• Excel spreadsheets should be supplemental to system generated reports only, including:

• Cash flow projections

• Supplemental financial analysis

• Discussion examples

6. Not Having A Clear Conflicts Of Interest Policy

A Conflicts Of Interest Policy Is Designed To:

• Monitor financial transactions

• Ensure that the organization fulfills its charitable purpose

Problems From Conflicts Of Interest:

• IRS penalties and possible violation of state laws

• Negative publicity

A Good Policy Includes Provisions For:

• Disclosure

• Determination of a conflict

• Addressing the conflict

• Record keeping

• Communication of the policy

• Application to a compensation committee

7. Internal Controls

• It’s not about employee distrust, it’s to protect financial resources, reducing errors and fraud.• Size doesn’t matter, you’re never too small

• Cost benefit considerations

• Bonding insurance not enough, but a good start

• Involvement should include Board members

• Controls should be reviewed regularly

• Trust everybody, but insure the trust with good internal controls

Internal Controls

• Preventive Controls

• Focus in on preventing financial improprieties

• Organization has ability to segregate duties

• Difficult to prevent collusion

• Some of these controls are difficult to achieve in smaller organizations

Internal Controls

Preventive Controls (cont.)• Examples:

• Mandatory vacations with someone else performing duties

• Dual signatures on check disbursements• Two individuals required when opening mail• Accounting department separate from development• Payroll reports review before payroll is disbursed• Record keeping and custody should be separated• Responsibility for related transactions should be

divided

Internal Controls

• Detective Controls• Focus is on detecting improprieties that may have

occurred

• Small organizations with the inability to segregate duties may not be able to implement preventive controls, but will be able to implement detective controls.

• The Board may be needed to implement these controls which is part of their oversight responsibilities.

Internal Controls

• Detective Controls (cont.)• Examples:

• Bank statements mailed to someone other than the person processing cash disbursements for review

• Review of bank reconciliations

• Publish contributor lists - display on website

• Review of payroll reports

• Review of the Executive Director’s credit card statements and expense reimbursements by the Board

• Reconciliation of receipt books to general ledger by someone independent of the receipting function

Internal Controls

• Conclusion

• Internal controls are extremely important and the highest level your organization can obtain should be implemented with consideration of cost benefit. This will help to prevent and deter misstatements due to error and by fraud of both asset misappropriation and financial reporting

8. Poorly Documented Board Minutes

• In an environment of heightened regulatory scrutiny, board minutes are extremely important documents

• The IRS manual instructs its agents to review board minutes closely to get “an indication of the thinking and intent of those controlling the organization.”

Properly Documented Minutes Will:

• Help in preventing administrative errors

• Help save money

• Help avoid loss of exempt status

How To Improve Board Minutes:

• Have the best person for the job take the minutes

• Have attorney and/or CFO review

• Minutes should be taken at every board and committee meeting

• Be thorough

How To Improve Board Minutes (continued):

• Documentation should include:• Names of people involved• All quantitative information• Questions left open or agenda items not covered• All resolutions• All responsibilities delegated for future activities• Votes taken, their outcome, and the way each member

voted• Draft minutes should be prepared promptly and

reviewed by relevant parties• Board minute procedures should be consistently

followed

9. Funding Administrative Costs

• Organizations not budgeting or assessing how it will pay for administrative costs.

• Assuming funders will cover administrative costs, but not including costs in proposals or appeals.

• End up using unrestricted funding and reserves to cover administrative costs.

• Without budget allocation to cover administrative costs, organization’s should always consider whether its prudent to decline funding.

Funding Administrative Costs

• Important for organizations to understand its budgeted administrative costs to apply for that proportionate amount on each of its proposals.

• Funders may try to deny or decrease funding of administrative costs but organization should be prudent in negotiations.

• Most funders want to provide organizations with support for infrastructure to enable programs being funded to continue.

10. The IRS Is Watching

The IRS’s Top 10 For Exempt Organizations:

• Inurement/private benefit• Intermediate sanctions• Political activity• Inadequate records• Gaming• Social clubs• Advertising• Employment taxes• Failure to file or filing improperly completed 990’s• Fundraising

top 10 nonprofit financial mistakes power point presentation

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