Nonprofit Financial Management E-Book

Charles K. Coe

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Nonprofit Authority
• Sprache: Englisch

Seitenzahl: 304

Veröffentlichungsjahr: 2011

Beschreibung

A timely, practical, and concise handbook of best practices for nonprofit financial management

In 2010 an estimated 325,000 charities, membership groups, and trade associations?with small nonprofits disproportionately represented?stand to lose their tax exemptions for failure to comply with financial management requirements. Nonprofit Financial Management: A Practical Guide is a timely, functional, and concise handbook of best practices for nonprofit organizations of every size.

• Addresses federal reporting requirements and discusses methods to decrease expenses, ensure accounting control, increase revenues through professional cash management, and understand budget statements
• Explains how to read financial statements and analyze a nonprofit's financial condition by using the most recent IRS 990 reporting form
• Covers the full range of financial-management topics, including accounting, internal controls, auditing, evaluating financial condition, budgeting, cash management and banking, purchasing and contracting, borrowing and risk management

Written in an easy-to-read style, with more than 100 exhibits, this book is essential for every nonprofit financial manager.

Leseprobe

Contents

Cover

Title Page

Copyright

Dedication

Who this Book Is For

Acknowledgments

Chapter 1: Introduction

Background on Nonprofits

Finances

Financial Management Organization

Conclusion

Chapter 2: Account for Transactions

Staffing Structure

Basic Accounting Terms

Accounting for Transactions

Chapter 3: Create the Internal Control System

Create a Control Environment

Assess Risks

Create Controls

Create an Information/Communication System

Monitor Effectiveness

Chapter 4: Manage the Audit

Designate the Audit Coordinator

Select the Auditor

Conduct the Audit

SAS 114

SAS 115

Common Audit Terms

Chapter 5: Evaluate Financial Condition

Understand Financial Statements

Analyze Fiscal Condition

Chapter 6: Prepare and Manage the Budget

Board Sets the Policy Direction

Budget Preparation

Forecast Revenues

Make Budget Requests

CEO Reviews Budget Requests

Board Adopts the Budget

CEO Administers the Budget

Chapter 7: Manage Cash Flow

Step 1 Take a Revenue Inventory

Step 2 Expedite Cash Flow

Step 3 Prepare a Cash Budget

Chapter 8: Purchase Goods

Adopt Purchasing Policy

Order Goods

Receive Goods

Make Payment

Dispose of Goods

Appendix

Chapter 9: Contract to Provide a Service

Issue RFP or Bids Request

Award the Contract

Administer the Contract

Chapter 10: Manage Capital Assets and the Inventory

Manage Capital Assets

Manage the Inventory

Chapter 11: Invest Funds

Adopt an Investment Policy

Chapter 12: Manage Banking Relations

Select the Bank

Core Services

Secondary Services

Award the Contract

Manage Banking Services

Common Banking Terms

Chapter 13: Borrow Funds

Select the Debt Instrument

Obtain Debt Financing

Chapter 14: Manage Risks

Identify Risks

Treat Risks

Administer the Program

Common Risk Management Terms

Notes

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Index

Copyright © 2011 by Charles K. Coe. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Coe, Charles K. Nonprofit financial management : a practical guide / Charles K. Coe. p. cm. – (Wiley nonprofit authority series) Includes index. ISBN 978-1-118-01132-4 (hardback); 978-1-118-08815-9 (ebk); 978-1-118-08861-6 (ebk); 978-1-118-08862-3 (ebk) 1. Nonprofit organizations–Finance. I. Title. HG4027.65.C64 2011 658.15–dc22 2011004109

This book is dedicated to the students in my Nonprofit Financial Management classes, whose care for others gave me the impetus to write this book.

Who this Book Is For

The genesis for this book came from my students in a nonprofit financial-management course. Many of them work in or volunteer for nonprofit organizations. They have a deep passion for their cause and the people they serve. They hunger for knowledge that can enable them to use their scarce financial resources as efficiently as possible. Few, though, have a financial background, which is the case for most nonprofit managers. In 2009, there were 1,617,447 nonprofit organizations in the United States, 714,000 of which—about 44 percent—had gross receipts of less than $25,000. Such an organization typically has an executive director who is knowledgeable about the mission and has experience in service delivery and, perhaps, fundraising, but with little financial expertise. Though appropriate for a nonprofit of any size, this book is especially useful for the nonprofit whose executive director and Board have relatively little experience in financial management.

If you are an instructor, go to www.wiley.com/college (search for the book title) for additional classroom tools including PowerPoint slides, cases, and testing materials, to use alongside the content presented in this book.

Acknowledgments

My most sincere appreciation goes to those who gave their time to review and comment on the book. Nancy Kwansnich, the assistant vice president, Branch Banking & Trust Company, who specializes in nonprofit banking services, reviewed the chapters on cash flow management, investments, and banking. Her long experience working with nonprofits of all sizes gave valuable insights into the particular cash management needs of nonprofits. Also shedding light on cash management was a team of professionals in the city government of Raleigh, North Carolina, namely, Perry James, the finance director; Jerrae Williams, the treasury manager, who has experience as a nonprofit banking specialist; and Jordan Topal, the investments and cash manager, who shared his wisdom about investments and referred me to The Essentials of Treasury Management, 2nd ed., the bible for financial professionals.

From the accounting and auditing world, two people were tremendously helpful. Kristen Hoyle, Audit Partner with the firm Thomas, Judy and Tucker, has audited nonprofits for many years and has graciously served on the boards of many nonprofits. Kristen reviewed the chapters relating to accounting, auditing, internal control, and evaluating financial condition. Also providing most valuable input in these areas was Mig Murphy Sistrom, CPA. Mig served as finance director for a nonprofit with an annual budget over $10 million. She now provides accounting and tax services exclusively to nonprofits and teaches in the Nonprofit Management Program at Duke University.

Anita White, administrative officer, Haven House, helped me to understand the myriad funding sources that a nonprofit can receive. Exhibit 6.12 in Chapter 6, Prepare and Manage the Budget, indicates the varying length, fiscal years, payment periods, and reimbursement time of Haven House’s various funding sources. Cheryl Perry, procurement and risk service manager for the town of Cary, North Carolina, reviewed the chapters on purchasing and managing capital assets.

Students in my Nonprofit Financial Management class for the fall semester contributed significantly to the effort. Caroline Gibson contributed the notes to the financial statement problem; Kristen Feneley contributed material on contracting with hotels. My son, Lincoln, prepared many of the spreadsheets in the accounting and financial analysis chapters. Charlene Reiss contributed two very useful budgeting cases, as did Johanna Foster with the Wake County Community Service Department. Michael Riley, working as a graduate student, helped with the instructors’ website materials. Mac McGee again exhibited his editing mastery to get the book in decent shape.

Chapter 1

Introduction

Background on Nonprofits

There are over 1.6 million nonprofits in the United States. They are diverse in size and mission, ranging from human service organizations to advocacy groups to religious organizations. They are growing rapidly in number. From 1995 to 2005, the nonprofits registered with the Internal Revenue Service (IRS) grew by 27 percent.1 They are important economically, contributing 7.2 percent of the paid jobs and 6.6 percent of the total wages in the United States (see Exhibit 1.1).

Although nonprofits are extremely diverse in size in mission, each one must have a sound financial management system.

There are three types of nonprofits: charity, foundation, and other. In 2009, there were about 957,000 charities and 113,000 foundations registered with the IRS as 501(c)(3) organizations (“501(c)(3)s”). The “other” group includes 501(c)(4) registered mutual benefit organizations (e.g., medical plans, civic leagues, and advocacy organizations) and about 350,000 religious organizations not required to register with the IRS, although about half chose to do so.

All nonprofits are exempt from income taxes on their mission-related income, but only 501(c)(3)s can receive tax-deductible donations. A 501(c)(3) organization cannot support or oppose anyone running for public office but can engage in a political campaign consistent with its purpose. Most 501(c)(3)s can spend no more than 20 percent of their resources on lobbying. Exhibit 1.2 shows the types of public charities.

EXHIBIT 1.1 Charities’ Employment

Source: Lester Saloman and S. Wojciech Sokolowski, Employment in America's Charities: A Profile (Baltimore: Johns Hopkins Center for Civil Society Studies, 2006).

CategoryNumberPercent of U.S. EconomyPaid workers9.4 million7.2%Volunteer workers (FTEs)4.7 million3.9%Total workforce14.1 million11.1%Wages$321.6 billion6.6%

EXHIBIT 1.2 Number of Reporting Public Charities by Subsector

Source: Urban Institute, National Center for Charitable Statistics, Core Files (2007–2008).

SubsectorNumber of OrganizationsPercent of TotalArts, culture, and humanities125,1707.7%Education216,02113.3%Environment and animals58,2093.6%Health101,4586.3%Human services410,02825.3%International and foreign affairs20,7371.3%Public and societal benefit359,16022.3%Religion-related231,85814.3%Other94,8065.9%Total1,617,447100.0%

Board of Directors

Nonprofit governance and management rests on three legs: the Board of Directors (Board), the chief executive officer (CEO), and the staff. Board members nominate and elect fellow members. Board members have civil immunity for the official actions they take, as do volunteers, but the law does not protect Board members from criminal, intentionally malicious, or reckless conduct. Board meetings are not subject to open-meeting laws, as government meetings are; however, Board members must exercise care, loyalty and obedience. Board members should:

Determine the nonprofit's mission and issue the mission statementSelect, support, and review the performance of the CEOContribute time and resources to the nonprofitRaise fundsConduct business ethically and professionallyMake well-informed, engaged decisionsAdopt the budgetOversee the management of fundsAdopt a human-resource policyFollow lawsServe on a committeePromote the organization's image

The mission statement should succinctly reflect the nonprofit's core values. The Board should adopt the mission statement with input from the CEO, the staff, and stakeholders such as clients, members of the organization and community members. Board members should contribute both time and resources to the nonprofit. Some Board members have needed skill sets. For instance, a Board member who is a certified public accountant (CPA) or has a strong business background can serve on the Finance Committee or even volunteer as the chief financial officer (CFO). Likewise, a Board member who is a lawyer can provide legal advice. Board members should visibly participate in fundraising activities, contributing their own funds, and ask community members to contribute.

Boards with many members typically break down into subcommittees and each Board member should have an office or committee responsibility. As the policymaking body, the Board adopts policies, including the annual budget. This book discusses an array of financially related policies. For reference to these and other policies, the organization Boardsource offers downloadable policies in 48 topic areas, including 13 financial management policies (see http://www.boardsource.org/?Bookstore/).

Management

The second leg is the CEO, either volunteer or paid, who carries out the Board's policies. There is no single package of education and experience necessary to be a successful CEO. She (or he) may be an experienced professional with a graduate degree in public, nonprofit or business administration. Absent a management degree, she may have extensive nonprofit working experience as a program manager or CEO. She may even be a volunteer with limited nonprofit experience.

The CEO should facilitate the Board's interaction with herself and the staff. The CEO should seek broad Board involvement in setting policy. In serving the Board, the CEO should:

Orient new membersHelp craft a mission statementHelp adopt a strategic plan and envision changePrepare the budget for the Board's adoptionManage the budget during the fiscal yearProvide financial and programmatic informationTout the organization's accomplishments to the community

In theory, the Board makes policy decisions that the CEO carries out. In practice, however, many Boards heavily depend on the CEO to engage more in policymaking. This is often because many Boards have an unwieldy size. For instance, 47 percent of the Boards in Indiana have 10 or more members; 19 percent have between 15 and 29 members.2 Another reason for strong CEO influence is Board member turnover. Often, Board members limit themselves to three-year terms.

In addition to Board-related responsibilities, many CEOs are extensive boundary-spanners, interacting with a host of stakeholders, including funders, community leaders, service recipients, volunteers, and staff members. A typical CEO must be entrepreneurial and should be thankful to deal with less red tape and enjoy more flexibility than do government managers.3

Staff

The third leg of the stool is the staff. Many nonprofits have an all- or mostly all-volunteer staff. Volunteers are motivated to serve because of a nonprofit's good works. The CEO and the Board should consistently laud the efforts of volunteers and staff members and compensate staff equitably. The CEO should:

Follow best practices with regard to hiring and disciplinary actionOrient new employeesBuild a high-performance management teamTrain employees to do their jobTreat employees fairlyGive performance feedback throughout the year, not just at annual performance review

Finances

Most reporting nonprofits have small budgets. Indeed, 44.6 percent had annual expenses less than $100,000 (see Exhibit 1.3). Large nonprofits, with expenses of more than $10 million, account for only 3.7 percent of nonprofits, but a whopping 82.7 percent of total expenses.

EXHIBIT 1.3 Number and Expenses of Reporting Public Charities

Source: Urban Institute, National Center for Charitable Statistics, NCCS-Guide Star National Nonprofit Research Database: Special Research Version (2005).

ExpensesPercent of Total CharitiesPercent of Total Expenses$10 million or more3.7%82.6%$5 million to $9.99 million2.6%5.5%$1 million to $4.99 million11.4%7.5%$500,000 to $999,0008.5%1.8%$100,000 to $499,00029.2%2.0%Under $100,00044.6%0.6%Total100.0%100.0%

Nonprofits have three main revenue sources. The main revenue, fees for services and goods, includes items such as Medicare and Medicaid reimbursements, ticket sales and tuition payments (see Exhibit 1.4). The second principal revenue source, private contributions, includes grants and contributions from foundations, individuals and corporations. Other revenue sources are government grants, investment, and other income.

EXHIBIT 1.4 Sources of Revenue for Reporting Public Charities

Source: Urban Institute, National Center for Charitable Statistics, NCCS-GuideStar National Nonprofit Research Database: Special Research Version (2005).

Sources of RevenuePercent of All CharitiesPercent of Charities Excluding Hospitals and Higher EducationFees for services and goods70.4%53.5%Private contributions12.3%23.3%Government grants9.0%17.0%Investment income5.4%2.3%Other Income2.9%3.9%Total100.0%100.0%

The revenue picture changes significantly when looking only at human service nonprofits, of which there are eight types: (1) crime and legal, (2) employment and job related, (3) food and nutrition, (4) housing and shelter, (5) public safety and disaster preparedness, (6) youth development, (7) community development, and (8) human service multipurpose organizations. These nonprofits depend far more heavily on government grants (see Exhibit 1.5).

EXHIBIT 1.5 Sources of Revenue Human Service Nonprofits

Source: The Urban Institute, National Survey of Nonprofit Government Contracting and Grants (2010).

Funding SourceNumber of NonprofitsLargest Funding SourceGovernment (federal, state, or local units)19,65760%Donations (individual, corporate, foundations, federated giving)6,12419%Fees (public and private) for services5,17916%Other1,6635%Total32,623100%

Financial Management Organization

The National Association of Schools of Public Affairs and Administration (NASPAA) has issued guidelines for graduate professional education in nonprofit organizations, management and leadership.4 One such guideline requires graduate education to cover in its curriculum budgeting and resource management, including general accounting practices and budget management, risk management, contract monitoring, supervision of grant projects, and reporting to government agencies, philanthropic foundations, and other funding agencies. To perform these functions, nonprofits organize differently, depending on their size and resources.

Organizational Options

Very small nonprofits rely on a volunteer to do the accounting. Somewhat larger ones have a full- or part-time bookkeeper with some accounting experience and usually structure themselves as shown in Exhibit 1.6. A still larger nonprofit can hire a CFO with an accounting degree and perhaps is a CPA as shown in Exhibit 1.7.

EXHIBIT 1.6 Organization with a Bookkeeper

EXHIBIT 1.7 Organization with a CFO

Conclusion

Nonprofits are extremely diverse with regard to their size, mission, funding sources, and organizational structure; however, one constant remains. Each nonprofit should have a sound financial management system with which it can be accountable to its funders and perform capably. This book is designed to assist all nonprofits, from the smallest to the largest and most financially sophisticated, to manage their finances responsibly and professionally.

Chapter 2

Account for Transactions

Staffing Structure

Depending on their size and complexity, nonprofits can staff the accounting and financial management function in several ways. Large, relatively complex nonprofits are more likely to have an in-house certified public accountant (CPA). Small, less complex nonprofits can have a non–accountant administrative staff member handle the day-to-day bookkeeping operations and have the books periodically reviewed and adjusted by a CPA adviser. Alternatively, the entire accounting function might be outsourced to a CPA adviser. For organizations that do not need an in-house CPA, outsourcing the accounting work often ensures competency at a lower cost than paying a full-time employee. Regardless of the staffing approach, it is helpful for any nonprofit to have a finance professional, preferably a CPA, on its Board.