Wednesday, January 20, 2010

New to Nonprofit Finance and Accounting: Here's a Brief Overview

This will be the second year that I'll be co-teaching (as a Doctoral Teaching Assistant) the Nonprofit Finance course at University of San Diego. For those of you interested in understanding nonprofit finance here's a brief overview:

The Unified Chart of Accounts was developed for nonprofits to use in their accounting practices. This chart of accounts makes it easier for nonprofits to file their annual 990 tax form.

Introduction nonprofit financial terms (From Nonprofit Principles and Practice - Michael Worth - Chapter 12 Financial Management)

  • Financial Accounting: “financial information published for use by parties outside the organization"
  • Managerial accounting: “information that is useful to an organization’s managers"
  • Bookkeeping: “methods and systems by which financial transactions are recorded”
  • Financial Management: “Planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization.” (From business dictionary)
  • Differences between for-profit and nonprofit accounting
    • Treatment of Restricted Contributions
      • Unrestricted – can use these funds for any expense
      • Temporary Restricted – must use these funds during a specific time period or for a specific use (example: grant related funds)
      • Permanently Restricted – never use these funds (example: endowment- can only spend interest, cannot spend principle).
    • Functional Classification of Expenses
      • Program – all expenses directly associated with a specific program
      • Administrative – expenses not directly associated with a program (example : legal fees, accounting fees)
      • Fundraising – expenses related to engaging in fundraising activities (example: fundraising event, fundraising lunch)
  • Other key nonprofit financial terms: Assets, Liabilities, Net Assets, GAAP, Revenue, Expenses, Net Income. The Nonprofit Finance Fund provides a great glossary of these and other nonprofit financial terms.

Internal controls (From Business Dictionary and Streetsmart Financial Basics for Nonprofit Managers by Thomas A. McLaughlin)

· Definition of Internal Control: Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to:

    • conduct its business in an orderly and efficient manner
    • safeguard its assets and resources
    • deter and detect errors, fraud, and theft
    • ensure accuracy and completeness of its accounting data
    • produce reliable and timely financial and management information
    • ensure adherence to its policies and plans.

· A good internal controls system will eliminate 3 general conditions present when fraud occurs

o Incentive/Pressure

o Opportunity

o Attitude and rationalization

o More information about internal controls for nonprofits from the Nonprofit Genie & Blue Avocado.

Identifying and interpreting nonprofit financial statements

· There are four main financial statements for nonprofits.

    • Statement of Financial Position a.k.a balance sheet:

· Statement summarizes Assets, liabilities, and net assets of an organization
as of a specific date. (Peters & Schaffer, 2005)

    • Statement of Revenue and Expenses

· Statement reports the financial activity of the organization by function over
a period of time. (Peters & Schaffer, 2005)

    • Statement of Cash Flows

· Cash inflows and outflows of the organization between one date and another.

    • Statement of Functional Expenses (this statement is unique to the nonprofit sector)

§ Shows distribution of costs between three functional categories: Program, Admin, Fundraising

· Papers about nonprofit financial statements here & here.

Key nonprofit financial ratios

· Financial ratios are helpful in assessing the financial health of the organization. The nonprofits assistance fund explains nonprofit financial ratios are useful if they are:

o Calculated using reliable, accurate financial reports

o Calculated consistently from period to period

o Used in comparison to benchmarks or goals

o Viewed both at a single point in time and as a trend over time

o Interpreted in the context of both internal and external factors

Example nonprofit financial ratios:

  • Current Ratio:
    • Current Assets/Current Liabilities
    • For every $1 the organization owes it has ___ cash and receivables.
    • Shows organization’s ability to pay obligations in a timely way (within 12
    • Ideally ratio will be higher, however not excessively high
  • Quick Ratio:
    • Total Cash and Investments/ Total Current Liabilities
    • For every $1 the organization owes it has ___ in the bank. The closer the organization gets to 1: 1 the more precarious it is.
  • Days Cash
    • Cash & Equivalents X 365/Expenses-Depreciation
    • A test of the operating cash
    • Shown as # of days
    • Want to be higher
  • Cash Flow to Total Debt
    • Net income + depreciation/Total liabilities
    • Ideally want higher

· More nonprofit financial ratios are explained by the Nonprofits Assistance Fund

Steps in the budgeting process (From Financial Leadership for Nonprofit Executives by Jeanne Bell and Elizabeth Schaffer)

· A budget is a financial reflection of what a nonprofit business expects to accomplish over a twelve-month period. Key steps in the budgeting process.

    • Define the planning context and goals
    • Estimating Costs
    • Forecasting Income
    • Striking the balance between goals and resources
    • Approving the plan

· Article about nonprofit budgets.

Other Nonprofit finance resources

Donations to Haiti

I've been really busy with school right now to write a blog post about Haiti, however I just received an e-mail from my colleague Meg Busse who works for Idealist aka Action without Borders. Her e-mail provides info on how to donate to Haiti. Thanks Meg for the info!

I've been getting lots of emails from friends about the best org to donate to to help in Haiti. While there's not a "best" org...there are lots of great ones to choose from. However, there's also a lot of clutter to cut through to figure out the options.

That pressure to do anything--it's really a personal decision. This info is just FYI.

There are two blog posts on our site (Idealist) that are amazing distillations of ways to donate and help:

This post is an incredibly concise list of ways to find organizations to donate to and to find out more information

This post is more in-depth, with information such as why cash is preferable and how to make sure orgs are reputable.

This post on the Good Magazine blog just came out today and has some different aggregated resources.

Even if you've already made a decision about donating or not, there's a fascinating overview of the technological and web-based aid initiatives related to the Haiti recovery. It's an incredible look at how groups have collaborated to leverage their technologies and capacity to help.

Tuesday, January 5, 2010

How will we measure impact in 2010?

I was in the middle of writing a blog post about a community impact study when I saw that Give and Take featured a lively discussion (hosted by Ken Berger) about organizational impact and community impact.

I agree with Ken and Hildy in their discussion of impact. As Ken stated, many nonprofits do not incorporate evaluation methods in their organizations. This is important to keep in mind when we (researchers and consultants) study impact within nonprofit organizations, we must present evaluation tools that nonprofits will understand and use (See Carmen's research about nonprofit evaluation Nonprofits and Evaluation: New Directions for Evaluation). We must also work with nonprofits to create measures to study COMMUNITY impact as well. This is not an easy task but it is beginning to happen.

At the University of San Diego we studied organizational and community impact of the Nonprofit Leadership and Management program by conducting an extensive qualitative study to determine whether student-led applied projects conducted for nonprofit organizations had an impact on those organizations, and if so, to assess the type and duration of that impact.

We first studied if and how the projects were used by the organizations. We then asked questions that went beyond the internal workings of the organization to determine if and how the project influenced programming and future work. Our findings indicated that all of the projects were used in some form. In addition, respondents offered recommendations to strengthen the applied projects process.

This is an exciting first step for studying community impact of the Nonprofit Leadership and Management program at the University of San Diego.

Sunday, January 3, 2010

American Humanics Management Institute - preparing college students to change the world!

American Humanics (the premier organization that equips college and university students to become skilled professionals and leaders in America's nonprofit organizations) is holding its annual Management Institute (AHMI) this week in Phoenix, Arizona. AHMI is an intensive educational symposium that provides college and university students their capstone experience in nonprofit management and leadership education. I attended AHMI many years ago and really benefited from the experience. You can follow blog updates from there conference here and tweets here. (Hash Tag #AHMI2010) Go AHMI!!