Nonprofit Finance oversight and management Presentation by: Mike Macdonald, Executive Director, Budget Systems and Process, CMS Energy Content from Detroit Executive Service Corps

Oversight and Management Agenda Overview of the Financial Management Model Fiduciary Responsibilities Treasurer and Finance Committee Oversight and Management Responsibilities Ask Questions – What if I can’t answer them? – Keep a parking lot?

Oversight and Management Session Objectives Understand the Six Core Competencies of Financial Management Understand the Board’s fiduciary responsibilities and liability Understand the Treasurer and Finance Committee Responsibilities Understand Oversight and Management Responsibilities

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Fiduciary Responsibilities

Board Member Fiduciary Responsibilities Duty of Diligence Duty of Loyalty Duty of Obedience Business Judgment Rule

Duty of Diligence or Care Directors and officers must act with the care of a “reasonably prudent person” Perform duties in good faith and in a manner they reasonably believe to be in the best interest of the nonprofit Make informed business decisions Key aspects of the duty of diligence: Paying attention to the organization Monitoring its activities Achieving its mission Protecting its financial resources

Duty of Loyalty Refrain from engaging in personal activities that would injure or take advantage of the organization Prohibited from using their position of trust and confidence to further private interests Requires undivided and unselfish loyalty to the organization Requires no conflict between one’s duty to the organization and self-interest Key aspect of the duty of loyalty Avoid conflicts of interest

Duty of Obedience Perform duties in accordance with applicable statutes and the terms of the organization’s articles and bylaws Liability may occur when board’s authorize acts beyond the powers conferred by articles, bylaws and federal/state laws Key aspects of duty of obedience: Carry out the mission/purpose of the organization Comply with all laws

Follow the Defense of the ‘Business Judgment Rule’ Directors are presumed to have acted properly and to have satisfied these three basic duties if the Business Judgment Rule (BJR) applies The BJR recognizes that directors may be personally liable for loss to the organization if the elements of the defense are not satisfied Elements of the Business Judgment Rule Defense: Act in good faith With a reasonable basis for believing that their conduct is in the lawful and legitimate furtherance of the organization’s purposes Exercise their honest business judgment after due consideration of what they reasonably believe to be the relevant factors

Oversight and Management Treasurer Responsibilities Typically Include: oversight role in the following: Financial Planning Process Policies & Procedures Finances Reporting Compliance Expertise Resource to Staff & Board Liaison between Board & Staff Staff Competency evaluation Chair the Finance Committee

Oversight and Management Finance Committee Responsibilities Typically Include: Review of Financial Statements Provide analysis & recommendations for improvement Involved in policy formulation Actively participate in oversight & controls Standing vs Advisory committee

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Financial Planning Provide Budget Guidelines Financial Goals Realistic Meaningful Measureable Linked to Strategic Plan Timeline Establish Dates For Completion Approval Implementation Time Horizon and Reporting Periods

Oversight and Management Financial Planning Provide Budget Guidelines (cont’d.) Level of Detail Type of Revenue and Expense By Activity Program Event Department Responsibilities Who Does What

Oversight and Planning Financial Planning Budget Approval Verify Budget is in Accordance with the Mission Verify Budget meets Guidelines Forecasts Periodic updates or revisions to original budget Projections Cash Flow

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Financial Policies & Procedures Policies Investment Banking Spending Authority Check Signing Accounting Method Procedures Accounting Asset & Liability Revenue & Expenses Internal controls Cash Receipts Disbursements Separation of Duties

Oversight and Management Review Systems Practices Established review systems are in place and used to compare expected results to actual results.

Oversight and Management Continuous Improvement Activities A methodology is developed and used to improve cost effectiveness through the elimination of waste and implementation of best practices.

Oversight and Management Audits etc Audits, Reviews, Compilations Auditor Selection Audit Report Management Letter

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

REPORTING Accurate All transactions posted to the correct chart of accounts in the proper period. All general journals posted to the general ledger to the correct chart of accounts in the proper period. All account reconciliations completed.

REPORTING Meaningful process for the organization. All reports distributed assist in the decision making process for the organization.

REPORTING Timely All reports must be completed and distributed as soon as practical after the reporting period ends.

REPORTING Financial Reports Determine Report Requirements Income & Expense Statement Balance Sheet Cash Flow Statement Accounts Receivable Aging Accounts Payable Aging Monitor Results Comparison to Budget Comparison to Prior Period Comparison to Prior Year Identify Key Indicators Review Variance Analysis Review CFO/Treasurer Commentary

REPORTING Types of Reports Standard Custom Subsidiary

REPORTING Standard Report Balance Sheet Statement of Financial Position Content Assets, Liabilities and Net Assets Purpose Snapshot of financial position

REPORTING Standard Report Income Statement Profit & Loss Revenue & Expenditures Statement of Activities Content Income, expenses and net income Purpose Summary of activity for a period

REPORTING Standard Report Cash Flow Statement Content Sources of cash and outlay of payments Purpose Reconciliation of beginning and ending cash position.

REPORTING Custom Reports Specific to each organization. Examples Activity Funder Donor Dashboard

REPORTING Supporting Detailed reports that justify the numbers on the Balance Sheet.

REPORTING Frequency of Reporting

REPORTING Analysis Actual Performance vs Planned. Period Comparisons Trends Peer Group Comparisons Ratios

REPORTING Analysis Actual Performance vs Planned. Income Statement Month Year-to-date

REPORTING Analysis Period Comparisons Balance Sheet Month vs Previous Month Month vs Same Month Previous Year

REPORTING Analysis Trends Trailing Twelve Month Multiple Year Historical

REPORTING Analysis Peer Group Comparisons

REPORTING Analysis Key Ratios Reserves Number of months cash reserves Rule of thumb is 3 months Unrestricted Cash and Investments / Average Months Expense

REPORTING Analysis Key Ratios (continued) Functional Spending Program, Mgt & Admin and Fund Development as a percent of total Rule of thumb is 75% for Programs

REPORTING Analysis Key Ratios (continued) Fundraising Expense measured by the Cost to raise a $ Rule of thumb is 25 to 35 cents Fundraising Expense / Contributions and Special Events

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Compliance Legal Generally Accepted Accounting Principles (GAAP) Funder

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Organization Financial training for board and staff Performance evaluations for financial staff Software Tools

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Record Retention Established policies and procedures established to meet record retention, storage and media requirements.

Oversight and Management The Six Core Competencies of Financial Management are; PLANNING CONTROLLING REPORTING Budgets Procedures Accurate, meaningful Forecasts Review Systems and timely financial Projections Continuous Improvement statements Audits COMPLIANCE ORGANIZATION RETENTION Legal Training Plan Records Storage GAAP Staff Evaluations Funder Software Tools

Oversight and Management Any Other Questions??