Nonprofit Finance Fundamentals Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman, CPA Jacqueline A. Oneto, CPA Directors/Shareholders March 4, 2011 Proud Sponsors of the Future Executive Directors Fellowship

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Ian Shuman, CPA Shareholder/Director, Gelman, Rosenberg & Freedman, CPAs 2 Director of Client Services 15+ years of experience in auditing, consulting and accounting Specializes in nonprofit outsourced accounting services – Controllership assignments, recruiting and training of client accounting personnel and set up of accounting systems. Nonprofit Involvement: – Treasurer of the Sitar Arts Center – Treasurer of the Bach Sinfonia – Former Treasurer for the Maryland chapter of the Race for the Cure

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Jacqueline A. Oneto, CPA Shareholder/Director, Gelman, Rosenberg & Freedman, CPAs 3 17 years of experience with auditing and accounting Specializes in audits of nonprofit organizations including associations – Focuses on employee benefit plan audits, including 401(k), 401(a), 403(b), profit-sharing, pension and health and welfare plans Nonprofit Involvement: – Membership Committee Member of the Nonprofit Roundtable of Greater Washington – Community Council Member of the Tree House Child Assessment Center of Montgomery County

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Snapshot Reading financial statements Financial statement components For-Profit income statement example Nonprofit example Functional expenses example 4 Financial Statements Overview

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs 5 Measure the activity showing how we got from one image to another (Statement of Activities) Snapshot Take a photo and capture the image (Statement of Financial Position)

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Reading Financial Statements Who is reading your financial statements? – The purpose of financial statements – The story financial statements tell about your organization 6

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Financial Statement Components Statement of financial position (balance sheet) – Snapshot in time Statement of activities and change in net assets (handout) Statement of functional expenses (handout) 7

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Financial Statement Components (cont) Statement of cash flows Footnotes Supplementary schedules (handouts – sample financial statements) 8

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs 9 Five and Dime Consulting Income Statement For the Year Ended December 31, 2010 Revenue Fees $ 10,000 Interest income 100 Total Revenue 10,100 Expenses Salary 7,000 Travel 1,000 Supplies 300 Rent 200 Total Expenses 8,500 Net Income $ 1,600 Who are the users of this report? Maybe bankers, owners, potential owners or management What do they want to know? Profitability, ability to repay a loan, etc.

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs … maybe they want to break out between business lines Now let’s make this a nonprofit organization 10 Harriet's Law & Fine Shoes Income Statement For the Year Ended December 31, 2010 Law ShoesTotal Revenue Fees $ 6,500 $ 3,500 $ 10,000 Interest income Total Revenue 6,590 3,510 10,100 Expenses Salary 4,500 2,500 7,000 Travel ,000 Supplies Rent Total Expenses 5,690 2,810 8,500 Net Income $ 900 $ 700 $ 1,600

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs 11 Carwash for Good Income Statement For the Year Ended December 31, 2010 Revenue Contributions $ 15,000 Interest income 100 Total Revenue 15,100 Expenses Salary 7,000 Consultants 2,000 Travel 700 Program Materials 300 Rent 500 Total Expenses 10,500 Net Income $ 4,600 For a nonprofit entity, who are the users of the reports? Management, potential donors, funders, board members Does this format still work? NO, it’s no longer all about net income Conclusion: In the 1990’s, nonprofits got a completely different format

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs 12 Functional Classification (see glossary) Natural expense classification (see glossary) Shows expenses by functional instead of natural classification Carwash for Good Statement of Activities For the Year Ended December 31, 2010 Total Revenue Contributions $ 15,000 Interest income 100 Total Revenue 15,100 Expenses HIV-AIDS 7,450 Nutrition 2,000 Total Program Expenses 9,450 Administration 1,050 Total Expenses 10,500 Change in Net Assets $ 4,600

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs 13 Show restricted categories in separate columns Most of this information is required There’s nowhere to show the natural expense categories except on a separate page Carwash for Good Statement of Activities For the Year Ended December 31, 2010 Temporarily Unrestricted Restricted Total Revenue Contributions $ 4,500 $ 10,500 $ 15,000 Interest income Release from restriction 9,000 (9,000) - Total Revenue 13,600 1,500 15,100 Expenses HIV-AIDS 7,450 - Nutrition 2,000 - Total Program Expenses 9,450 - Administration 1,050 - Total Expenses 10,500 - Change in Net Assets $ 3,100 $ 1,500 $ 4,600

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs 14 Administration and fundraising are called "supporting services” Page is optional for most orgs (but encouraged) Carwash for Good Statement of Functional Expenses For the Year Ended December 31, 2010 Program Services HIV-AIDS Nutrition Admin. Total Expenses Salary $ 5,050 $ 1,500 $ 450 $ 7,000 Consultants 1, ,000 Travel Program Materials Rent Total Expenses $ 7,450 $ 2,000 $ 1,050 $ 10,500 Note these Interchangeable words: "administrative,” “management and general,” “general and administrative,” and "overhead"

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Audited vs. Unaudited Audit Review Compilation 15

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs GAAP vs. Non GAAP Generally Accepted Accounting Principles (GAAP) Tax Basis Cash Basis 16

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Cash vs. Accrual Accounting A - On Jan 12, a donor pledges to donate $1,000 per month for three months starting next month (and does). B - On Feb 8 you collect a donation of $5,000 from a donor who had promised it last year. C - On Feb 28 a customer uses your classroom for an agreed rent of $800. You send them an invoice on March 2 and collect it on April 7. 17

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Cash vs. Accrual Accounting (cont) D - On March 20 a foundation offers a donation of $15,000. You receive the check in May. E - On January 18 you spend $5,000 on a project funded by a temporarily restricted donation. The money was collected last year. 18

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Cash vs. Accrual Accounting (cont) 19 CASH-BASIS JanFebMarAprilTotal A - 1,000 3,000 B - 5, C D E Total - 6,000 1,000 1,800 8,800 ACCRUAL-BASIS JanFebMarAprilTotal A 3, B C D ,000 - E Total 3, , ,800

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Red Flags Unrestricted net asset deficit Net loss in unrestricted net assets (operations) Current liabilities exceed current assets 20

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Red Flags (cont) Insufficient current assets to cover temporarily restricted net assets Supporting service expenses ≥ 25% of total expenses 21

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Red Flag Example (refer to handout) 1.Unrestricted net assets are less than net fixed assets (and deposits) 2.Deferred revenue is greater than cash 3.Temporarily restricted net assets are greater than cash plus grants receivable 4.Accounts payable is greater than liquid assets 22

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Overhead The cycle that starves nonprofits Cost of running programs (handout) 23 Funders have unrealistic expectations Nonprofits feel pressure to conform Nonprofits neglect infrastructure and misrepresent data

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Reserves Unrestricted net assets Often 3 to 6 months budgeted expenses Cash – What is cash? 24

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Restricted Net Assets Temporarily restricted Permanently restricted 25

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Budgets About budgets Constructing a budget Common differences between budget and accounting An example 26

Nonprofit Finance Fundamentals Nonprofit Roundtable of Greater Washington Ian Shuman & Jacqueline A. Oneto Gelman, Rosenberg & Freedman, CPAs Internal Financial Reporting What’s in your report? Here comprehension is more important than completeness or proper form Reporting against budget Cash projections 27

Ian Shuman, CPA Jacqueline A. Oneto, CPA Ian’s Jackie’s Phone: (301) 951 – 9090 Website: Questions & Answers 4550 Montgomery Avenue, Suite 650N Bethesda, MD 20814