Financial Management

General Rule.

A donor taxpayer will not be entitled to a deduction for any charitable contribution of $250 or more unless the donor has... written substantiation from the charity. In cases where the charity has provided goods or services to the donor in exchange for making the contribution, the written statement must include a good faith estimate of the value of such goods and services (unless such goods or services are of insubstantial value).

Culture of Scarcity

A neglect of finances can lead to... -Underpayment of staff salaries -Delaying payments to vendors -Taking risks with mandatory payroll tax withholdings •In this type of culture, financial crisis is the norm -"As long as you are in a cycle of crisis [culture of scarcity], you can't spend a lot of time doing your business better, and you certainly aren't spending a lot of time making your art better. The reason we've been able to focus on some exciting projects is (that) we haven't been in about 5,000 meetings dealing with the cash-flow crisis..." •Can lead to demoralized staff and frustrated donor base

Nonprofit business

A nonprofit business is simply an organization pursuing its mission and managing its financial resources in a responsible and effective manner Ultimately, an organization can't have impact if it doesn't exist. -Expansion of programming -Broader constituent reach

Zero-based budgeting

A popular approach ■The budget is built from scratch ■Each revenue and expense is justified by current programs and conditions without regard to previous years ■Some potential problems with ZBB: ■Must have dependable, detailed cost info ■Often feels very threatening ■Requires detailed planning and cost calculations ■Can you really ignore prior data?

Value of Pledges

A promise to give is worth less on financial statements than an immediate contribution This is an accounting and time value of money issue. Be aware of donor history when taking pledges Be aware of macroeconomic conditions Create an allowance for uncollectible pledges

Temporary restrictions

A restriction that permits a nonprofit to use or spend donated assets as specified. Temporary restrictions are satisfied by passage of time and/or specific organizational actions

Organizational budgeting

A tool for planning and monitoring ■Inclusive process ■Teamwork!

Chart of Accounts

All accounting systems use a chart of accounts. A chart of accounts is simply a listing of all the accounts that make up your accounting system. •The traditional order of the accounts is dictated by two concepts: -The Accounting Equation •assets = liabilities + net assets or...•assets - liabilities = net assets -Liquidity (Current vs. long-term classification) -Based on the accounting equation, the chart of accounts list the accounts in the following order: •Assets •Liabilities •Net assets •Support and revenue •Expenses

NEA- what can be included in indirect costs?

Allowable indirect costs typically include: ■General and administrative salaries and wages ■Related employee benefits ■Facility occupancy costs (rent, utilities, insurance, taxes, and maintenance) ■General equipment rent/lease expenses, plus maintenance and repair expenses ■Depreciation (except for buildings and equipment purchased with Federal funds or contributed to meet statutory matching requirements) ■Office supplies

Unconditional transfer

An unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity. Must be unconditional before you can record it in your income statement

Net Asset Classification

Assets of Nonprofits are grouped into three classifications. Unrestricted Net Assets -no donor-imposed restrictions -May be designated by board (not legally binding) Temporarily Restricted Net Assets -Purpose and/or time restrictions placed on the asset by the donor -Asset is/can be consumed Permanently Restricted Assets -Asset permanently maintained but can profit off its interest

Program/Project Budgets

Basic Steps in Creating a Project Budget Identify anticipated sources and amounts of income Set specific goals for the program Prepare a detailed work plan for reaching goals Identify all the resources needed to implement the work plan Determine the costs of all resources Prepare the budget

Financial Flexibility

Be open to alternatives Be in a position to modify the forecast based on environmental conditions Be able to adapt to change

Why is Financial Management Important to Nonprofits?

Can better control organizational efficiency and effectiveness Mission suffers when financial position is ignored. People give to winners. Good financial responsibility attracts more contributions. It is our responsibility as arts managers to be good stewards

Types of Accounting

Cash basis -Revenues are recorded when received, expenses recorded when paid, Checking account method Accrual Method -Recognizes expenses when they are incurred and revenues when they are earned, rather than when cash changes hands. •Account payable - - an obligation to pay •Account receivable - - an expectation of receiving payment Modified Cash Method -Books are kept on a cash basis except for certain items that are treated on an accrual basis

Historical-based budgeting

Developed by reviewing the organization's recent expense and revenue history and compensating for new conditions. ■Using forecasting and projecting

What is financial management?

Different from financial accounting -Which focuses on validity/accuracy of the #s? Which focuses on meaning of the #s? •Assessing an organization's profitability, liquidity, asset management, and long-term solvency •Using ratios, financial statements, metrics, and other types of descriptive financial information.

From NEA guidelines- direct costs

Direct costs are those costs which can be identified and assigned to a specific project or grant activity. These include: ■Salaries and wages of employees ■Employee benefits ■Consulting services and artist fees ■Travel costs ■Materials, supplies, printing and reproduction, shipping and postage, telephone and messenger services

Money Mix (earned vs. contributed income)

Earned Income - - income derived directly from goods and services -Ticket sales -Concessions -Merchandise -Etc. •Contributed Income - - revenue in which program services/activities are not directly involved -Grants -Donations -Gifts -Etc

Investment Strategies and Banking Strategies

Essentially, always look for ways to improve returns on investments while also minimizing risk, find alternative asset allocation outlets, manage bank relationships responsibly and monitor accounts thoroughly, Eliminate inefficiency

Cash flow management- who is involved?

Everyone Awareness leads to better management of resources, don't hide issues.

Indirect costs

Expense that is difficult to trace directly to a specific costing object Or, more simply, costs that do not relate to the specific activity but to the administration and management of the organization or to the group of activities-not just one. Indirect cost rate is generally set as a % by accountant or finance director An indirect cost rate is a method to allocate indirect costs to a specific project or function, usually as a percentage of total direct costs. Are these always allowed by funder

Direct Costs

Expenses that can be directly identified with the costing object such as a product and department Or, put more simply, money or resources spent (or to be spent) that can be tracked straight to a project activity

Fixed Assets and Supplies

Fixed Assets - - Land, Buildings, and Equipment Supplies and equipment should be recorded (as both in-kind revenue and expense) at the amount which the organization would normally have to pay for similar items. Supplies can take many forms, not just simple office material.

Reviewing the Forecasts

Forecasts are just that.. Forecasts What are the variances? Why did they occur? Methodological? Environmental? What does this tell us about our financial health?

Staff (director of finance)

Generally responsible for the day-to-day finances of the organization -Oftentimes, this is a part-time or voluntary position

Financial Statements

Give the information that the board and staff need to measure the financial status of the organization The two primary financial statements are -The statement of position (balance sheet) -The statement of activities (income statement)

General Cash Flow Improvement Strategies

Improve the capability to receive all types of funds Electronic transfers, credit cards, internet transactions, etc. Earmark Cash Have cash set aside to pay off obligations

Strategies for Improving Cash Flow Management

Income Improvement Strategies Working Capital, Liquidity, and Financial Flexibility Strategies Investment Strategies Banking Strategies General Cash Flow Improvement Strategies Solutions for Short-Term Negative Cash Flow Problems Solutions for Serious Cash Flow Problems

NEA guidelines- Indirect costs

Indirect costs are overhead or administrative costs (facilities and administration, rent, electricity, depreciation, telephone, etc.) that cannot be identified to a specific project or function. However, these are actual costs that are incurred by an entity

Current liability

Liability that can reasonably be expected to be paid within one year

Liquidity:

Liquid assets - - can be converted into cash in a short time and with little cost Org type, environmental factors, program service

Personnel

List numbers and titles of personnel needed to carry out the program Write down the salaries and percentage of time each of the listed staff will be employed in the program (100% as fulltime)- Consultants are handled somewhat differently List employee fringe benefits

Five leadership principals

Move beyond mission vs. money thinking •Cultivate financial leadership on both the staff and board •View the organization as an interdependent set of programs and activities •Recognize the relationship between strong infrastructure and strong programs •Set a tone of financial accountability and transparency

Working Capital

Must maintain appropriate levels of working capital to survive Working capital = total current assets - total current liabilitiy

Gifts In-Kind

Noncash donations of voluntary services, property, equipment, or materials to which an organization can assign value. 3 Primary Categories: Fixed Assets and Supplies Museum Collections Contributed Services of Volunteers

Cash flow management- Why is this Important?

Org may be operating in the black but unable to pay bills when they are due. Cash shortages lead to higher peripheral costs and lose good-will opportunities- Losing income, raising expenses Creating uncertainty Strategies will differ based on types of income

Budget Types

Organizational budget -Overall operation Program budget -Project focused

Another word for a promised give

Pledge

Cash flow management

Process of monitoring cash inflows and outflows to ensure that the company has the right amount of funds on hand.

Who is involved?

Program managers, associated board committees, finance committee, executive director, board of directors

Financial Leadership

Providing timely and accurate information to Board of Directors and other decision makers •Understanding financial data so an assessment of organizational financial health may be made •Setting financial goals and planning around them •Monitoring financial health and communicating progress to the staff, board and external stakeholders

Striking the Balance between

Rare that income and expense projections will match ■1st draft often more than expenses ■Must find a balance b/t goals and resources ■May choose fiscal deficit, surplus, or balanced ■Choose is the operative word ■Remember the culture of scarcity though ■Be very careful in raising revenue projections to match expenses ■Balancing reality and optimism ■Project cash flow ■Plan for contingencies

Most donated to organizations

Religious, then health, human services and education. Then arts, then environmental, then public benefits.. etc.

Finance Commitee

Responsible for providing a detailed review of financial statements and audit reports, internal as well as external, and reporting the results to the Board of Trustees. Specifically, it -Monitors income and expenditures -Recommends budgets -Helps guide financial policy -Oversees investments

Defining the planning context and goals

SWOT • Strengths• Weaknesses• Opportunities• Threats "Exactly in the instances of market volatility, it's important that charities have rainy day funds and that they are financially stable" - - New York Sun, August

Forecasting Income

Same process as seen in estimating costs ■Historical information, personal experience, and current environmental considerations are all important ■New funding sources expanding programs ■Past not always a predictor of the future so be aware ■Environments...

Statement of Position (balance sheet)

Snapshot, particular point in time. •Key sections: -Total assets -Total liabilities -Total net assets •Divided into unrestricted, temporarily restricted, and permanently restricted

Operational Budget

Sometimes called Organizational Budget Normally, a yearly budget created to carry out the organization's operational plans. ■Structure ■Revenues ■Expenses ■Variances

Permanent restrictions

Stipulation that resources be maintained permanently, but permits the organization to use or spend part or all of the income derived from the donated assets. Endowment funds a common example ■But not all funds in an endowment are necessarily restricted.. Another might be investments or equities which pay out quarterly income disbursements. ■Annuities■Stocks■Etc.

Statement of Activities (Income Statement)

Summary of revenues received and expenses incurred - - - Are revenue targets being hit? - - - Are expense limits being exceeded? Is prepared monthly and at the end of the year

Providing Acknowledgement

Tax-exempt organizations must provide written acknowledgment to donors of $250+ in order for the deduction to be taken. Most organizations choose a threshold that is much lower than required. If a donor received some value for their contribution, that cost is deducted from the gift

Donor Restrictions

Temporary Restrictions Permanent Restrictions Unless a donor stipulates a restriction, all contributions are considered unrestricted "I certainly have learned one thing," Cecil said. "I will never make an unrestricted gift to anyone, ever again."

Accounting Treatment of Contributed Services

The $ value assigned to contributed services should be reflected as income in the section of the financial statements where other unrestricted contributions are shown. On the expense side, the value of contributed services should be allocated to the program and supporting service categories based on the nature of the work performed. In many cases, the recording of contributed services will not affect the excess of income over expenses, since the income and expense often offset each other.

Budgeting Roles and Responsibilities

The Board ■The Staff ■Executive Director ■Financial Manager ■Program Manager ****Review February 8 reading****

Approving the Plan

The Board has ultimate approval of the budget ■Will also participate substantially in reviewing and marking up budget drafts ■Usually finance committee and executive committee most active

Staff (Executive director)

The financial leader of a nonprofit organization

Income Improvement Strategies

The foundation of good cash management: Accurate operating budgets based on sound strategic planning Ongoing budget monitoring

Cash flow forecasting

The process of estimating the expected cash inflows and cash outflows over a period of time An effective operating budget is key to an effective cash flow forecasting system. Otherwise impossible...Why? Review the operating budget Assess the cash flow effect of each line item. How does each affect cash flow? What are the differences?

Museum Collections

There is an exception for recording a value for donated (and purchased) collection objects This depends on certain criteria and disclosures, largely related to whether a museum provides a value for its permanent collection within its financial statements - capitalized ■Many don't - - why not do you think?■Is primarily an accounting issue and beyond our purposes here but, in brief...

Top Down Strategies

Two primary approaches: ■Outcome goals are set at the top as a guide ■Financial targets are set at the top

Project Budget

Typically associated with an event that has a start and end time and isn't repeated on an annual basis Essentially, a financial plan developed for a single project

Capital Budgets

Typically used for large-scale or one-time equipment or facility expenses. Used to help plan and manage capital projects. Two basic sorts of capital projects: Capital improvement projects Adding a new wing, adding seats in a venue Capital equipment projects

NEA guidelines- what cannot be included in indirect costs

Unallowable indirect costs include, but are not limited to: ■Entertainment costs ■Fundraising ■Fines and penalties ■Lobbying ■Bad debts ■Interest on borrowed capital

Contributed services of volunteers- When to recognize in financial statements?

When they create or enhance the value of a non-financial asset Require specialized skills, are provided by persons possessing those skills, and would typically be purchased if not provided by donation Some examples of services requiring specialized skills - - accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, etc.

Are pledges legally enforceable?

Yes (but you probably won't)

Budgets

a financial plan expressed in quantitative, monetary terms over a specific time period Will always reflect revenues and expenses regardless of format Deficit - excess of expenses over revenues Surplus - excess of revenues over expenses

One can trace the demise of virtually every bankrupt arts organization to..

a lack of competent staff and/or board leadership

Pledge

a promise or intention to give

Which Method is Better?

accural (more accurate)

Fixed Asset

an asset that has a relatively long useful life, usually several years or more, such as land, buildings, or equipment.

Asset

an item providing a future economic benefit or future service potential in the form of future cash flows Other assets include securities, land, buildings, use of facilities or utilities, materials and supplies, intangible assets, services, and unconditional promises to give those items in the future.

Liability

an obligation to transfer cash or other assets, or to provide services, at some point in time.

Current Asset

asset that can reasonably be expected to turn into cash or be consumed within one year

Primary difference between Chapter 7 and Chapter 11 Bankrupt

ch 11 you can come back from. ch 7 you're done

Expenses

charges incurred, whether paid or unpaid, presumed to benefit the current fiscal year

5 stages of the budgeting process

defining planning context and goals estimating costs forecasting income striking balance between goals and resources approving plan

What is the $600 threshold?

if they give them more than $600 they have to document it

sources of public contributions to arts organizations

local then state then federal (order in most to least)

bending the map

making reality conform to your expectations instead of seeing whats there, "what they wish they were", you have to be the org. you are first before you are the org. you want to be, people to often budget what they wish they were rather than what they actually are

Matching and In-Kind Contributions

matching the organization has to raise the same amount, can also be cash, listed as line items Remember - - in-kind contributions must also be listed as expenses for the value received.

Activity Goals

measurable statements of activities or services that will help a program reach its goals Identifying activities that lead to results Are supportive of outcome goals An Activity goal within this program might be... To offer a comprehensive curriculum over a four week period where 100 participants actively create visual arts and learn about multiple medium

Outcome goals

measurable statements of what a program is expected to accomplish during the coming year the specific results of what the program should achieve Outcome goal example (NEA): The outcome the Arts Endowment intends to achieve through the Summer Schools in the Arts program is: Children and youth will demonstrate increased levels of appreciation, knowledge, and understanding of and skills in the arts based on the application of national, state, or local arts education standard

What is ticket scaling?

offering lower prices

Restriction vs. Condition

restriction is specific ways on how to use the money (PURPOSE) whereas condition is when the organization must follow or the donor has the right to return (get their money back) When you receive it it is recorded as deferred revenue because you haven't earned it yet (which is a liability statement because it is possible you may have to pay this back) Once you meet your conditions it can then be recorded as revenue.

In general, what costs more to sell- season tickets or single tickets?

single tickets, more of your resources

Also, what are appreciated stocks and how can they be utilized in fundraising?

stocks that are worth more now than when you bought them (went up in value). Ex. buying $1000 of shares from bank of america and now it is worth $2000 (it appreciated over time) if you sell it, you get a capital tax gain cut of about 20-33% and only gain about $800 whereas if you decide to donate it instead then it goes to the organization in full and for you it counts as a charitable gift so you can get tax deductions of about 20-30%/ So for donors this is a great way to give because you end up saving on taxes and its just your share money so it doesn't feel as real. So appreciated stocks is a great fundraising strategy.

Treasurer

the board's chief financial representative Five key responsibilities of the Treasurer: Keep accurate records Prepare accurate and meaningful financial statements Budgeting and anticipating financial problems Safeguarding and managing the organization's financial assets Complying with federal and state reporting requirements -Compliance, SC Law

Net Asset

the equivalent of capital and retained earnings in a for-profit organization, net assets contain the cumulative surpluses and deficits of a nonprofit's activities and have three classes: unrestricted, temporarily restricted, and permanently restricted.

Revenue

the inflow of economic resources (usually cash or accounts receivable) for goods sold, support received, or services performed

Reasons people contribute to the arts

those who have more should give to those who have less, something is owed to the community, they are asked to contribute, religious obligations and beliefs encourage giving, an income tax deduction

"No business has ever fixed a financial problem by offering an inferior product." - - - Do cuts lead to a lesser product? Why? Why not?

yes- money spent is less so quality is less

Estimating Costs

■Considering specific activity costs ■Often building on current year's numbers ■Utilize both trend analyses and percentages where possible ■Again, environment is important

Budgeting processes

■Zero-based budgeting ■Historical-based budgeting ■Top-down

What is a 1099 employee? And why does it matter to artists as well as organizations

1099 employee is an independent contractor

IRS Form 990

501(c)(3) organizations are required to file a full yearly 990 federal tax form if gross receipts are more than $50,000. Guidestar-www.guidestar.org

Cash outflow

- only cash paid out by the organization for expenses and other liabilities

Cash inflow

- only money received and deposited by the organization should be recognized, not expected income or pledges outside of the projection period. Can still include pledges receivable for projection period