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1 Finance Guide for Nonprofit Organizations Informational Session April 13, 2005 Controller’s Office
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Finance Guide for Nonprofit Organizations

Nov 05, 2021

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Page 1: Finance Guide for Nonprofit Organizations

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Finance Guide for Nonprofit Organizations

Informational SessionApril 13, 2005

Controller’s Office

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Questions/Wrap Up 20 minutes – 3:10 to 3:30

Audits and Miscellaneous 40 minutesJohn Haskell, Controller’s Office Performance Auditor

QuestionsBREAK (10 minutes – 2:20 to 2:30)

Financial Management Systems 40 minutesDeborah Gordon, Controller’s Office Financial Auditor

Handbook ReviewMonique Zmuda, Deputy Controller

Context 25 minutes – 1:15 to 1:40Introductions and Logistics 15 minutes

Agenda

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How much money do nonprofits receive in City payments annually?

How many nonprofit organizations contract with the City each year?

Trivia

Over 650 each year

Nearly $440 million (2003 dollars)

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Context

Monique ZmudaDeputy Controller

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This session is the first in a series of trainings for nonprofits doing business with the City. They will focus on finance-related issues.

1. Training program for nonprofits2. Streamlining monitoring procedures3. Audits

Controller’s Office project includes

Context, cont.

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Note: We are here to learn from each other. These sessions are meant to be interactive and informative.

Others? (You tell us, use feedback form, etc.)What Executive Directors should know (proposed)

Key elements of a financial procedures manual (proposed)

Cost allocation methodologies – indirect cost ratesUpcoming trainings

Finance Guide – overview of managing financial operations

Context, cont.

Training and Technical Assistance

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Provide base of knowledge on contractor expectations, evaluation criteria, and performance. The results of program reviews will be available to anyone who seeks this information

Reduce/merge contractor reporting requirements

Process underway to minimize redundancy in the City’s monitoring process

Monitoring Procedures

Context, cont.

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Results will require contractor response to findings and recommendations, department plan to implement recommendations, and possible hearing before the Board of Supervisors Government Audit and Oversight Committee

Combination of financial and performance audits

Risk Assessment will determine audit scheduleAudits

Context, cont.

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Accountability

Increasing demandsPerceptions of nonprofits and the CityWhat Executive Directors and finance staff should know

Environment and expectations

Context, cont.

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Additional demands by the public for more information on nonprofit organizations, services, and costs

Additional demands by the City to expand services, reduce costs, increase financial reporting

More categorical funding that changes agency practices and often requires separate management of services and funds

More complex State and Federal financial restrictions and requirements

Increased financial and programmatic reporting and accountability

Increasing demands on nonprofits

Context, cont.

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Neither of these perceptions are true. The City and the Controller’s Office are offering to assist nonprofits in meeting financial reporting requirements and maintaining financial accountability

Nonprofits operate autonomously from the City, and have poor accountability and little-to-no transparency to the public

Nonprofits are inexpensive, and can provide any service that the City requires

Two perceptions may exist

Context, cont.

Perceptions are not always correct

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12Must report this information to the Board on a regular basisThe annual audit, financial statements and management letterThe agency’s reporting requirements

The cash flow cycle, and the legality of transferring funds fromone program to another

The cost of individual programs, who they serve, and how they are funded

Well versed in agency’s funding sources and their restrictions

Board of Directors, Executive Director, and Finance Director should function as a system of checks and balances – it is not one person’s responsibility to ensure accountability and financial viability

What an Executive Director must know to be accountable:

Context, cont.

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Supervise and manage financial planning; maintain internal controls; process financial transactions; execute monthly billing; monitor cash, accounts receivable, and accounts payable; participate in preparation of agency’s financial statements and annual audit

Maintain communication with agency program managers, City administrators and financial staff, as well as representatives from the nonprofit family

Inform Executive Director of all important phases of financial cycles (budget preparation, monthly monitoring of revenues and expenditures, annual audit), and report financial status to the Board of Directors

Role of the Finance Director and finance staff

Context, cont.

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Working together with the City

What can go rightWhat can go wrong

Why this is important

Context, cont.

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In some instances, success by nonprofits encourages a shift of funding and services from City programs to community-based nonprofits

Good reputation of agency – improves public perception of nonprofit sector as a whole

Stability of services – Ensures the well being of our community

Clean audit – Indicates that agency is financially stable

Success Stories

Context, cont.

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Funding is often reduced

Public, policy makers, and City officials lose faith in nonprofits

ResultKickbacks – jail time, agency closureContractor fails to deliver service to clients – funding lostFunds used for political purposes – debarment, loss of jobs

Funds used for personal use – public scandal, funding lostHorror Stories

Context, cont.

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Maintain dialogue with funding agencies regarding ability to meet funding requirements

Keep City departments informed about financial condition prior to audits or monitoring visits

Cooperate with departments in providing requested information and required reports on time

Testify before commission meetings and Board hearings regarding nonprofit services and funding

Attend and provide feedback to Controller on technical assistance and monitoring process

Participate in department workshops, trainings and other meetings

Working with the City

Context, cont.

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Goal of training series is to increase the awareness of financial requirements and to increase the proficiency of nonprofit financial staff

Per the Charter, Controller has responsibility to protect the financial and functional integrity of City government. The Controller is providing assistance to departments and their contractors in meeting this obligation

Training is for staff of nonprofits contracting with the City

Goals of training and technical assistance

Context, cont.

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Deborah GordonController’s Office Financial Auditor

Finance Guide: Financial Management Systems

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Finance Guide, Financial Management Systems

Record retentionSource documentsPolicies & procedures manualsChart of accounts General ledgerPayroll journalsReceipts journalsDisbursement journals

Accounting records

Revenue cyclePayrollExpenditure cycleReporting

Accounting cycles

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Finance Guide, Financial Management Systems

Internal Accounting Controls

Insurance

Leveraging memberships in professional organizations

Human resource practicesGeneral Internal Controls

ReportingSafeguardingComplianceOperations

Accounting Internal ControlsControl Activities

MonitoringRisk AssessmentInformation & CommunicationControl Environment

The COSO (Committee of Sponsoring Organizations) Components:

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Finance Guide, Financial Management Systems

Allowable costs means COSTS that do not include payroll advances or funding a severance reserve for administrative staff

Contract guidelines (program and finance staff each need to have a copy of every contract)Source of funding: sometimes not only local moneyOffice of Management and Budget (OMB) Compliance Supplements often list unallowable costsEven individual and foundation donations may have restrictions

Allowable costs

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Finance Guide, Financial Management Systems

Budget development and controls

Indirect costs: must be budgeted based upon anticipated actual benefits to cost center

By funding source

Matching funds

Shared costs: direct costs shared across more than one funding source

By program Budget Components

Board authorization (meets agency mission, within agency resources)

Staff input (workable, quality program)

Full participation

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Finance Guide, Financial Management SystemsCash flow management

Early payment discounts

Surplus strategies Buy goods & supplies on sale Investing (board should have

policy)

Lines of credit (often require that lines of credit be fully repaid for a number of consecutive days each year)Contract advances (funders that permit them have specified timing and process requirements)Fundraising (ongoing or intermittent?)

Shortfall strategies

Reduce expensesRenegotiate termsShort-term borrowingPostpone acquisitions

Cash flow projections: project out at least 6 months

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Finance Guide, Financial Management SystemsFinancial Reporting

Report reconciliations: should be able to reconcile any report to the accounting general ledger

California 199 RRF-1 IRS 990

Information returns to federal and state governments

Additional SchedulesStatement of Cash Flows Single Audit SchedulesStatement of Activities

Statement of Functional Expense

Statement of Financial Position

Reports required by funders Cost reports Final invoices

Annual Financial Statements

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Finance Guide, Financial Management Systems

Audit adjustments: posted to audit year and current year if new year has been openedStatus of prior year general ledger: if not closed, then have a copy of the general ledger that matches the audited financial statements saved to a disk and stored offsiteStorage of prior year accounting data: store records in a secure location, well-identified for easy retrieval

Closing the Books

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Finance Guide, Financial Management Systems

Be aware of natural accounting cycles for your organization in order to schedule most wisely: fund appeals, budget preparation, paying off lines of credit, hire of temporary help or consultants, approve staff vacations

Nourish your financial information garden: have a well-planned chart of accounts, a detailed budget, and good internal controls

Managing for a fruitful harvest of financial information:

Wrap Up

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Questions 5 minutes

Break 5 minutes

Finance Guide

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John HaskellController’s Office Performance Auditor

Finance Guide: Audits & Miscellaneous

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Finance Guide, Audits

Perform analyses outside scope of audit

Try to discover fraud or embezzlement unless a reason to suspect it is found

Initiate/ record transactions

Guarantee all transactions are accurate

Create original recordsWhat an auditor does not do

Issues an opinion (qualified or unqualified) or a report

Reviews recordsInterviews personnelRequests informationTests sample transactionsTests financial

statements

What an auditor does

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Finance Guide, AuditsAuditors are nice people and have been around for a long time …

For example:

H.L. Gunn - Auditor & Recorder Napa County, 1908

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Finance Guide, Audits

When required by the funderWhen Federal awards are $500k and above (A-133 audits)When requested by the Board of Supervisors or when the Controller determines an audit is neededSome City departments may build into their contracts an annual audit requirementController recommends all contractors have an annual financial audit by an independent firmController to begin regular audits of nonprofits

When is an audit necessary?

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Finance Guide, Audits

Structure your accounting systems and internal controls to be in compliance with requirements

Be familiar with requirements of OMB Circulars

•A-110 Administrative Requirements

•A-122 Cost Principles for Nonprofit Organizations

•A-133 Audit Requirements ($500k and above)

Know the requirements, laws and regulations governing the award

Federal Awards

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Finance Guide, Audits

Board minutes, leases/contracts, bank records, financial files, accounting system documentation, budget

Assign staff to coordinate with the auditor(s)

Evidence of internal controls

Schedules showing assets, liabilities, revenue & expenses

ConfirmationsGathering documentationConsiderations for selecting a CPA firm

How to prepare for an audit

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Finance Guide, Audits

CA Form 199 must be filed within 5½ months of end of FY

IRS form 990 or 990EZ must be filed within 4½months of end of FY

Tax Reporting RequirementsSources of information on filing requirements

California exemption granted by Franchise Tax Board

IRS 501(c)(3) tax exempt status applies to most nonprofits

Nonprofit Tax Status

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Finance Guide, Miscellaneous

Review/authorize plans, including the budget

Act as “ambassadors”Bring in outside contacts and information

Monitor & evaluate organization’s work

Select the Executive Director/CEO

Ensure compliance with legal & contract requirements

Board members provide governance over the organizationProtect the public interest

Provide special skillsRaise fundsBoards support and assist with staff-led workBoard responsibilities and development

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Required by SF Administrative CodeMust be filed by April 1Includes names of CEO or Director, all officers or directors and names of other boards on which they serveIncludes total expenditures, budget showing sources of funds & detailed expenditures by program

Annual Economic Statement

Finance Guide, Miscellaneous

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Finance Guide, Appendices

(1) Correlate to the budget and to IRS form 990 line item categories.

Liabilities – Obligations to creditors such as loans and accounts receivable.

Net Assets (fund balances) -reflect financial worth of organization.

See sample Chart of Accounts in Appendix A

Assets – tangible items such as cash, accounts receivable, equipment and property.

(3) Present account categories in a “standard order” as they are shown in the Statement of Position (balance sheet):

(2) Provide the information and reports you need to track income and expense items and make good financial decisions.

Chart of accounts should:

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Finance Guide, Appendices

See Appendix C for complete checklist

Internal accounting controls related to payroll ensure that employees and taxes are correctly paid

Payroll accounting checklist

See Appendix B for complete checklist

Controls over disbursements ensures that funds are safeguarded and unauthorized expenditures do not occur

Checklist for paying bills

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Finance Guide, Appendices

See Appendix D for descriptions and websitesCCSF Ethics CommissionCA Board of Equalization

CA Office of the Attorney GeneralCA Franchise Tax Board

CA Secretary of StateU.S. OMB

CA Employment Development Department

IRS

Be familiar with government forms and documents you may need from the following agencies:

Government Documents

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- show monthly expected revenues and expenditures and follow a format similar to the budget

- have options or corrective actions for addressing cash shortfalls or surpluses

See Appendix E for sample cash flow budget

A cash flow budget should:

- a financial management tool that allows you to account for changes in expected timing of cash receipts or disbursements, anticipate surpluses or shortfalls, and take corrective actions

- not the same as a “Statement of Cash Flows”, which is a required financial statement for nonprofit organizations

A cash flow budget is:

Finance Guide, Appendices

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Finance Guide, Related Resources

Eve Eichwald, 554-7526Project manager for nonprofit audits & technical assistance

For most contract-related questions you may want to contact your contracting department. For Human Services, contact Dave Curto, 557-5581. For Public Health, contact Anne Okubo, 554-2825.

Nori Hirasuna, 554-7647Financial audits

Naomi Little or Mike Ward, 554-6743Office of Contract AdministrationAllison McGee, 554-6125Mayor’s Office

Remy Nelly, 554-6609Accounting operations

Other contacts:

Monique Zmuda, 554-7500City budget

Mark Tipton, 554-7660Performance auditsPeg Stevenson, 554-7522Audits & technical assistance

Controller’s Office subject-area staff contacts:www.sfgov.org/controller - See “resources for nonprofits”

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Wrap-Up and Questions