Arthur Temple College of Forestry & Agriculture and the Forest Resources Institute

Theresa Coble, Ph.D.

Associate Professor

Arthur Temple College of Forestry & Agriculture and the Forest Resources Institute

Stephen F. Austin State University

NAI Treasurer’s Report
November 2013

Dear colleagues,

In my role as NAI Treasurer, I have reviewed NAI financial statements (i.e., budgets, balance sheets, profit/loss statements, accounts receivable, credit card statements, checks written statements, mortgage statements, line of credit statements, class account statements, NAI business plans, executive staff reports and board communications).

More recently, I have discussed with Margo Carlock, NAI Executive Director, a new chart of accounts that will revamp NAI’s accounting system, making it much easier to implement a full cost accounting-based approach to assessing the financial profitability of NAI’s program areas (or business lines). These efforts are consistent with the “matrix map” approach outlined in Bell, Masaoka & Zimmerman’s (2010) text entitled Nonprofit Sustainability: Making Strategic Decisions for Financial Viability. As we enter a season of renewed financial leadership and organizational strategic planning, I encourage all NAI leaders to learn more about the matrix mapping process and consider how it could strengthen decision making.

Within the past two weeks, I have discussed with Margo Carlock her efforts to produce a draft cash-flow budget forecast for 2014 for NAI. Margo is currently in the midst her first annual budgeting cycle. I am pleased to report that her leadership in this area has led to a first-ever cash flow budget for NAI. The “cash flow budget” approach that Margo has implemented strengthens NAI’s financial planning efforts because it breaks down the anticipated revenue and expenses in each budget category for each month of the upcoming year. To produce this cash flow budget, Margo had to go back through several years of revenue and expense reports, tracing how fluctuations occurred during the course of annual budget cycles. Based on this analysis and the resulting cash flow budget forecast for 2014, NAI can better anticipate and plan for ups and downs in the budget cycle. This is huge. Now NAI can better anticipate and monitor fluctuations in our cash flow on a month-to-month basis.

In recent months I also reviewed draft and final versions of the management letter and financial statement for NAI’s external audit by Brock & Co. for the 2012 calendar year. These documents, and conversations between NAI and the external auditor, have suggested some areas where financial procedures can be strengthened within NAI. I am pleased to report that Margo Carlock is actively working to address the relatively minor suggestions and issues that were raised through this process. Additionally, Margo has reported to the Executive Committee of the Board efforts she has taken to reduce expenses by, for example, eliminating unnecessary checking accounts at Wells Fargo and discontinuing several phone lines at the NAI office.

In my first Treasurer’s Report for 2014, I will provide a thumbnail sketch of NAI finances for the 2013 fiscal year. For now, I encourage board members and NAI leaders to review a blog posting by Elizabeth Hamilton Foley (2008) entitled “Statement of Financial Position” (available online at: http://www.nonprofitaccountingbasics.org/reporting-operations/statement-financial-position). This posting clarifies terminology and provides assistance with reading and understanding financial reports.

Consistent with the stated intent of Jane Beattie, the Chair for NAI’s Strategic Planning Committee, I recommend that NAI conduct a cost-benefit analysis of NAI’s program areas in conjunction with their strategic planning efforts. Doing so will provide valuable information as NAI reconsiders its mission, mission impact, member services, revenue generation, and the various trade offs that inevitably occur during a strategic planning process.

As NAI Treasurer, I recommend that the board support NAI staff in their efforts to establish adequate financial reserves so that we can position ourselves to borrow from ourselves (instead of from an interest-accruing line of credit) when we face cash-flow challenges. I also encourage the board to support NAI staff in their efforts to generate increased revenue through fundraising and other mechanisms.

I would like to commend all NAI staff for their professional and highly admirable efforts to maintain high quality programs and services during Margo’s first six months with NAI.

In sum, I would like to work with NAI’s board, staff and committee members, as appropriate, on the following financial tasks: strengthen cash flow management, expand revenue generation activities/capacity, pay off NAI’s line of credit, fairly and efficiently manage organizational unit budgets, increase NAI’s reserves of unrestricted funds, develop financial benchmarks, accurately assess the cost-benefit of NAI programs, formulate economic objectives that are specific, measurable and targeted to ongoing financial needs, leverage resources through effective partnerships, further develop NAI’s volunteer resources, and update NAI financial policies on an as needed basis.

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- Appendix A -

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Statement of Financial Position
http://www.nonprofitaccountingbasics.org/reporting-operations/statement-financial-position

Elizabeth Hamilton Foley

It used to be called the balance sheet. Although the name of this report has changed in the nonprofit world to the “statement of financial position” (SOP), the concept and the equation are essentially the same as any business balance sheet or statement of personal net worth.

Assets / (what you have or what you are owed)
minus / Liabilities / (what you owe to others)
equals / Net Assets / (what’s left over)

The SOP reflects the overall financial position of your organization at a given moment in time. It is the report that shows the accumulated results of all the individual years of your organization’s operations put together. It is important to learn how to read and understand your organization’s SOP report. Following is a discussion of the components of the SOP and what they can mean.

Assets

Assets are what your organization has, what is owed to you, what you have invested in, and what you have deposited with others.

What you have:

·  Cash in bank accounts, investment accounts, and petty cash

·  Things your organization has bought for future use, such as merchandise inventories or supplies

·  Fixed assets such as furniture, equipment, and improvements to your facility, listed at cost, that are non-liquid, as the cash has already been spent to acquire them

·  Accumulated Depreciation, a “contra asset” (against asset) indicating the extent the fixed asset has decreased in value as it is used up (depreciated) over its useful life

·  Collections of art, artifacts, other valuables related to your mission

·  Payments your organization has made for goods or services that have not yet been received or used such as annual insurance premiums that could be refunded to you if cancelled, or expenses relating to future fiscal years paid in advance (prepaid expenses)

·  Long-term investments of unrestricted or temporarily restricted funds

·  Long-term investments of permanently restricted principal such as endowment funds that cannot be used for operations

What is owed to you:

·  Grant awards promised to your organization but not yet received

·  Revenue earned from services provided by your organization for which payment has not yet been received

·  Loans your organization may have made to others

What you have deposited with others:

·  Deposits your organization has paid to others and is held by them on your behalf such as advance rent, utilities security deposits, payroll bonds, etc.

Assets are usually listed in order of declining liquidity. Short-term assets are those available as cash or equivalent within one year, and long-term after one year. Assets are a natural “debit balance” meaning that, in an accounting entry, a debit to an asset account will increase it. A negative number (credit balance) in the assets section of a balance sheet is unusual, and should be questioned and explained. The exception is Accumulated Depreciation, which, as noted above, is a “contra asset” (against asset) account that tracks the depletion of the value of fixed assets as they are used.

What you might want to ask when looking at the asset balances:

Cash

·  Do we have enough cash to pay our bills?

·  Is there too much cash in non-interest bearing accounts?

·  Are our investments diversified per our investment policy?

·  Have we protected the restricted funds?

·  Is our cash balance increasing or decreasing?

Accounts/Pledges Receivable

·  Are we collecting what is owed to us in a timely way?

·  Are there any we will never receive?

·  Do we have an allowance for doubtful accounts?

·  What are current vs. long-term portions?

Prepaid Expenses

·  Are we preparing for future programming?

Inventory

·  Do we have too much on hand or is the inventory too old?

·  Do we need to replenish?

Other (Deposits, etc.)

·  How much of our assets are held by others and for what purpose?

Fixed Assets (property, plant, equipment, accumulated depreciation)

·  Have we invested enough (too much) in property and equipment?

·  Do we need to upgrade our equipment or technology?

·  How much did we invest in capital assets during the year?

Liabilities

Liabilities are what your organization owes to others or holds on behalf of others.

What you owe:

·  Vendor accounts payable (bills for goods and services)

·  Amounts payable on company credit cards

·  Payroll liabilities (withholdings, federal, state, and local payroll taxes owed; unemployment owed)

·  Accrued expenses (usually estimated rather than based on actual bills, for instance: accrued vacation pay or accrued interest)

·  The amount accessed from a bank line of credit

·  Short-term or long-term loans

What you hold on behalf of others:

·  Deferred revenue or refundable advances (funds paid to your organization in advance for services not yet delivered; your organization would be liable to return these funds if the service is not delivered, for example, play subscriptions or tuition for future classes)

·  Conditional contributions (funds given to your organization that you are entitled to only if the condition is met, such as a matching grant)

Liabilities are presented in declining order of their maturity. Short-term liabilities are those due within a year. Long-term liabilities are multi-year loans such as mortgages or other funds borrowed by the organization and payable over more than one year. Liabilities are a natural “credit balance” meaning that, in an accounting entry, a credit to a liability account will increase it. A negative number (debit balance) in the liabilities section of a balance sheet is not normal and should be questioned and explained.

What you might want to ask when looking at the liabilities balances:

Accounts Payable/Accrued Expenses

·  Are vendors being paid in a timely way?

·  Do we have enough cash to pay our bills?

·  Are we carrying balances on high-interest credit cards?

·  How long have we had these liabilities on the books?

Payroll Liabilities

·  Are we meeting our tax liabilities in a timely way?

Deferred Revenue/Refundable Advances

·  Are we recognizing revenues as they are earned? (This balance will decrease and income increase as services for which the deferred revenue was given are performed.)

·  Are we sure no restricted contributions are included as deferred revenue?

Conditional Contributions

·  Can we raise the matching funds; meet the condition that gives us the right to the funds?

Line of Credit

·  Do we have the means to repay our line of credit?

·  Are we strategically using our line of credit?

·  Are we using the line of credit to meet our operating expenses?

Loans/mortgages

·  How much has the organization borrowed?

·  Is the loan internal (from cash reserve) or external?

·  Is there a plan for repayment of the loan/mortgage?

Net Assets

The net assets of a nonprofit organization are equivalent to the net worth of the organization. Net assets can be liquid (comprising cash and short-term receivables), or fixed (furniture, fixtures, equipment, inventories, and land & buildings net of long-term debt), or long-term. Generally accepted accounting principles (GAAP) call for an organization’s net assets to be classified as unrestricted (UR), temporarily restricted (TR), or permanently restricted (PR).

Small and midsize nonprofit organizations usually do not have PR net assets such as endowments, and it is usually not advisable, as having an endowment ties up a lot of cash that is not accessible to the organization for operations or program delivery. It is far more advisable for small and midsize nonprofits to build a working capital or operating cash reserve fund before attempting to create an endowment. If a small or midsize nonprofit does have PR net assets, such as an endowment, these net assets usually comprise long-term investments and are not considered liquid.

TR net assets comprise contributions received or promised to the organization that carry a donor imposed restriction as to when (time restriction) or for what purpose (purpose restriction) the funds can be used. Funds that are “carried over” to the subsequent fiscal year for either restriction are shown as TR net assets.

All net assets that are not PR or TR are Unrestricted (UR) and can be used by the organization as its board sees fit. It is useful, at least for internal financial management purposes, to separate liquid from non-liquid UR net assets in order to have a better idea of the organization’s liquidity, the financial resources it can use for day-to-day transactions. A single UR line item balance does not always tell the full story.

For instance, the total UR net asset balance in all three examples below is $100,000.

NP Org A / NP Org B / NP Org C
Unrestricted Net Assets / $100,000
Undesignated / $75,000 / ( $20,000)
Property, Plant & Equipment / $25,000 / $120,000
Total UR Net Assets / $100,000 / $100,000 / $100,000

Nonprofit Org A shows total UR net assets as $100,000 without distinguishing between available vs. fixed (non liquid) net assets. It would be easy to assume the organization was in decent shape with a positive $100,000 in UR net assets. However, with a deeper look at more detailed information as to the composition of the UR net assets as in Examples B or C, different conclusions about those organizations’ financial health would be reached.

Nonprofit Org B shows $75,000 in undesignated net assets that one could assume comprises cash, receivables, and investments available for operations. In addition Org B shows net fixed assets of $25,000, totaling $100,000, a more accurate picture of the organization’s financial position. This organization’s board might want to consider designating some of the $75,000 into a cash reserve fund and an equipment maintenance and replacement fund.