Understanding Financial Operations.A guide to policies, procedures, financial statements, and fiscal fitness. Does your organization have adequate monetary resources to accomplish its mission? Are financial operations managed well? Educating yourself about typical nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental will give you the knowledge you need to carry out your fiduciary responsibilities. THE FIRST STEP: AN ORIENTATION You may wish to start by requesting an orientation conducted by the chief staff executive or chief financial officer. This should include a review of your organization's objectives and goals; programs, products, and services; and financial practices and procedures. It's also important to discuss the differences between the goals and operations of for-profit and nonprofit organizations Nonprofit Organization An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well. Notes: Examples of non-profit organizations are charities, hospitals and schools. . For-profit organizations, which are typically governed by compensated boards and corporate insiders, obviously have a profit motive. Nonprofit organizations, on the other hand, are usually governed by volunteer leaders, and although these organizations must at least break even to survive, making a profit is not their primary goal. Typically they exist to improve conditions for society or advance a specific cause, profession, or industry, hence their nonprofit, tax-exempt status. Nonprofit organizations must report the results of their efforts to the public and to federal, state, and local agencies by filing the annual Form 990 federal tax return; producing and distributing annual reports; and submitting other reporting documents, as required. FINANCIAL POLICIES AND PROCEDURES Every nonprofit organization needs policies and procedures in place to protect its assets and dictate how the finances are to be managed. Sometimes these policies and procedures are spelled out in formal manuals. Effective financial management includes procedures that guarantee prompt, efficient processing of all cash receipts and disbursements. To ensure effective internal controls, different members of the staff must be responsible for processing cash receipts, processing cash disbursements, reconciling bank records, and preparing financial statements. Policies should cover, among other things, the types and amount of insurance to be purchased to protect the assets and operations of the organization. Such insurance should include bonding for staff and volunteers who handle cash and securities as well as directors and officers liability insurance Directors and Officers Liability Insurance is insurance payable to the directors and officers of a company to cover damages or defence costs in the event they are sued for wrongful acts while they were with that company. . RESERVES AND INVESTMENTS Typically, financial policies also cover investment and reserve policies and guidelines. These policies should be reviewed to determine if they are consistent with current conditions or need to be revised. If no policies exist, this is an opportune op·por·tune adj. 1. Suited or right for a particular purpose: an opportune place to make camp. 2. Occurring at a fitting or advantageous time: an opportune arrival. time to create them. It's important to have a clear understanding of the difference between investments and reserves. An investment policy dictates how cash and liquid reserves will be invested. The policy should include what types of investments the organization can purchase and who approves their purchase and sale. This should be reviewed and updated regularly as the organization's needs and market conditions change. A reserve policy dictates how the net assets Net assets The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand. net assets See owners' equity. (reserves or fund balance) will be allocated. Net assets represent the excess of assets over liabilities. Reserve policies vary widely from organization to organization because they're based on the individual organization's culture and needs. While one organization may have a policy in place that prohibits an excessive buildup build·up also build-up n. 1. The act or process of amassing or increasing: a military buildup; a buildup of tension during the strike. 2. of reserves, another may grow the reserves to fund future programs or operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. . BUDGETING: A TOOL TO MEASURE RESULTS Developing an annual operating budget Noun 1. operating budget - a budget for current expenses as distinct from financial transactions or permanent improvements budget items, operating cost, operating expense, overhead - the expense of maintaining property (e.g. is a process that may involve both staff and volunteer leaders, depending on the organization's size and scope. Because a budget spells out goals and activities in financial terms, it's an effective tool for monitoring the results of activities. To help you detect and review any budget variances, financial statements should include the annual and year-to-date budget numbers in addition to the actual numbers. In addition to the annual operating budget, your organization may include an annual capital budget that allows it to allocate resources for the purchase of equipment or other long-term assets Long-Term Assets 1. Reported on the balance sheet, it's the value of a company's property, equipment and other capital assets, less depreciation. 2. A stock, bond or other asset that you plan on holding in your portfolio for a lengthy period of time. . Your organization may also maintain cash-flow projection worksheets for monitoring cash balances weekly or monthly. FINANCIAL STATEMENTS Designed to report the organization's fiscal health and results of operations, financial statements are typically prepared internally each month and forwarded to the board or appropriate committee for monthly or quarterly review. All financial statements must be accurate, easy to understand, and produced in a timely, consistent manner. Ideally they show prior-year activity to allow for tracking of trends and operating variances. Financial reports include these types of documents: * Statements of financial position (formerly known as the balance sheet), to help you understand assets and liabilities as of a specific date. Review these statements to determine the status of assets, liabilities, and net worth and to answer broad questions about the organization's overall solvency. For example, is sufficient cash available to support the organization's operations? Do current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. exceed current liabilities Current Liabilities Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. ? Is the organization laden with debt? Does it have a positive fund balance? * Statements of activities (formerly the income statement), to provide information about income and expenses for a specific period of time. Review these statements to determine if revenue goals are being met, if expenses are in line with budget projections, and if the organization is generating an addition to net assets (formerly net income). Statements of activities should include the annual budget and budget-to-date figures so you can determine if income and expenses are in line with projections. Ask for an explanation of any large variances between actual year-to-date figures and budgeted year-to-date figures. Income and expenses may be reported by natural account or by program area. When financial statements are prepared using natural accounts, expenses are listed by type, such as outlays for printing, postage, and salaries. Natural account statements report net income or loss of the organization as a whole. When statements are prepared by program area, expenses are listed by broad activities (such as the annual convention and membership) and include both direct and indirect costs Indirect costs are costs that are not directly accountable to a particular function or product; these are fixed costs. Indirect costs include taxes, administration, personnel and security costs. See also
* Statements of cash flows, to provide information regarding increases or decreases in current assets and liabilities and increases or decreases in cash balances since the beginning of the fiscal year. In addition to compiling monthly financial statements, your organization may also have an independent external auditor The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. or accounting firm conduct an annual audit of the financial operations. This practice is highly recommended to ensure proper management of your organization's financial resources. INDUSTRY TRENDS Finally, to determine how the results of your organization's operations compare to those of others, both board and staff can refer to ASAE's Operating Ratio Operating Ratio A ratio that shows the efficiency of management by comparing operating expense to net sales: Report, 10th Edition. Produced every three years, this report provides operating ratios on key nonprofit organization operations categorized cat·e·go·rize tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es To put into a category or categories; classify. cat by organization size. The ORR serves as a valuable tool for comparative assessment. To purchase a copy of the ORR, contact the ASAE ASAE American Society of Association Executives ASAE American Society of Agricultural Engineers (Society for Engineering in Agricultural, Food, and Biological Systems) ASAE Alkali-Sulfite-Anthraquinone-Ethanol Member Service Center by phone, (202) 626-0940; fax, (202) 371- 8315; or e-mail, service@asaenet.org. Once you understand the basics of how nonprofit finances work, you must keep abreast Verb 1. keep abreast - keep informed; "He kept up on his country's foreign policies" keep up, follow trace, follow - follow, discover, or ascertain the course of development of something; "We must follow closely the economic development is Cuba" ; "trace the of your organization's financial condition through a combination of close monitoring and appropriate questioning. Only by being aware and alert will you have the understanding you need to fulfill your fiduciary responsibility as a board leader. Doris Fee, CAF CAF - constant applicative form , is president of Blue Ridge Blue Ridge, eastern range of the Appalachian Mts., extending south from S Pa. to N Ga.; highest mountains in the E United States. Mt. Mitchell, 6,684 ft (2,037 m) high, is the tallest peak. Beginning with a narrow ridge in the north, c. Business Consultants, a Pennsylvania-based company that assists organizations nationwide in the evaluation and improvement of their financial and business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets . Questions to Ask About Finances * Are adequate cash balances and reserves maintained? * Are investment policies in place? * Are reserve policies in place? * Are financial statements prepared regularly? * Do financial statements contain budget and prior-year information? * Are financial statements easy to read and understand? * Is a budget prepared annually? * Has adequate insurance coverage been purchased? * Are there adequate internal controls? * Is an independent audit performed each year? |
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