Posts made in March 2018

Common audit pitfalls and misperceptions

By Jim Simpson, CPA and director, Financial Technologies & Management

While not required by Indiana law, one reason a nonprofit might conduct an audit is to demonstrate the organization’s commitment to financial transparency and accountability.

And while a nonprofit can spend considerable resources for its annual audit, it is important that it consider the following to ensure the audit is a success.

No delays: An audit needs to avoid any major delays. It is important that an auditor schedule significant time to complete most of the audit during fieldwork. The nonprofit needs to prepare for the auditor and have all the major items ready prior to the start of the audit. An auditor and the nonprofit should work together to complete any open-audit items prior to the audit.

Minimal accrual and year-end adjustments: The nonprofit needs to ensure that all accrual and year-end adjustments are completed prior to the start of the audit and to verify that last year’s audit adjustments have been recorded and reconciled with the prior audit. It is also important to understand and record any adjustment so that auditor is not performing the nonprofit’s responsibilities.

Minor board and management comments: It is a good idea to have an exit interview after the fieldwork to review the audit’s results and any remaining open issues that need to resolution to complete the audit. An auditor should provide written and verbal feedback of results.

Here are items that might be addressed in a written communication:

 significant new accounting policies

 significant or unusual transactions

 significant accounting estimates

 audit adjustments

 management disagreements

 significant issues or difficulties

No material weakness or significant deficiency: This is a deficiency in internal controls that could negatively impact financial integrity. A significant deficiency is also a falling of internal controls that is less severe than a material weakness, yet important to mention to those charged with the organization’s governance. An example would be investment reconciliation that was not performed on a consistent basis and led to investments not being properly reported.

Nonprofit should prepare audited financial statements and related disclosures: The organization should have the ability and accounting systems to prepare the audited financial statements and related footnotes and disclosures. The auditor’s focus should be to test financial statements prepared by management and provide an independent, expert opinion that the nonprofit’s financial statements are properly presented.

Fraud detection is not purpose of audit: While nonprofit leaders may believe the annual audit will uncover fraud, it is very unlikely this will occur. It may be surprising, but the external audit is only likely to detect fraud about three percent of the time. The top fraud detection methods are the responsibility of the nonprofit and not the auditor. It is important that the organization be diligent, and not over rely on the audit to deter and detect fraud.

Auditor does not guarantee financial statement accuracy: While auditor does issue an opinion on the nonprofit’s financial statements, the auditor does not certify or guarantee its accuracy. The auditor just represents that the financial statements fairly present the financial statements of the nonprofit.

If your nonprofit has one of these audit pitfalls or misperceptions, you should take action to bring expertise and capacity to your organization to remedy it. Eliminating these pitfalls and concerns later can require significant resources and can have an adverse impact on the reputation of your organization. It is much better to focus on putting corrective and proactive measures in place, rather than the time-consuming process of responding to an auditor’s findings. Accounting Solutions for your Nonprofit

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.

Developing an effective dashboard and key performance indicators

By Jim Simpson, CPA and director, Financial Technologies & Management

Nonprofits are complex organizations that are built around mission and outcomes, which must be supported by the right revenue and expense models.

Dashboards are one way to simply communicate and give an overview of the organization by using a graphical summary of important information. It is an easy way for decision-makers to see where and whether the organization is on the planned financial path, and additionally can be used with funders and stakeholders to transparently show progress towards desired goals.

But a dashboard without metrics is useless to the organization, it is important to develop the associated metrics and constantly review to ensure you are actually measuring success for the organization.

Effective dashboards

Charts and graphs are not considered a dashboard unless that have the following characteristics:

 Align success definitions across organization

 Encourage communication regarding progress towards goals

 Identify successes and challenges

 Actual data and evidence to make decisions

 Strengthen relationships between different activities

A properly designed dashboard allows a nonprofit to monitor its effectiveness as evidenced by the financial health along with the impact of the programs and services provided. Board and staff should develop strategy and goals to create dashboards with focused conversation and collaboration.

When you select the dashboard elements, you should understand the data you will track and how that data will influence decision making. Questions to ask include: Are the metrics for the organization or particular function? Is the tool for the board, staff, or funders?

Successful dashboards achieve the following:

 Successfully communicate strategic-level results

 Present data in a user-friendly visual format

 Create snapshot of current status and trends over time

 Show performance against defined targets

 Highlight out-of-the-ordinary results

 Create a manageable set of key performance indicators

Consider each revenue and expense stream and the factors that influence the reliability and predictability and what contributes to the increasing or decreasing of these streams.

Performance indicators (KPIs)

it is important to determine the program-delivery mechanism that influences results. Different types of nonprofits have different organizational models with different drivers for success. It is important to select Key Performance Indicators (KPI’s) that focus the organization on data that will support decision-making. Consider whether you need a dashboard that reflects trends over time or performance against goals.

In order to get started, focus on the most important part of the process, which is to define the key drivers and metrics while focusing on the most pressing issues to start. This will help you start the process of developing your organization’s key performance indicators and the related dashboards to move your organization towards data driven decision-making.

When creating a dashboard and KPI’s, you should do the following:

 Start with the big picture

 Identify the audience and how to engage it

 Define business model drivers and key levers inherent in program delivery

 Choose KPIs in a thoughtful, team-based process that is inclusive

 Re-evaluating KPIs is an ongoing process

 Establish a culture of data driven decision making

Successful Key Performance Indicators (KPIs) achieve the following:

 Represent business model drivers

 Reflect progress towards intended outcomes

 Guides priorities and decisions

 Limited number of KPIs that can be realistically monitored

 Should be periodically reassessed

When putting the dashboard reporting into action make sure you consider the following:

 Where does data come from?

 Who is responsible to collect data?

 How will dashboard be updated and how often?

 What platform or tools should we use to update dashboard?

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.

Building a Superior Budget

By Jim Simpson, CPA and director, Financial Technologies & Management

A strong budget is an essential element for any nonprofit organization to achieve financial leadership. Superior budgets, though, have written plans about the core activities to include strategic, organizational, and program goals and how they will be financed.

Most financial leaders focus too much time on budget variance analysis and not enough time to anticipating or planning for the future. By anticipating or planning, organizations can focus on what’s upcoming regardless of its budget cycle or fiscal year end. A budget can be complemented with rolling forecasts to better anticipate upcoming financial results.

Budgets also need to include cash flow projections, which maybe outside of the finance departments capacity or capabilities. Financial leaders must have a direct role in developing useful cash flow projections and assumptions with frequent, detailed analysis.

Any cash flow shortage needs to be further evaluated to determine if it is just a timing difference or an actual cash deficit. Shortfalls created by deficits need to be solved by budget adjustments or strategic choices to absorb a shortfall. An organization can determine timing or actual deficits by reviewing the budget to see if it had planned for or not.

Financial sustainability can only be achieved with a well-prepared and continuously monitored budget. Conversely, a poorly developed budget can diminish mission focused activities opportunities and threaten long-term success.

Typically, the budgeting process should begin three months before the end of the fiscal year to ensure the budget is approved before the start of the fiscal year. It is important that each of the following budget process practices is used to develop the budget.

 Under current financial status, including review income and expenses, compared to existing budget, forecast remainder of year, then analyze to understand variances.

 Establish a timeline that allows each step to have time for review, discussion and revisions.

 Set up goals to determine organizational and program goals and desired financial outcomes.

 Agree on budget approach to include budget team’s roles and responsibilities along with authority.

 Draft expense budget to attain strategic, organizational and program goals. It is important to break expenses into variable expenses, fixed expenses, incremental expenses and indirect expenses.

 Develop draft income budget to identify expected income from funding sources, including any new activities.

 Review draft budget to ensure it meets organizational and program goals. Distribute draft budget to the budget team to develop consensus and collect recommendations. Modify budget with budget team input to ensure everyone understands and approves the revised draft budget.

 After presentation of the budget to the board, committee and internal stakeholders, approve proposed budget. The proposed budget may need to be revised, so include this possibility in your timeline.

 Implement budget to communicate budget, assign management responsibilities, implement in accounting system, monitor and respond to changes to the budget. It is important that you document budget decisions including writing down all budget assumptions.

A budget should be implemented with monthly distributions to anticipate the changes to monthly income and expenses.

Take a strategic approach to your budget, which might include a multi-year approach to create a better budget. A budget is a living document and narrative that tells the nonprofit’s story using numbers.

Sometimes a zero-based budget approach can help you to understand a budget from the ground up and provide a fresh perspective and generate new possibilities.

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.

Effective Grants Management and Cost Allocation Nonprofit Forum

Effective Grants Management and Cost Allocation – FTM Nonprofit Forum for April 25, 2018

Nonprofit Forum Agenda for April 25th

11:30 to 1:00 – Financial Management Topic

Nonprofit Forum Registration – free for Nonprofit Organizations

Effective Grants Management and Cost Allocation

How should you perform your grants management and cost allocation responsibilities? We will describe the best practices for these responsibilities. Please bring your questions so we can have a candid and productive conversation.

We will cover the critical aspects grants management and cost allocation including:

  • General grants management requirements
  • Governance requirements for grants administration
  • Review Uniform Grant Guidance
  • Internal control and financial management system requirements for federal awards
  • Schedule of Expenditures of Federal Awards and associated audit requirements
  • Cost Allocation methodologies including examples
  • Cost Allocation plan requirements
  • Best practices for grant budget financial management
  • Best practices for grant reporting and reconciliations
  • Performing an effective grant close out
  • How to use your accounting system to perform grants management role?
  • How to maximize your grant reimbursement?
  • What are signs that grants management role is not being performed?
  • How should you as leader evaluate your various options?

We will share our expertise and candid advice to better prepare you for these complex decisions.

3 Key Things you will learn include:

  • What are best practices for performing grants management role effective?
  • What are federal compliance grants management requirements?
  • What are signs that grants management role is not being performed correctly?

Those attending the forum will receive handouts.

Click here to register for the April Nonprofit Forum