Posts made in May 2018

Financial Health of the US Nonprofit Sector – Facts and Observations Report

We felt this report was important to share to the nonprofit sector and hope you find these observations helpful.  This report was provided by GuideStar, SeaChange Capital Partners, and Oliver Wyman.

Nonprofits play a critical social role in improving education, alleviating poverty, providing economic opportunities, supporting the health care system, and sustaining the arts. Their health is vital to our nation. So, when they face financial distress, it creates hardship for some of the most vulnerable and fragile segments of society. It also means that hardworking staff may lose paychecks or pensions and that trustees may be exposed to personal liability.

Our analysis shows just how fragile the nation’s nonprofits really are:

  • 7-8% are technically insolvent with liabilities exceeding assets
  • 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities
  • 30% have lost money over the last three years
  • ~50% have less than one month of operating reserves

What can Funders, Regulators, and Policy-Makers Do?

A nonprofit’s ability to substantially improve its financial situation is often limited. Taking action to enhance risk management practices is important, but may not be enough. Improving the financial health of the nonprofit sector will require coordination between nonprofits, funders, regulators, and policy-makers.

The following ideas may help to improve financial health:

  1. Provide adequate funding for overhead
  2. Provide more flexible funding
  3. Encourage nonprofit restructurings, closures and/or mergers
  4. Create a rescue fund for strategically important nonprofit

We hope everyone will take this report seriously and see what we can all do to improve the financial health of the US Nonprofit Sector going forward.

How organizations can streamline the month-end close

This process is a time of stress and long hours for employees, despite technological improvements.

Companies have long sought ways to streamline processes so that accountants can spend less time collecting numbers and more time analyzing them for the organization’s benefit. Many nimble organizations are finding those time savings in the month-end close.

Closing the books quickly gives them the opportunity to take corrective action as soon as possible. This results in efficiencies and, in turn, cost savings. It also frees up the accounting department to devote more time to providing management with better information.

Despite improvements in efficiency from modern accounting systems, the month-end close process still causes considerable stress. A recent survey by software provider FloQast reported that 88% of accounting and finance professionals were negatively impacted by the pressure to close quickly.

Obstacles preventing a faster close process abound. Among them are the complexity of accounting standards and tax regulations; difficulty obtaining information from outside the accounting department; and working across incompatible legacy software platforms. Understaffed accounting teams, meanwhile, face a lack of time to design and implement new processes.

If management is comfortable with estimates, closing can be done quickly, perhaps in hours or days. But emphasizing speed over accuracy can compromise integrity.

Increasing speed and accuracy puts pressure on employees who may already be stressed. In the FloQast survey, 82% of accounting and finance professionals reported a negative personal impact from the close process. Finding the right balance between speed, accuracy, and employees’ needs is key.

Here are some best practices to smooth the process:

Develop and document standard procedures
Having well-documented procedures and checklists — are vital for speed and accuracy.

The order of prescribed closing procedures can be moved forward or backward depending on when information is available.

Keep improving your processes
One process per month might be broken into steps to find ways to improve the accuracy of estimates and to save time.  What do we want at the end?  What could we do at the beginning to get us there?

Cross-train the critical steps
Documented standard procedures and cross-training mean there’s no holdup in the process if a key employee is out sick or if that employee leaves the company.

Spread out the work
Many routine journal entries can be prepared well in advance. Some accrual or impairment calculations can be started midperiod and fine-tuned at the end of the period. Once the process becomes routine, staff will know what information is necessary and they can start preparing in advance of the month end.

Frequent reconciliations of key accounts — such as cash — reduce the work needed to close the books.

Consider materiality for estimates
In calculating accruals and estimates, keep materiality in mind. Finding a simple method for estimating accruals can save time if there’s no material difference from the exact amount.

Communicate the importance of a speedy close to the entire organization
Getting information from those outside of accounting can often be the biggest impediment to a speedy close. So developing relationships outside the finance and accounting departments is critical.

Automate as much as possible
Data integrity and speed improve as manual processes such as spreadsheets are replaced with automation. While spreadsheets are a useful tool, they can be prone to errors and have no means to track changes made to them.

The best path to an accurate and efficient close is for companies to follow the practices recommended for their software systems. Look to the system to see if it will solve the problem rather than just developing yet another spreadsheet. The extra effort required to become familiar with the advanced reporting capabilities of the company’s software system and to learn how to create a report that provides the information will likely pay off in the long run.

With automation, manual data entry is no longer needed. Rather than eliminating data-entry positions, it is better to retrain these individuals to perform higher-level skills such as research or variance analysis. These higher-level skills lead to better job satisfaction, which is crucial in a tight job market.

While retraining can require considerable time and resources, this investment can pay off by retaining the knowledge of those employees in the organization.

Source: Journal of Accountancy, How organizations can streamline the month-end close, March 1, 2018

 

About the author

Liz Farr (liz@farrcommunications.com) is a freelance writer based in Los Lunas, N.M. She also works part time as a tax manager at Pulakos CPAs in Albuquerque, N.M

 

Are you in Compliance with ASU 2016-4? Financial Statement Presentation of Not-for-Profit Entities

Update:

White Paper Available: “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Overview

In November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda focusing on the financial reporting of not-for-profit (NFP) entities. The project has resulted in the issuance of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update strives to improve how a NFP organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flows and liquidity.  We have summarized the full 270-page standard into this brief guide which outlines the primary changes to the financial statements of not-for-profit organizations.

Net Asset Classes

  • Replaces the current three net asset classes with the following two:
    • Net assets with donor restrictions
    • Net assets without donor restrictions
  • Removes hardline distinction between temporary and permanent restrictions
  • Enhances disclosure requirements:
    • Amounts and purposes of board-designated net assets
    • How restrictions affect the use of resources

Underwater Endowments

  • Presents deficits relative to original gift amounts of donor-restricted within the donor-imposed restrictions class of net assets
  • Enhances disclosure requirements:
    • Governing board’s policy related to appropriations from such funds
    • Any action taken during the period related to such funds
    • Original gift amount or level otherwise required to be maintained by the donor or law
    • Amount of the underwater endowments in the aggregate

Expiration of Restrictions – Long-lived Assets

  • Requires use of the “placed-in-service approach” for determination of when restrictions expire
  • No longer allows the recognition of the expiration of restrictions over the asset’s useful life

Statement of Cash Flows

  • May continue to elect either the direct or indirect method
  • When using the direct method, no longer requires the reconciliation of changes in net assets to cash flows from operating activities

Liquidity and Availability of Resources

  • Requires disclosure of qualitative information about how liquid resources are managed
  • Requires disclosure of quantitative information related to availability of financial assets to meet cash needs for general expenditures within one year, including impact of the following on financial assets:
    • Nature of the financial assets
    • External limits by donors, grantors, laws and contracts
    • Internal limits by the governing board

Investment Return

  • Requires external and direct internal investment expenses to be net against investment returns
  • Removes requirement to disclose amount of investment expenses net against investment returns
  • Clarifies what activities constitute direct internal investing activities:
    • Salaries and related expenses of staff responsible for the development and execution of investment strategy
    • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms
  • Permits separate, appropriately labeled line items on the statement of activities for net investment return managed differently or derived from different sources
  • Eliminates the requirement to present investment return components for changes in endowment net assets

Reporting of Expenses

  • Requires all NFPs to report expenses by nature
  • Retains requirement to report expenses by function
  • Requires expense analysis by nature and function to be presented in one location, in either:
    • The statement of activities
    • A separate statement of expenses (similar to the statement of functional expenses)
    • A schedule in the notes
  • Enhances disclosures related to methods used to allocate costs among functions
  • Updates descriptions of management and general activities

Effective Date and Transition

  • Annual financial statements issued for fiscal years beginning after Dec. 15, 2017
  • Early application is permitted
  • Requires adoption on retrospective basis for all years presented, except for:
    • Analysis of expenses by nature and function
    • Disclosures related to liquidity and availability of resources

Don’t forget to take advantage of our free resource.   “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations