Financial Reporting – Page 3

Embracing Financial Accountability through Effective Financial Reporting

There is a lot of talk regarding accountability today, particularly in the case of financial accountability for nonprofit organizations.

Nonprofit organizations need to embrace accountability in order to protect the organization, its mission, and the people it serves. Accountability helps nonprofit organizations fulfill their financial responsibilities to the government, donors, and the public, as well as demonstrates an openness and transparency that the public can trust.

While financial accountability sounds like a good idea in theory, how can nonprofits embrace it for their organization? First of all, nonprofits need to have a good governing body. No organization can run effectively without participating board members and directors. These people are key to ensuring that your nonprofit organization is compliant with all applicable rules and regulations as well as best practices. Proper governance ensures that your organization is keeping in line with its mission and guiding principles, including the integrity of your finances.

When it comes to nonprofit accountability, the responsibility lies on your board. For this reason, it is crucial for your board to understand its responsibilities and focus on carrying out the organization’s mission – not the day-to-day processes that can be completed by nonprofit staff.

Effective financial reporting is also critical to embracing financial accountability. Ensuring that your organization’s financial records are spotless is important. Complete regular, board-approved audits, and have management present financial statements to the board on a quarterly basis. Also make sure that your organization is complying with all financial reporting requirements from federal and private donors. If one of your funders requires you to provide key performance indicators or other reports, make sure you do so. Effective financial reporting requires some work, but in the end your organization will be better because of it.

Financial accountability requires you to make the best use of your resources. Make sure that your resources and funds are only being used for carrying out your mission and benefiting the community in which you serve. Evaluate your organization’s program accordingly to ensure that they coincide with your organization’s mission. If not, your funds and resource could be better used elsewhere.

Communication is key if you plan on embracing financial accountability and maintaining effective financial reports. Your annual report should reflect your organization’s mission and summarize the year’s activities. Make sure that the report also includes financial data and other information for the year, including a list of board members, staff and other key employees.

Giving the public access to your Form 990 is key to establishing and embracing accountability. This form will give the public a good overview of your organization’s activities, finances and compliance, governance, and compensation methods.

Embracing accountability will generate a positive response from the public. Once the public sees that your organization is committed to being open and transparent, they will want to support your efforts even more through donations, funding, volunteering, or simply spreading the word about your organization. Contact us today if you’d like to learn how our CPAs and accountants can help you create more effective financial reports and maintain a level of transparency the public will trust.

How Nonprofits Can Improve Transparency and Maintain 501 (c) (3) Status

Your status as a tax exempt “public charity” provides you with significant benefits. In addition to paying no federal, state, or local income taxes, the designation from the IRS allows you to accept private donations and receive government funding in the form of grants. Your 501 (c) (3) status also entitles you to reduced rates for services, such as mail delivery. Overall, the status allows your organization to focus more of your financial resources toward your mission and goals.

Keeping your 501 (c) (3) status is never guaranteed. With that in mind, how can nonprofits improve transparency and maintain their 501 (c) (3) status? In order to maintain your status, you will need to do the following:

Comply with nonprofit reporting requirements. Nonprofit organizations face different reporting regulations than their for-profit counterparts. You are required to file Form 990 (either Form 990, Form 990-EZ, or Form 990-N) depending on the amounts of your total annual receipts and assets. If you fail to file this form for three years in a row, your tax-exempt status will be revoked.If you do not need to file the full Form 990 (based on your annual receipts and assets), you will need to complete Schedule A, Part 1 (“Reason for Public Charity Status”) annually. You are also required to file payroll tax returns for your employees and 1099 forms for all public contractors. Make sure you are aware of any additional federal or private donor reporting requirements. Some donor require additional financial reporting, so make sure that you are maintaining those reports.
Pay employment taxes and properly withhold from employee paychecks. Even though your organization does not pay income taxes, your employees do. Make sure that you are paying applicable employment taxes, such as each employee’s Social Security and Medicare taxes. You must also withhold the employee portion of employment taxes from your employees’ paychecks, as well as federal, state, and local income taxes where they apply, and report the withheld amounts to the appropriate governmental agencies.
Use a formal process to approve employee compensation. The salaries and benefits you pay your directors and key employees must be available to the public on your Form 990. The process you use to determine each director’s compensation is just as important as their compensation. Make sure that the process is reasonable and that your compensation packages are comparable to the amounts paid by similar organizations in size and activity. The IRS determines this review and approval process as the responsibility of your board of directors and committees.
Maintain the required level of public support. If your nonprofit organization is primarily supported by a government unit or the general public or is a community trust, you will need to complete and pass the public support test on Part II of Schedule A. If your nonprofit is exempt because it receives more than one-third of its funds from private donations or contributions, you will need to pass the public support test on Part III of Schedule A every year.

In summary, it is your responsibility to make sure that you maintain your 501 (c) (3) status. In addition to the following the do’s, we have created three don’ts that are necessary to maintaining your status: don’t operate for the benefit of private interests; don’t generate excessive unrelated business income; and don’t pay more than market rates for goods and services.

The above tips will help you maintain your tax-exempt status so you can continue serving your local community for years to come. If you have any additional questions regarding your tax-exempt status, contact us today. Our nonprofit accounting experts can help you determine which tools to use to demonstrate the proper transparency and accountability necessary to maintaining your 501 (c) (3) status.

How to Introduce a New Financial Budget to Your Company

Budgeting is crucial to the success of your business or nonprofit organization. As we have already discussed extensively on this blog, budgeting can improve your business’ efficiency and help you make smart decisions in regards to your company’s finances. Re-evaluating your company’s financial budget periodically is essential, for your company’s financial situation is always changing. Make it a point to re-evaluate the company financial budget at least once a year to make sure that your budget is still working. If you need to make adjustments or craft an entirely new budget, do so.

Once you re-evaluate your company’s financial budget, you will need to introduce the new financial budget to your employees. The new budget will most likely have an impact on how employee projects progress, so employees will need to be informed of the new budget before it is put into place. It is also a good idea to share the new budget with your employees simply so they have a better idea of your company’s financial standing and can make more informed decisions.

Prior to announcing the new budget, consider the information you’d like to receive and make a list of the people you’d like to receive it. If you make this a standardized process, all of your employees will be on the same page and you won’t have to worry about anyone being misinformed.

Identify the employees to receive the new budget information. If there are employees on different levels, decide if certain employees (such as managers) should hear the budget announcement first. Make a list of who will receive the budget announcement and when, and announce the new budget accordingly.
Write up an overview of the new budget. In your budget overview, highlight any major changes from the previous budget. This will give your employees an idea of the numbers without having to wade through the entire budget.
Make a list of action items the employees will need to perform based on the new budget announcement. If certain areas of the budget are being cut, make sure that your managers are made aware of the cut so they can determine how to account for the decrease in funding. By providing your employees with a list of action items to be performed, you are preparing them for success.
Create an information packet for each employee detailing the new budget. This should include your budget overview, the action item list, and the budget itself. If the information varies between departments or employees, make sure that you mark each packet accordingly so the employees receive the right information.
Send out an email letting your employees know that a new budget has been prepared. In the email, announce the date that the new budget will be released.
Set a time and date for a meeting to discuss the new budget with your employees. This will give your employees an opportunity to ask questions about the new budget and how it pertains to them. If you need to hold several meetings with various departments or teams, schedule them accordingly.

Keeping your employees in the loop is crucial to the success of your new financial budget. For more information about re-evaluating your company’s financial budget and rolling out your new strategies, click here. As always, contact us for any budgeting and financial questions. Our CPAs and business advisors would be more than happy to guide you toward financial success.

Using the Financial Statement for Effective Financial Reporting

Whether you run a nonprofit organization or are in charge of running a small business, effective financial reporting is crucial to the success of your business or organization. While there are many components necessary to creating effective financial reports, the financial statement plays an important role. Financial statements are used to show the true status of your company or organization’s financial standing and are usually run on a monthly basis. Monitoring the financial health of your company periodically can mark the difference between your company’s success and failure. We recommend reviewing your financial statements once a month in order to gain a good picture of your true financial standing and to adjust your financial planning for the remainder of the year.

What is a Financial Statement?
A company’s financial statement, in simple terms, is composed of three primary financial statements: the balance sheet, the income statement, and the cash flow statement. Each statement provides valuable insight into your company’s financial health. The balance sheet, for instance, is a summary of all your financial balances as a company or organization. It is often described as the “snapshot” of your company at a particular point in time. The balance sheet includes a summary of three parts: the company’s assets, liabilities, and the owner’s equity. The assets include everything pertaining to the business’ value (everything that is owned or owed), liabilities include everything that the business itself owes, and the owner’s equity is the owner’s share of the business (calculated by subtracting the company’s liabilities from its assets).

The income statement, more commonly known in the business world as the Profit and Loss statement, summarizes the profitability of a business (or lack thereof) at a single point in time. Companies can measure the profitability from any given time, such as from Quarter 1 to Quarter 2 or from August 1^st to February 1^st. The cash flow statement simply converts the company’s finances from an accrual basis to a cash basis and measures the flow of cash that has gone – and is going – out of the business.

How Can the Financial Statement Lead to Effective Financial Reporting?
Seeing the true financial status of your company can help improve your decision-making skills and clarify any questions you may have. Financial statements summarize business trends, measure the rates at which you are collecting receivables and paying creditors, summarize cash flow problems, help you determine which customers are in good standing, and highlight customers who are in need of collection efforts (or who have uncollectible open invoices). They also help you create more effective financial reports which – in turn – help guide your business to success.

Financial statements generally include a summary of your company’s accounts payables report, letting you know much you owe to other companies and when it is due. You can also run financial reports showing your current inventory levels and the value of that inventory. The purpose of the financial statement is to answer any questions you have regarding what you owe, what you own, and how much your company is making. These questions need to be answered in order to make strategic decisions on how to run your company more effectively in the future.

All statements and reports included in the financial statement are valuable to the financial process and should be treated as such. Reviewing these statements on a regular basis can increase your chances for success and provide you with an accurate view of your company’s financial standing at any given point in time.

If you need help making strategic financial decisions for your company (or would like us to walk you through the value of a balance sheet), contact us today. If you run a nonprofit organization and would like to learn more about effective financial reporting, stay tuned to our blog.