Nonprofit Accounting Blog – Page 28

Effective Budgeting Practices for Nonprofit Organizations

In order to create an effective budget, nonprofit organizations must establish an effective budget process. An effective process engages those responsible for adhering to and implementing the objectives created in the budget, including the financial committee and senior staff. Organizations must establish a budget timeline, leaving plenty of time for the research, review, feedback and revision of the budget. The yearly budgeting process should be thoroughly documented and clearly state the tasks, responsibility assignments and deadlines needed to create the budget. An effective process also incorporates strategic planning initiatives and requires that income be budgeted before expenses.

Once the budget has been reviewed and revised by the necessary people, it will be presented to the organization’s board. Prior to submitting it to the board, organizations need to take the following into consideration when creating a budget:

Budget Income First. Make sure that you base your income targets on realistic expectations and only include income in the budget if it is reliable. Never include an income projection to fill the gaps of expenses. This is not realistic and sets your organization up for a budget deficit before the year even begins.
Keep Expenses Lower than Income. This may seem obvious, but it is crucial when creating an effective budget. Make sure that your expenses are always lower than the total dependable income.
Analyze and Understand Your Revenue. Does your organization depend on a single source of revenue? In some cases, the lack of diversity in revenue sources can threaten the financial stability of an organization should the sole revenue source become unavailable. There is no “right” list of revenue sources, so in order to find the right sources, you will need to analyze your organization’s circumstances, mission and industry and find a good match for your organization.
Make Sure Your Budget Supports Your Mission. Before you even begin to develop your budget, you need to sit down and go over your organization’s mission and strategic plan. Make sure that all strategies that have an effect on the budget are included in the budget you create. Your budget is designed to communicate and support your organization’s mission through numbers, so make sure that your allocation of funds coincides with the mission of your nonprofit.
Budget for Capital. The budget should take an organization’s annual operating income and expenses into account, as well as ensure resources for long-lived or non-operational needs (the capital budget). The capital budget could cover several years and should include target amounts and fundraising strategies to achieve the organization’s financial and strategic goals.
Make Notes to Explain Budget Assumptions. Board and committee members will appreciate any explanations you offer to help them understanding the underlying thoughts behind the numbers in the budget. While it is best to present budgets in spreadsheet format (which does not allow for much note-taking room), you can provide the board with narrative notes in a separate document. Whether or not the notes are in a separate document, make sure that you add a key that associates each note to the related line on the spreadsheet.

As you can see, developing an effective budget takes a lot of hard work and determination. While it may not be an easy process, your organization will benefit greatly from the work you put into your budget. By maintaining an inclusive budget and well-documented policies, an organization can carry out its mission thoroughly and effectively. If you have any questions about creating your budget, please contact us today.

For more tips on creating effective budgets, read our article “Five Tips for Effective Budgeting”.

Effective Financial Reporting Solutions Improve Nonprofit Transparency

Is your organization doing all it can to keep your donors’ and supporters’ trust? Are you using a financial reporting solution to produce transparent and accurate reports? If you plan to continue carrying out your mission for years to come, you need to do all you can to keep the trust of your supporters and an effective financial reporting solution can help you do just that.

Nonprofit organizations are facing increasing government regulations each passing year. Restrictions around the use of government grants are continuing to increase and private funders are now asking for specific measurable outcomes resulting from grant awards. With the recent proposed rule changes to A-133 and Form 990, nonprofits will be required provided extensive reports on all federal and private funding.

Being accountable in all aspects of your organization’s financial and program management has always been important; however, with the recent regulations, it is more crucial than ever to develop effective financial reports.

An organization’s accountability does not fall solely on the CFO or Executive Director; it is also the responsibility of all staff and board members who are involved in the financial management, fundraising and program planning aspects of the organization. Keep the following tips will help you maintain accountability among your supporters and funders:

Make sure that you are using raised funds only for the purposes you outlined in your solicitations. Keep your donors updated on how you are using their donated funds and send out communication on a regular basis. This can be as simple as sharing a success story in your organization’s newsletter or making your annual report available on your organization’s website, or as complex as reporting on fulfilling grant restrictions, program outcomes and the impact donated funds have had on your organization. However, at the end of the day, funders need tangible proof, such as clear tracking of donor restrictions and funds spent, in order to keep their trust in your organization.
Keep the lines of communication open. Ensuring accountability means allowing your supporters to communicate with you through the good times and the bad. Grant-makers and donors desire open communication, especially when things do not go as planned. Funders are not looking for justification to take the grant away; they just want to know what the roadblocks are and how they can help organizations overcome them.
Don’t let your actions come back to haunt you. Remember that donors and members of the grant-making community network and talk. While your actions and communications can reinforce their decisions to fund you and gather support from other funders, they can also be a deterrent. When your organization becomes tainted in the mind of your donors, you can expect to never receive funding from that donor again. So let your actions speak for the good you do.
Maintain an effective financial reporting solution to meet your financial needs. Part of being accountable means having the right infrastructure in place to assist with the necessary reporting, tracking and communications. Audits come yearly, and your organization must be prepared to provide key stakeholders, grantors and auditors with a clear trail to verify the financial accuracy of your reports. Make sure that your financial reporting solution not only tracks and reports outcome measures on financial statements, but that it can also be used to budget outcome measurements for more accurate forecasting. Information on outcome measures can be factored into the financial data and presented to the necessary constituents. An effective financial reporting solution will give your donors and grantors a clear picture of your organization, outline your intentions and ensure that your supporters see the accountability of your financial data.

A financial reporting solution can also helps organizations manage donor information. An effective system helps nonprofits acknowledge donations in a timely manner, keep record of all communication histories, maintain profiles on all donors, create follow-up reminders and personalize communications with your organization’s programs and projects.

While effective financial reporting software can help keep your organization accountable and transparent, at the end of the day, it is the people in your organization that use these tools to demonstrate transparency, accountability and financial accuracy. Contact us for more information about maintaining financial transparency.

How to Prevent the Most Common Issues in Nonprofit Audits

Nonprofit organizations are as unique as their for-profit counterparts and while they have key organizational differences, auditors have noticed three common issues when performing nonprofit audits: insufficient staffing, weak internal communications and insufficient application of internal controls. These issues not only affect the reliability of the financial information provided by the organization, but they also create an environment for potential fraudulent activity. Consider the following issues that arise out of nonprofit audits and how nonprofits can prevent these issues:

Insufficient Staffing
An accounting department that is insufficiently staffed could mean that the financial information reported by the nonprofit is unreliable. As nonprofits continue to cut costs, individual employees are taking on too many roles, resulting in more reporting and data-entry errors. Because employees may not have the necessary time needed to complete a task carefully, errors may be over-looked or require many time-consuming corrections.

Insufficient staffing can also put an organization at risk for internal fraud. The limited number of accounting staff requires individuals to take on multiple roles within the organization, leading to an improper segregation of duties. The proper segregation of duties is a key in fraud prevention. The authorization of transactions, custody of assets and record-keeping functions must be separated in order to ensure that fraudulent activity does not occur.

Nonprofit organizations need to analyze their individual situations regarding the lack of staffing in their accounting departments. If the accounting staff is burdened by their responsibilities, it may be necessary to hire an additional employee (or two) to take on some of the responsibility. If an organization is short on funds, part-time help may also be considered to alleviate the burden on the accounting staff.

Weak Internal Communications
Weak or insufficient internal communications can damage an organization’s reliability, especially when the accounting department fails to receive updates on individual transactions. Communication breakdowns within an organization can increase the potential for unaccounted for transactions and non-compliance with government regulations.

Communication breakdowns can also affect an organization’s standing with granters. If the accounting staff is not aware of specific grant restrictions and requirements, the nonprofit may jeopardize its ability to obtain grants. If the organization is closely scrutinized by regulatory agencies and its financial records are found to be deficient, future grants may be at risk. Ensure that your organization remains in good standing with your granters by implementing strong internal communications within your organization.

Nonprofits with weak internal communications have an increased potential for fraudulent activity. If the accounting department is not informed of an organization’s various activities, questionable transactions may not be identified.

Nonprofits can overcome the risks associated with poor communication by ensuring that the accounting department receives copies of every contract and agreement, is notified of all oral transactions and is informed about the circumstance of all transactions. Nonprofits can also improve communication efforts by setting up frequent meetings between key accounting personnel, management and their auditors to ensure that everyone is on the same page regarding the organization’s activities.

Insufficient Internal Controls
An organization’s internal controls represent the policies and procedures established to ensure that management directives are carried out. When those policies and procedures are overridden or ignored, internal control problems result. Inadequate policies and procedures can also result in potential financial problems that may not be identified until the audit. In order to prevent any potential financial problems, nonprofits need to conduct reviews of budgets, forecasts and prior periods on a regular basis.

Nonprofit organizations need to examine their internal control structure in order to identify weaknesses and financial overseers should verify the financial information reported to them on a regular basis. As auditors discover weaknesses in an organization’s internal controls, they should focus on expanding audit testing in order to compensate for the lack of controls and offer the organization suggestions for improvement.

As auditors and nonprofits work together, they can reduce the risk of these issues and ensure that organizations are prepared for an upcoming audit. For more information about preparing your organization for an audit, click here.

How Will the Changes to the Form 990 Impact my Organization?

The role of nonprofit organizations is ever-changing. Over the years, the Form 990 has become more complex and is subject to more intense scrutiny by the IRS, funders and donors. Take a look at some of the most significant changes to Form 990 for 2012:

The IRS has revised the definition of “grants and other assistance” to exclude certain payments by voluntary employees’ beneficiary associations in the Form 990 glossary.
The IRS has also made an amendment to Appendix K, Contributions. The amendment clarifies that a donor’s phone bill for a text message meets the Sec. 170(1) (17) requirement of a reliable written record if it shows the donor organization’s name, date and amount.
Nonprofits that have foreign investments during the tax year valued at $100,000 or more must now complete Form 990, Part 1 of Schedule F.
Nonprofits that report their distributive share of assets in any joint ventures and other entities treated as partnerships for federal tax purposes according to the ending capital account in the partnership reported on Schedule K-1 must now complete the Balance Sheet in Part X.
Nonprofits now need to report their distributive share of investment income, royalties and rental income from joint ventures on specific lines of Part VIII, “Statement of Revenue”.

Reporting Fundraising Events in the New Form 990
Many nonprofits are unaware of the requirements for reporting received donations. Since donations are key to a nonprofit’s continuation and success, organizations need to learn how to properly report their donations on the Form 990.

Organizations can begin by reporting their fundraising events on the form’s Schedule G – Supplemental Information Regarding Fundraising or Gaming Activities. This is required to be filed with Form 990 if the organization reports more than $15,000 of fundraising event gross income and contributions for the year. In order to accurately report fundraising events on Part II of Schedule G, the gross receipts and the value provided to donors must be divided as follows:

Line 1: Gross receipts from the event
Line 2: Charitable portion of event proceeds (the portion that exceeds the value of goods and services provided to the donor)
Line 3: Fair market value of event proceeds

The fundraising event should also be reported on Part VIII of Form 990 – The Statement of Revenue. Nonprofits need to make sure that the information in this section agrees with Schedule G in order to avoid any unwanted questions by the IRS.

Learn more about Form 990 by reading our article, “Demystifying IRS Form 990 for Nonprofits”.

What Should I Look for in an Accountant?

Accountants do more than help you prepare your yearly taxes. They can advise you on important financial decisions, help you create and maintain your company’s budget and help you select (and implement) the right accounting system for your business. An accountant is a crucial part of your business team and should not be selected without careful consideration.

Prior to starting the accountant selection process, determine your reasons for hiring an accountant. Are you looking for someone to help your prepare your taxes? Is your financial system going through an overhaul? Do you need someone available to answer your financial questions or concerns? Determining your needs for an accountant will ensure that you select the right accountant for your business. Consider the following tips for choosing an able accountant:

Ask Around
Ask everyone you know who they use for their accounting services. When you attend any type of meeting (or meet other business owners), ask who they’ve used and recommend. Check with your local Chamber of Commerce for the names of accountants in your area. Get as many names as possible, for you will narrow down your search to the accountants who most fit your needs.
Consider Their Current Clients
Choose an accountant who has at least 60% of their businesses coming from businesses similar to yours. They will be more familiar with the laws pertaining to your type of business than other accountants. If you are a corporation, make sure that they specialize in corporate accounting and all that it entails.
Schedule Interviews
Prepare a list of questions for the accountant prior to your meeting. Ask each accountant about the services they provide for their clients, how long they’ve been in business, and for references. Also, ask to see their license and certifications before you leave.Make sure to bring any necessary records to the interview (such as last year’s tax return). Many accountants will be able to tell you the services they can provide your company (and what it will cost) by looking at your tax return.
Rates
Ask about their rates and what those rates include. Find out what their hourly rate is and what the cost would be if you have questions throughout the year. Many accountants will be able to provide you with a rate chart that thoroughly outlines all of their rates.
Ask about Their Preferred Software Program
Ask each accountant what accounting program they prefer their clients to use (if they have a preference) and why. If you do not currently use their preferred program, ask if it will affect the services (or rates) they can offer you.
Corporation or Individual?
Are you interested in hiring an accountant backed by a corporation, or would you rather hire an accountant that works individually? If you opt to go the corporation route, find out if you’ll be dealing with one particular person, or will it be whoever answers the phone when you call. It’s best to have one person to build a relationship with!
What are Their Hours of Operation?
When do they work? Find out their hours of operation and make sure that you can call or email them at hours that are convenient for you.

Interview at least 3 accountants before choosing your final accountant. While it may seem like a lot of work up front, you will reap the benefits in the end. Choosing the wrong accountant for your company’s needs will only end up in a costly mess. The proper accountant will transform your accounting processes and give you the guidance you need to remain successful. Discover the value an accountant can bring to your business here.

Effective Budgeting for the Small Business

There are surprisingly few small businesses that develop and maintain yearly budgets. Regardless of their reasons – whether they feel it takes too much effort to learn how to develop a budget or too much time during the week to maintain it – small business owners have been cautious when it comes to creating budgets for their businesses. And their businesses are suffering as a result. In fact, recent surveys show that a good number of businesses that have failed within the last year failed because of poor financial management.

An effective budget can give companies a clear perspective and enable them to make smart decisions in regard to their finances. Without a budget to guide them, many companies do not know the state of their finances and end up making costly financial decisions. By creating an effective budget, companies can ensure that their finances are being managed properly, guaranteeing their spot in the economic future.

Creating an effective budget does not have to be hard. Consider the following tips to help you get started on creating an effective budget for your company:

Spend some time developing your budget. While it should not take an exorbitant amount of time, creating an effective budget will take some time and thought. It should not be something you throw together in an afternoon; it should be the result of coordinated input and effort by you and your team. The future of your company is valuable, so invest the time and do it right.
Practice makes perfect. While it may seem challenging to forecast your business’ future, it will get easier over time. Don’t get discouraged if you do not get it right the first time. The more you forecast and stick to your budget, the more accurate your forecasts will be.
Allow for some flex. Accounting for every penny that goes in and out of your company is not the objective. A budget is designed to give your company some direction, not an ultimatum. When developing your budget, make sure that you account for some unexpected costs (such as service repairs, unexpected fees, etc.) and allow some room for error. Remember that the budget is just a guide to help you manage your finances better and prepare for the immediate financial future.
Make an estimation on your income and expenses. An effective budget takes your income and expenses into account during a specific timeframe. Your income should include: gross sales, any interests accrued, accounts receivable, and any other income sources. Your expenses consist of any monetary resources that leave your company (such as accounts payable, payroll, material costs, utilities, and real estate costs).
Create cash flow and profit targets. Every budget needs both cash flow and profit targets. The two bottom lines are very different and require different kinds of attention to control them. Make sure you understand the difference between the two and create your budget accordingly.
Compare budgets at the end of every month.This will give your company a good understanding of your finances and where to go from there. Compare your actual results to your forecasts and ask yourself the following questions:
- How are we doing compared to the budget? Why do our results differ from our plan?
- What can we do NOW to ensure that we have a better result next month?
- What are we learning that will make next year’s budget more effective?
- Was there anything that was unaccounted for last month that we can include in next month’s budget?

Regardless of how you set it up, your budget will help your company achieve its goals and ensure success for the future. While it can be challenging to develop and maintain a budget (especially for small businesses), it is worth it. Learn more about effective budgeting strategies here.

How Nonprofits Can Prepare for the Year-End

With the end of the year only a few weeks away, many nonprofits have already started focusing on closing out their books and preparing their year-end reports. Unfortunately, the holiday season makes it hard to focus on what needs to be done and many nonprofits could use a little help in preparing for the year-end. The following is a checklist that will help you prepare for the year-end and ensure that your new year starts out on the right foot.

Strategic Planning
The current economic uncertainty has brought about many challenges for nonprofit organizations. In fact, many are having to cut back on services and programs in order to stay afloat. The end of the year is a natural time to start re-evaluating your financial processes, procedures and goals. Focus your efforts on maximizing your impact in the next year while minimizing your expenses.

Analyze and Develop a New Budget
While nobody enjoys budgeting, it is a necessary part of running a nonprofit. Take a look at this year’s budget and make note of any trends. Was your organization able to stick to the budget? What were the challenges? What could area use some improvement? Learn from this year’s mistakes and create an effective budget for the year to come.

Evaluate Your Financial Records
What is the current state of your financial records? Good, bad… or in need of some improvement? Hopefully your financial records are in good shape, but if they are not, you will need to do some work on them before the year ends. If necessary, hire a professional. While it is important to straighten out your financial records due to legalities, it is also important for properly managing your organization. Inaccurate financial records often results in poor decision making and missed opportunities, not to mention trouble from the government and other funders. Ensure that you have the documents you need by asking yourself the following questions:

Are last year’s operating documents (such as board meeting minutes, resolutions, loan agreements, etc.) easily accessible? If not, make sure that all of your documents are organized by the end of the year. You will need to access this information at a moment’s notice and cannot afford to waste time digging around looking for a document.
Are you prepared to file your organization’s IRS annual reporting requirement (Form 990)? While it may not be due until May 15^th, now is a good time to make sure your financial records are in good shape. You don’t want to be scrambling right before the deadline!

Update Donor Records
Donors are extremely important to nonprofit organizations, as they make your mission possible. Make sure that your donor records are in order by the year-end, for donors will be expecting their annual contribution statements at the beginning of the year.

Payroll
If your organization has staff, you probably have some work to do in this area. Tax deadlines are on the horizon (think W2s and tax deposits), and you need to be prepared. Make sure everything is in order to ensure your employees receive their W2s in a timely manner.

Prepare for Your Annual Board Meeting
While many organizations only have board meetings once a year, nonprofits would benefit from having a year-end meeting to discuss the challenges of the past year and focus on the necessary improvements for the year to come. Prepare for your end-of-year meeting by creating the necessary financial reports.

As you can see, nonprofits need to be prepared for year-end. Many organizations also like to focus their efforts on last-minute fundraising. For more information about year-end financial reporting, click here.

Industry Update: Proposed Rule Changes to A-133

In order to ensure that the public receives the most value for the more than $600 billion tax dollars spent each year, it is essential that Federal grants programs function as effectively and efficiently as possible. To this end President Obama has directed the Office of Management and Budget (OMB) to work to evaluate potential reforms to Federal grants policies. The OMB has released an Advance Notice of potential reforms and Beck and Company CPA’s is keeping our ear to the wall in order to stay abreast of this process in order to help keep you informed.

The ultimate goals of the reform are to:

Strengthen the oversight of Federal grant dollars by aligning existing administrative requirements to better address ongoing and emerging risks to program outcomes and integrity.
Increase efficiency and effectiveness of grant programs by eliminating unnecessary and duplicative requirements.
Adopt a risk based model for Single Audits, and provide new administrative approaches for determining and monitoring the allocation of Federal funds.
Eliminate roadblocks to effective performance in carrying out and completing grants and cooperative agreements and to reduce unnecessary ‘‘red tape’’ that is attached to grant monies.

Section A: Proposed Reforms to Audit Requirements

Concentrating audit and oversight on higher dollar/risk awards.
Streamlining the universal compliance requirements.
Strengthening the guidance on audit follow-up for Federal awarding agencies.
Reducing burdens on pass-through /sub recipients by ensuring cross-agency coordination.
Reducing burdens on pass-through entities and sub recipients from audit follow-up.

Section B: Proposed Reforms to Cost Principles

Using flat rates instead of negotiated rates for indirect (‘‘facilities and administrative’’) costs.
Exploring alternatives to time-and effort reporting requirements for salaries and wages.
Including the cost of certain computing devices as allowable direct cost supplies.
Allowing for the budgeting for contingency funds for certain awards.
Requesting that the (CASB) increase the minimum threshold for disclosure statements.
Providing non-profit organizations an example of the Certificate of Indirect Costs, and Indirect Cost Proposal Documentation Requirements.

Section C: Possible Reforms to Administrative Requirements

Creating a consolidated, uniform set of administrative requirements.
Requiring pre-award consideration of each proposal’s merit and each applicant’s financial risk.
Requiring agencies to provide 90 day notice of funding opportunities.
Providing a standard format for announcements of funding opportunities.
Reiterating that information collections are subject to Paperwork Reduction Act approval.

If you’d like more in-depth information in regards to the proposed rule changes to
A-133, attend our free webinar. Learn more.

6 Tips for Keeping Your Data Secure

Nonprofit organizations and small businesses both handle significant amounts of sensitive information. With cybercriminals on the rise, nonprofits and businesses need to take extra precautions when it comes to securing their data. Cyber thieves target small businesses and nonprofits, knowing that they do not have the resources to invest in expensive security systems and often have older computer systems that make it easier to steal business-critical data.

So what can small businesses and nonprofits do to ensure that their data remains secure? The following tips will ensure that your data is secure from online predators:

1. Create a company-wide security policy. Create policies that specifically state who has access to which resources and be firm in implementing these policies. Access to systems and information should only be granted to people within the organization who need to know the information. Ensure that your systems are only being used for work-related activities. Make sure each user has his or her own credentials and that each system requires a unique password to login. Consider including prohibitions against accessing Facebook, personal email and social networking sites.

2. Store important data in encrypted formats. Donor information, customer details, employee information, financial data and other important documents should be stored in an encrypted format.

3. Run security software on all PCs. This includes antivirus software, firewalls, and antispyware protection. While this may seem obvious, you would be surprised at the number of companies and nonprofits that do not run security software. Also make sure that your security software subscriptions are current. If it’s out of date, it will do you no good.

4. Comply with credit card security rules. Ensure that your company or nonprofit is compliant with credit card security rules and, unless absolutely necessary, do not store credit card information after a transaction is completed. Make sure that you do not store credit card security codes or debit PINS anywhere on your computer.

5. Set up a separate network for visitors. If your company or nonprofit provides wireless Internet access for visitors and guests, protect yourself by implementing a separate network for your guests.

6. Change passwords regularly. As a rule, your passwords should be changed quarterly. Make sure that your passwords avoid personal information and are difficult for outsiders to figure out.

For more information about protecting your company’s important data, read our article about employees and company security.

Does Your Business Have a Disaster-Recovery Plan in Place?

No business is immune to disaster. Whether the disaster comes in the form of a hurricane, cyber attack or power shortage, unexpected disasters can cause considerable amounts of damage to any company. Since companies cannot prevent disasters from occurring, they need to have some sort of plan in place to guarantee that they receive as little damage as possible.

While the idea of implementing a disaster-recovery plan may seem obvious, more than 60% of small businesses do not have a formal emergency plan in place and fail to backup important data off-site, leaving their business susceptible to data loss should a disaster strike.

A recent research study by Sage North America shows that while 94% of small businesses regularly backup their data, most of them do not store their data off-site. Storing data backups on-site puts companies at risk. Should a fire, earthquake, flood or other natural disaster destroy the office building, crucial data backups will also be destroyed, leaving the company without the important data it needs to successfully do business.

Data loss can significantly impact the operations and future of a company. In order to come out of a disaster as quickly as possible, companies need to develop an emergency-response plan that includes solutions for protecting critical data, such as storing backups off-site.

The study also found that 62% of small businesses do not have a formal plan for responding to an emergency or natural disaster. The most commonly cited reason for not having a formal response plan in place was the lack of disasters in the area. If a company is located in an area that is not prone to disasters, companies are less likely to be prepared.

Even if your company is located in a relatively disaster-free area, you still need to be prepared. Guarantee that your data is secure, by making sure that your plan thoroughly covers data backup. Determine how often you will backup your data. Will you backup important data daily, weekly or at least once a month? How long will it take to backup your data? Where will you store your backups? Will you store it both on-site and off-site?

Keep these questions in mind as you are developing your disaster-recovery plan. Make sure that your plan is unique to your business and addresses all of the areas that will make it possible for your company to bounce back from a disaster quickly.