Category

Accounting

Jan 23
0

Best Practices and Tips to Prepare the Statement of Functional Expenses

By | Accounting | No Comments

In nonprofit accounting, the Statement of Functional Expenses is a financial statement that provides detailed information about how an organization’s expenses are allocated to different functional categories. This statement is a key component of the financial reporting for nonprofit organizations, offering transparency and accountability regarding the use of resources. It typically categorizes expenses into three main functional areas including program services, management and general expenses, and fundraising.

The purpose of the Statement of Functional Expenses is to provide stakeholders, such as donors, grantors, and the public, with a detailed breakdown of how the organization is utilizing its resources to achieve its mission. This level of detail helps in assessing the efficiency of the organization’s operations and its commitment to fulfilling its nonprofit purposes.

Nonprofit organizations are often required to include this statement in their financial reports, particularly for compliance with accounting standards and regulations. It contributes to the overall transparency and accountability of the organization’s financial activities.

We’ve put together a list of simple steps to help you prepare an effective, clear, and easily understandable Statement of Functional Expenses.

Step 1: Gather Relevant Data

Your first step is to gather the necessary data for the statement. Understand what you are trying to express, and what data you may need to gather. Identify the sources of data available both internally in your organization and possibly from third party sources. This may include reports available from your own systems as well as surveys, data reports from industry experts, constituent interviews, and more.

Step 2: Organize and Validate

Your next step is to organize the data and validate it. Organizing the data electronically into files and folders on a cloud-based system ensures that everyone working on the statement has access to the same information. Depending on how much information you have, consider various organization aids: a hyperlinked table of contents or spreadsheet to find documents can come in handy when working with a large number of files.

Additionally, you’ll need to validate the data. Check all the facts. Cross-reference data. And be sure that any third-party sources you cite are recent. A good rule of thumb is to use data that’s no older than two years, if possible.

Step 3: Analyze and Interpret

Next, analyze and interpret the data. This step may take the longest, and it should be conducted thoughtfully and carefully to ensure that no erroneous conclusions are drawn from the existing data. You may need to conduct statistical analysis, trend analysis, or draw conclusions from the findings.

Classifying Functional Expenses

Every business must classify expenses. Nonprofits face an added challenge because the classification of functional expenses assigns a “why” to every dollar spent. Consider how you classify expenses. A great way to begin is to reference your organization’s mission statement. By identifying the value of each expense as it pertains to your mission, you’ll naturally create direct links between expenditures and mission in an honest and accountable way.

If you organization is undergoing a nonprofit audit, you must present expenses by functional area as part of your accounting. A CPA must include a statement saying that the financial documents were prepared according to generally accepted accounting principles (GAAP).

Tracking functional expenses by category and preparing the statement of functional expenses is both a necessary compliance step and a further step for organizational transparency. By working with your CPA and helping prepare these statements, you’ll help ensure accuracy, transparency, and value for your constituents.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Jan 16
0

The Art of the Close: Closing Best Practices

By | Accounting | No Comments
people using a laptop computer, calculator, and clipboard and pointing at screen

Like most accounting tasks, there are best practices pertaining to closing. In a recent presentation, we shared our experience with closing, as well as best practices. This article shares that information, and we’ll continue sharing more next month so that you too can have the latest accounting best practices.

Three Types of Closing

In accounting, there are various approaches to closing financial records, each serving distinct purposes.

The first method is the “No Close” approach, where the books are intentionally left open, allowing for adjustments to be made, as necessary.

Another technique is the “Soft Closing” or “Pre-Closing” of a fiscal year, which safeguards the integrity of account balances by restricting any transaction postings to that specific period. Soft closing permits the reopening of fiscal years or periods if needed.

“Hard Closing” involves permanently preventing any postings to a fiscal year. Lastly, a combination of both “Soft and Hard Closing” strategies may be employed to strike a balance between maintaining flexibility for adjustments and imposing more stringent closure measures for certain periods. Each type of closing method offers its own advantages and is chosen based on the specific requirements and preferences of the organization.

When Should You Close Accounts?

The frequency and due dates for closing procedures in accounting are flexible, allowing organizations to tailor their approach based on specific needs. Not every step in the closing process needs to be completed each month, offering adaptability. Organizations can opt for a monthly, quarterly, or annual close step, depending on factors such as the volume of transactions, the complexity of the organization, and the efficiency of the accounting system(s). This approach ensures that the closing process aligns with the unique requirements and operational characteristics of each organization.

Barriers to Effective Closing

Several potential barriers or hurdles may impede the completion of the closing process in accounting. One significant challenge arises from system or software limitations, where the existing tools may lack the necessary capabilities for a smooth and efficient closing. This can hinder the overall process and necessitate workarounds or additional manual efforts.

Another obstacle is the lack of time to set up a Close checklist. The demands of other priorities may leave little room for the meticulous planning and organization required for an effective closing procedure. This time constraint can result in oversight and errors during the process.

Adjustments pose another challenge in closing the books. Unforeseen changes or corrections may be needed and addressing these adjustments can be time-consuming and complex. Late invoices or receipts further compound the issue by introducing delays and potentially disrupting the entire closing timeline.

The existence of separate systems that do not interface and require manual entry creates a considerable barrier. This not only adds to the workload but also increases the likelihood of errors, as information must be transferred manually between systems.

Closing isn’t for perfectionists. Although you want to be as accurate as possible, perfection isn’t the goal, and striving for absolute accuracy may lead to excessive scrutiny and time spent on minor details, potentially delaying the overall completion of the books.

Moreover, a lack of understanding about reconciliations and closing procedures among team members can impede progress. Adequate training and communication are essential to ensure that everyone involved comprehends the importance and intricacies of the closing process.

Staff shortages or absences during key times can be a significant hurdle. The unavailability of essential team members can disrupt the workflow and lead to delays in completing the necessary tasks.

Finally, if it takes too long to close the books each month, it can become a substantial barrier. Inefficiencies in the closing process may result in a drain on resources and can hinder the organization’s ability to respond promptly to financial insights and changes. Addressing these potential barriers requires a proactive approach, including system improvements, time management strategies, and ongoing training to enhance overall efficiency in the closing process.

More Tips for Effective Closing

In our next installment, we’ll share best practices for effective closing. If you have any questions about closing your accounts, let us know. We’re here to help!

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Dec 20
0

The Benefits of Data-Driven Audits

By | Accounting, Audit, Nonprofit | No Comments
person at laptop doing audit, interacting with virtual data file screen

The annual audit offers nonprofits an unbiased third-party analysis of their finances. It also assures the public, based on the auditor’s report, that funds are being accounted for correctly.

But many audits are conducted on a routine basis. Auditors often perform the same analysis year after year. Others may focus on areas that have little impact on the overall audit but are easier to see, or things they deem vital, but which may not have a significant impact on the organization.

A data-driven audit, on the other hand, focuses on data from the trial balance and general ledger to conduct a robust risk assessment. From this risk assessment, the auditors then tailor their approach and methodology to identify and assess risk areas. The resulting audit leverages data from both prior years and the current year to present a clear, robust picture of an organization’s financial health and risk areas.

Data-Driven Audits Require the Right Tools

If data-driven audits are so helpful, why aren’t more auditors performing them?

Organizations and auditors need the right tools to perform data-driven audits. This includes financial and accounting software that can provide ready access to current and prior year finances, as well as software to perform complex analysis of the data. This type of analysis cannot be completed easily using a calculator or spreadsheet; auditors who offer data-driven audits typically work with nonprofit software and databases to crunch the numbers they analyze later.

The Benefits of Data-Driven Audits

Data-driven audits provide many benefits. These include:

  • Enhances efficiency: Leveraging software and tools to perform data analysis reduces the auditors’ hands-on time with the finances. They can use their time more efficiently to focus on risk identification and assessment.
  • Improves outcomes: Risk identification enables nonprofits to take remediation steps for improved outcomes. Auditors can review 100% of the information because the initial analysis is completed using technology.
  • Reduces risk: Auditors who do not leverage data-driven audits may miss crucial information because they rely upon sampling techniques rather than a deep-dive into the entire database. Data-driven audits analyze everything, thus reducing the risk of missing something important in the audit.

Supports Remote Audits

Another benefit of using data-driven audits is that most of the technology used to gather and analyze data is cloud-based. Cloud systems enable remote access, meaning that the auditors do not have to spend as many days onsite with you as in the past. They can pull data remotely, analyze it, and focus on findings. This provides a more efficient and cost-effective audit, giving both nonprofits better results and saving auditors time.

With the current accounting employment shortage, in which fewer people seem to be entering the accounting profession, there will likely be a shortage of experienced auditors soon. However, by using technology, auditing firms can increase the amount of work they do, while providing better service and more detailed analysis to nonprofits. This can offset some of the accounting labor shortage.

No Need for a Big IT Department to Benefit from Data

Another benefit to using cloud-based accounting and finance software is the ease with which organizations can add it to their tech stack. Unlike site-based systems, which may require special hardware and personnel to maintain and manage them, cloud-based systems are accessed through the internet. The software provider takes care of maintenance, updates, and security. No special hardware or software is needed to use them either, thus enabling you to continue using the hardware that you have.

Added Value with Few Drawbacks

Data-driven audits add so much value and have few, if any, drawbacks. Not only can they cover more transactions than a traditional audit, but they also help auditors more easily focus on possible risk areas. With the right technology in place, nonprofits can reap the benefits of big data even with limited budgets.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Dec 13
0

How to Accommodate Neurodiversity in the Accounting Team

By | Accounting, Nonprofit | No Comments
people at table with laptop and ERP accounting dashboard printouts

According to Harvard Health, neurodiversity refers to a spectrum of neurological differences among people with autism and other conditions. Neurodivergent people demonstrate unique strengths and challenges.

However, many workplaces shy away from hiring neurodivergent individuals. With the continuing debate over a shortage of people entering the accounting profession, many companies are rethinking their hiring practices and finding ways to welcome neurodivergent people to the accounting team. Here are several ways in which nonprofits can hire from this community with confidence.

Reach Out to the Autism Community

As part of your organization’s hiring practices, you probably have connections with local universities, for example, to be part of job fairs and other recruiting efforts. The same type of networking can help you hire from within the autism community. Such groups or organizations that offer support to people with autism may also have career centers that look for placement opportunities. Share your job notices and hiring criteria with them and encourage people with autism to apply.

Allow for Accommodations

Many autistic people thrive in the workforce with simple accommodations, but such accommodations are not one size fits all. Ask what the person needs to feel comfortable and do their job well. Often, it’s as simple as reducing distractions: allowing them to wear noise canceling headphones or work in corner cubicle that limits distractions. Most accommodations can be easily made without disruption to other workers.

Find an Internal Champion

Perhaps you think it’s a great idea to expand the hiring pool by tapping into neurodivergent communities but others within your organization think differently. Find a champion to support your efforts. A champion refers to someone at the senior or executive level who can lead the change from the top. With the help of a champion, you can more easily lead change from both the management and senior levels in the organization and convince more people to welcome people with different abilities.

Benefits of Hiring Neurodivergent People

Are there any special benefits from hiring neurodivergent people? In the accounting profession, yes!

Many people with autism excel at pattern recognition, and an important aspect of many accounting tasks is recognizing when something deviates from the norm. Of course, this is a generalization, and people have unique skills, but neurodivergent people do think differently—and it’s this strength that can make a great difference to your organization. Encouraging people with different ways of thinking and seeing the world to be part of the accounting team can lead to improved work and better outcomes overall.

According to the CDC, about 2.2% of the United States population is on the autism spectrum. This figure does not include other diagnoses within the neurodivergent community. While it may not seem like a big number, it is likely that you know at least one or two people who have autism or who have children with autism. Having autism doesn’t mean someone can’t work. It simply means they think differently and possibly process information and sensations differently. And while this may make it challenging for them in some areas, it may make them perfect for the accounting profession. Don’t avoid hiring neurodivergent people. There’s a wealth of untapped talent within the community that may benefit your organization.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.