Category

Nonprofit

May 09
0

Avoid These 5 Common Financial Statement Errors

By | Accounting, Nonprofit | No Comments
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Common financial statement errors can undermine the credibility of a nonprofit organization and can also make compliance reporting difficult, resulting in audits, fines, and other problems. That’s why it’s essential to be aware of the most common financial statement errors found in small- and medium-sized not-for-profit entities, so you can watch for and avoid them.

5 Common Mistakes

They say to err is human, but your work must be superhuman when it comes to keeping accurate financial records for nonprofits. Even a seemingly small mistake can tremendously affect decision-making within the organization. Here is a nonauthoritative illustration of five financial statement errors commonly found in small- and medium-sized not-for-profit entities. This is not a comprehensive list of all possible misstatements, so be sure to review each financial statement thoroughly.

  1. Statement of Financial Position Errors

There are several reasons for errors in the statement of financial position, including missing or invalid entries in the general ledger or errors in drafting the statement of financial position by including general ledger accounts on the wrong line item.

There are a few possible errors when using a classified statement, including displaying current assets without current liabilities or incorrectly disaggregating cash and restricted cash. 

In addition, it is common to record conditional promises to give as revenue and receivables, trust or foundation receivables before the grantor formally awards the grant, or deferred revenue for amounts received under a grant instead of recording time- or purpose-restricted revenue, especially when the grant is a time- or purpose-restricted contribution rather than a true cost-reimbursement arrangement.

Another common mistake is not including one or more of the required totals: total assets, total liabilities, total net assets, net assets without donor restrictions, and net assets with donor restrictions.

  1. Statement of Activities Errors

A nonprofit entity quantifies its revenue and expenses in a Statement of Activities. This is the same as a for-profit income statement.There can be errors here, such as omitting one or more required totals, reporting contribution revenue that is due in future periods as net assets without donor restrictions, or not recognizing solicitation costs.

Additionally, revenue transactions may not be properly classified, expenses may be improperly included in net assets with donor restrictions, and fundraising expenses may not be reported.

  1. Statement of Cashflow Errors

The Statement of Cashflow bridges the income statement and balance sheet by summarizing the amount of cash flowing into and out of an NFP organization. There can be several common mistakes here, including not netting investment purchases and sales, not displaying donor-restricted capital contributions as a financing activity, and not displaying noncash gifts for endowment or property, plant, and equipment.

There may also be errors in netting property, plant, and equipment purchases and sales, borrowing and repaying long-term debt, and failing to include payables and receivables related to investing as investing activities, securities lending activities, and financing activities.

  1. Statement of Functional Expense Errors

An organization’s functional expenses statement shows how expenses are incurred for each functional area. In a statement of functional expense error, managers of not-for-profit organizations may omit certain applicable expenses on this statement or fail to include them in their financial statements altogether. 

A few common errors of this type include failing to include certain expenses in the statement or other presentation and improperly allocating management and general expenses to other functional categories.

Including a function or program line item within the listing of natural expenses and failing to report information about all expenses in one location are other mistakes often seen.

  1. Errors in Notes to the Financial Statement

Notes to the financial statements convey information not readily apparent or not included in the financial statements themselves that are necessary for presenting the financial position and results of operations fairly. 

Common mistakes may include failing to reveal the required disclosure when presenting prior year summarized financial information; i.e., failure to disclose an adequate description of the organization’s activities, including each major class of programs, the capitalization policy for property, plant, and equipment, and discount rates used in present value measurements, such as in measuring unconditional promises to give or split-interest agreements.

Information about the nature of donor restrictions on net assets, the nature of board-designated net assets, the programs and activities for which in-kind donations and contributed services were used, and advertising costs should also be correctly disclosed.

Avoiding Financial Statement Mistakes

To avoid these common errors, it is important for a nonprofit to formally document its accounting processes in detail, including how to accept and deposit donations and pay bills. If your nonprofit doesn’t regularly back up all accounting and tax information, now is the time to start. Meticulous record-keeping is critical to avoiding errors.

Nonprofit expense accounting can be complicated and, as humans, we all make mistakes now and then. You can prevent material misstatements by developing a comprehensive monthly and year-end checklist with your accounting team. In addition, software designed to utilize the most up-to-date best practices will help you avoid these common errors and more and will ensure compliance when reporting transactions.

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.

Mar 28
0

The Top 3 Challenges of Managing Government Contracts

By | Government, Grant Management, Nonprofit | No Comments
person standing in front of sticky notes making decisions

Nonprofit organizations frequently enter government contracts. Whether contracting with town, city, state, or federal government entities, nonprofits provide a valuable service to government entities. This mutually beneficial relationship spans many areas of nonprofit work including education, health and human services, the arts, and much more.

However, there are common challenges that nonprofits face once they have contracted with government entities to provide services. We’re not talking about the obvious initial hurdles that nonprofits must overcome to secure contracts, such as winning RFP bids to be on approved vendors lists and so on. No, we are talking about challenges that arise once the contract is signed and work has commenced.

Below are the top three challenges faced by many nonprofits and possible solutions. Perhaps after reading these, you’ll recognize your own work, and the challenges you face, in similar situations. Some of these dovetail with grant management challenges, so read our article on that topic for additional insights.

Challenge 1: Contract rates do not cover administrative costs

This one can make any nonprofit feel a pinch in the pocketbook. Unfortunately, it’s all too common—in one survey conducted by the state of Oregon, 75% of respondents felt this was the number one challenge when dealing with government-based contracts.

Nonprofits need to clearly assess the overall administrative costs of all contracts and add these costs into the contracted amount. What roles will be required to administer, maintain, and support the contract? What are the salary and related costs associated with the administration, and for what duration should the contract cover them?

To address this challenge requires working with your accounting and finance team to accurately assess costs for future contracts and ensure it is written into the contract itself. If you fail to do so, you could find yourself losing margin on future contracts as administrative costs sap whatever margin you intend to make from the account.

Challenge 2: Timelines are unrealistic

This is another challenge frequently encountered by nonprofits—the timelines given to them by the government agency to achieve a stated goal are considered unrealistic. Perhaps the government wishes to see a change of X percent in Y days, but given your knowledge of the issue, that is impossible.

First, ascertain where this time pressure is coming from within the government entity with which you are conducting business. Is it coming from a politician eager to gain votes? Or is it from a time-pressed bureaucrat who simply doesn’t understand the work itself?

It’s important to determine the source of the timeline pressures so you can address them. If it’s coming from people eager to see results (and enhance their standing within the organization) then sitting down with them and helping them to understand why a slower approach may be beneficial is essential. They may agree with you that more time is needed to get better results, which will also reflect well on them.

But do your part as well when negotiating contracts. Oftentimes nonprofits are so eager to secure government contracts that they do a poor job estimating how long it will take to achieve the desired results—or they do not have all the information necessary during contract negotiations to make a sound estimate. Adding some padding to timelines ahead of the project may give you enough grace to successfully achieve the desired outcomes or at least negotiate a longer timeline.

Challenge 3: Burdensome reporting requirements

Red tape, red tape, and more red tape—if you feel like you’re tangled in it, you’re not alone, as many nonprofits in the previously cited Oregon study also felt that reporting requirements were often burdensome.

To make reporting less burdensome, keep good records along the way. Using a cloud-based fund accounting system can make the financial reporting easier, for example, as it can directly chart expenses and revenues to specific budget lines.

Some nonprofits find that having a staff member on the team dedicated to the government contract and solely responsible for reporting requirements takes the burden off the rest of the team, enabling them to deliver services without worrying about completing the proper reports  You may wish to plan on a portion of a team member’s time for this function for your next government contract to avoid the feeling of always working on reports, rather than the delivery services for which your organization has been contracted.

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.

Nov 22
0

Understanding the Discount Rate: FASB Lease Accounting Standard

By | FASB, Nonprofit | No Comments
people looking at a laptop on a desk which has a graph

In November 2021, the FASB board rejected an extension request for the effective date of the new lease accounting standards. That means that the time is now imminent for nonprofits to adopt these requirements.

Your organization’s discount rate is an important item to both understand and determine as you begin the implementation of Accounting Standards Update No. 2016-02 (Topic 842). The discount rate impacts both lease classification and liability.

Importance of the Discount Rate

To determine lease liability, the discount rate is applied to all future lease payments. This is needed to calculate the present value of lease payments. Because a right-of-use asset is based on lease liability, the discount rate will impact the initial value of a right of use asset.

Determining Lease Classification

There are two lease classifications:

  • Finance lease
  • Operating lease

To determine the classification of a lease, consider whether the present value of lease payments is equal to or almost all of the fair value of the asset.

Now you can see how the discount rate can impact the income statement and the balance sheet. It depends on how you determined the lease classification.

Determining Discount Rate

For lessees, the discount rate is the rate stated in the lease. If the rate cannot be readily determined, you can use either the incremental borrowing rate or the risk-free rate.

What if a lease needs to be remeasured? Then a new discount rate is established at remeasurement.

You Can Elect the Risk-Free Rate

To make things easier, entities that are not public may make an accounting policy election to adopt a risk-free discount rate as their discount rate instead of the incremental borrowing rate. This rate should be applied using a term comparable to the lease term based on the earliest date the lease is presented in the financial statements.

However, if the rate is readily determinable from the lease agreement, that rate should be used instead of the risk-free rate. The risk-free rate can only be used when the rate implicit in the lease is not readily determinable. You can find risk-free rates on the Treasury website.

The bottom line: the rate to be used must be the one that best reflects the accuracy of the transaction and be easily determined. Nonprofits should create various financial what-if scenarios to see how each discount rate affects their income statement and balance sheet. Then choose the one that makes the most sense from both an accuracy and transparency situation as well as what makes the most sense for their financial needs.

Welter Consulting can assist you with this determination and other questions—contact us for an appointment.

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.

Nov 15
0

Improving Communications with Data and Trend Analysis

By | Accounting, Data, Donations, Nonprofit | No Comments
people looking at papers on a desk with graph overlay

Charts, graphs, and financial reports may seem like they don’t say much to those outside of the accounting and finance department. But with the right data and trend analysis, the information contained in these reports can inform and improve constituent communications.

The Tip of the Iceberg

It’s an old cliché, but a good one—the tip of the iceberg. If you imagine an iceberg, you can only see the tip of it. The majority of the iceberg is underwater but it’s probably the more important part.

The same goes for your organization. The data that you can easily find is the “tip of the iceberg” and readily available. And it’s usually what your team uses to base their decisions.

However, what’s going on underneath the surface is often the more valuable information. Getting to it is the challenging part.

How Nonprofits Can Leverage Data

Many organizations only dig at the surface level into their data. They run basic financial reports to gauge how fiscally solvent an organization is, or which programs require more funding and leave it at that. But the data that can be used to assess funding can also be used to dig deeper into issues such as program demand, program use, and more.

Each nonprofit is unique and tracks different data. But, in general, nonprofits can mine their data to find information to help them improve programs, improve donor communications, and ensure transparency.

Look beyond your existing technology for additional data. Although your current accounting system may provide plenty of data, other data exists. If your nonprofit sells items, look at warehouse and inventory reports. If programs provide participation and survey data, add that to the data repository for examination. Consider many sources to leverage all of your data and build a stronger, better organization.

Improve Programs

Nonprofits that track program participation can look more closely at program data to update their offerings. Programs that receive higher participation, for example, should be examined to determine if they can be spun into additional opportunities. For example, an animal shelter offering a spay/neuter clinic may find that a free rabies vaccination clinic is also in high demand and brings people into the shelter to view (and potentially adopt) homeless pets. An education nonprofit that finds its free mathematics tutoring program for elementary school children in high demand may wish to expand into the high schools and so on.

Better Donor Communications

The same data that reports on your program activities can also be leveraged to improve donor communications. Program participation and success data can be parlayed into donation campaigns demonstrating the efficacy of your offerings. People like to give to successful initiatives as it makes them feel that their donation is worthwhile, so demonstrating how successful the programs are can go a long way towards encouraging additional donations.

Enhanced Visibility

Successful nonprofits know that increasing visibility into their activities and finances is an excellent way to court donors and participants. The more transparency and visibility into their actions, the greater the trust they engender with the public, which in turns leads to better utilization of their programs and increased donations. Sharing the data from your systems and using it to for storytelling purposes can take your nonprofit to new levels.

Increasing Nonprofit Success in a Tough Economic Climate

Inflation and global unrest have created a climate of uncertainty, and this in turn means fewer people donating to nonprofits … or does it? It doesn’t have to lead to a downturn in donations. Instead, leveraging stories and data, improving program offerings based on data, and ensuring transparency and communications can build up programs and services during times when other nonprofits may be struggling. For those nonprofits that can dig deeply into their data, they may find information that can lead them to greater improvements across the 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.