May 11
0

3 MD&A Preparation Tips for Nonprofits

By | Nonprofit | No Comments
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Management’s discussion and analysis (MD&A) explains how an organization performed financially as well as how it has furthered its mission from a management perspective. In addition to providing a strategic context for the financial statements, it promotes transparency and enhances readers’ understanding of the organization’s finances, stewardship, and prospects. Although MD&As are not required of not-for-profit entities (NFPs), they can provide valuable information about their financial and non-financial performance. 

MD&As do not have a specific format, so you don’t have to write a long, detailed essay. Ideally, an MD&A should be written clearly and concisely, focusing on the most critical aspects of the NFP’s mission and purpose. Consider these three preparation tips before you begin, particularly if this is your first time assembling an MD&A.

#1 Development Planning

The first step to successful MD&A preparation is planning how it will be developed. Planning ensures efficiency in the process and allows for more effective delivery. To begin planning, you should first decide who will be part of the core group putting this analysis together. Your team should include people from all important areas of the organization, such as HR, legal, and program services.

Once you have your team, decide together on the project’s purpose and goals. Finally, part of your planning should be deciding if this project will be part of your annual report or if it will be a stand-alone report.

#2 Structure Your Content

Once you have a game plan in place, it’s time to structure your content to showcase your vision and strategic focus in an engaging manner. To do this, you must consider the perspective of your readers. Consider who your readers will be, what they need to understand, and which questions they may have after they review your report.

Your introduction should cover the organization’s mission, structure, and strategic objectives. You might also want to include Key Performance Indicators (KPIs) and how they reflect progress toward the organization’s goals. Then delve into qualitative insights that explain the results of your NFP’s operations and financial position, and any additional details and analysis for selected areas.

Your overall structure should focus on three things: 

  • Results that are relevant to the NFP’s ability to fulfill its goals.
  • Qualitative discussions that may add to what is found in the financial statement.
  • Strategic insight into why the organization did or did not achieve its goals and how those factors may affect the NFP’s ability to achieve its objectives. 

Other items to include are charts and graphs, excerpts from the financial statement, historical trends, benchmark data, and other helpful data. Follow this by highlighting key risks and opportunities that your NFP may encounter, and then wrap up with a concluding statement summarizing the overall outlook of the organization.

#3 Review the MD&A

To ensure that all your bases are covered, reviewing the MD&A once it’s finished is critical. Enlist the help of your external auditor, board and audit committee, senior leadership representative, legal counsel, and chief communication officer. These key people can assess the clarity of your MD&A from the perspective of people who are not financial professionals and can advise you on areas that need improvement.

A well-written and informative MD&A provides clarity and insight into the organization’s financial performance and mission-related impacts. Ensure that your MD&A has a strategic purpose, is easy to understand, and is practical and relevant for your organization’s audience.

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.

May 09
0

Avoid These 5 Common Financial Statement Errors

By | Accounting, Nonprofit | No Comments
person sitting on sofa with open laptop and credit or debit card in hand

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.

May 05
0

Accomplish More in Your Accounting Business with Mindfulness Meditation

By | Accounting | No Comments
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Mindfulness may seem like an odd topic in the world of accounting, but it’s a topic worthy of your consideration for several reasons. Practicing mindfulness can reduce stress, improve focus, and help you accomplish more in your accounting business. It’s easier than you think to begin a meditation practice. All you need is a comfortable place to sit and breathe.

What Is Mindfulness

Mindfulness is a mental state achieved by focusing on the present moment, including thoughts, feelings, and bodily sensations, without judgment. According to Jon Kabat-Zinn, author of Full Catastrophe Living (1990), mindfulness has seven basic pillars. 

Non-Judgment: You must become an impartial witness to your own experiences without judging or categorizing them. By doing this, you release yourself from the patterns of reacting and repeating thoughts, feelings, and actions.

Patience: Cultivating patience means you accept that things happen in their own time. You allow yourself kindness and compassion so you can deal with the situation as it is instead of trying to rush through it.

Beginner mind: A beginner’s mind watches as things unfold with curiosity, but without trying to force or control a situation, much like a child seeing things for the first time.

Trust: Learn to trust your own feelings and believe that no one knows you better than you. You don’t have to look outside of yourself for understanding.

Non-Striving: Non-striving means you release the need to constantly change a situation or feeling. 

Acceptance: Let yourself see a situation for exactly what it is without imposing your feelings as a filter. Focus on the here and now, not the “what if.”

Letting Go: Instead of clinging to a desired outcome in a situation, learn to let it go. Regardless of your feelings, what needs to happen will happen, so just let it be.

Why Mindfulness Is Important for Success

Mindfulness is critical for success as an accountant because the skills you cultivate while practicing mindfulness will also carry over into your time management, productivity, and ability to handle stressful situations at work. 

You’ll interact better with your accounting clients through the practice of mindfulness. You’ll communicate more clearly, collaborate more fully, and develop a stronger sense of wisdom to help you confidently advise your clients. 

This starkly contrasts with the modern mindset of “push, push, push” to be in control, work more, and accomplish more, which is a common mindset among accountants who feel the pressures of handling multiple accounts, clients, and deadlines. But a Control Mindset actually creates a lack of control because it forces you to look beyond the here and now and focus on everything at once while accomplishing very little.

Meditation: It’s Not What You Think

So how do you learn to be more mindful? Meditation is the key to a more relaxed, mindful state of mind, but meditation isn’t what you think. You don’t have to sit on the floor with your legs crossed, chanting “Om” to meditate. In fact, there are many ways to meditate, including a relaxing walk, yoga, or even dancing. The most important thing to understand is that mindfulness meditation is a practice. That means it’s an ongoing thing, not a once-and-done activity.

To do it, just find a quiet place to sit, and wear something comfortable. You can even practice at work on your lunch break if you’d like. Consider an app like Insight Timer to give you a gentle alarm after a certain time has elapsed, so you don’t have to worry about meditating too long and being late. Other helpful apps are Calm and Headspace.

Once you are seated comfortably, close your eyes, and focus on your breath. Breathe in and out through your nose and pay attention to the rise and fall of your belly. When thoughts cross your mind—and they will—just witness them. Let them float past like a leaf floating on a gentle stream. Then return your focus to your breath again. If your mind wanders and you get lost in a thought or feeling, just acknowledge it and then return to your breath. When you first start meditating, this will happen often. Don’t worry. It will get easier the more you practice. You can start with just five or ten minutes of meditation; over time, you may build up to 20 minutes or more. Soon you’ll wonder how you got through the day without it.

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.