September 21, 2017
 
New Year’s Resolutions to Make Your Finances Fit for 2014

By Paul Konigstein

Paul Konigstein
A new calendar year, which for most nonprofits is the start of their fiscal year, is an excellent time to review a number of accounting and financial practices to ensure your organization is ready to handle whatever may come its way over the next 12 months.

Consider the following:

1. Get Your Chart of Accounts in Shape

Your chart of accounts is the framework upon which your financial reports are built. If your reports don’t tell you at a quick glance what you need to know, then your chart of accounts may be the ultimate culprit. Check your chart of accounts for these following common problems:

  • Are you mixing and matching? – Don’t mix up variables in the same section. Your account code should have a distinct section for type of expense, activity, program/department, and funding source. For example, don’t have expense codes for training and travel, because employees who travel for training won’t consistently use the same code, which will distort your comparisons of expense to the overall budget. Travel is the expense code and training is the activity code.

  • Are you all over the place? – Similar account codes should be grouped together to simplify report writing and summarization of data and reduce the risk of missing or double counting of the data. For example, don’t mix salary and fringe benefit codes.

    Best Practice Problematic Practice
    5000 Regular Salary 5000 Regular Salary
    5010 Overtime 5010 Payroll Tax
    5020 Bonus 5020 Medical Insurance
    5100 Payroll Tax 5030 Overtime
    5110 Medical Insurance 5040 Bonus
    5120 Pension 5050 Pension


  • Are you living in the past? – Your accounting systems shouldn’t show inactivated or deleted accounts that are no longer relevant. For example, if you have closed a site, close down its account code as well.
2. Give your Policy and Procedure Manual a Workout

If the layer of dust on your policy and procedure manual is so thick that allergy sufferers avoid your office, your financial controls are likely falling down on the job. Make sure everyone is on the same page with regard to protecting your assets with the following solutions:

  • Get up to speed with new technology. – As technology changes, so must your policy and procedure manual. For example, if the accounts payable section focuses on procedures for issuing checks and you now pay most vendors electronically, add procedures for generating the payment file and uploading it to the bank.

  • Align with Form 990 – The revamped IRS Form 990 introduced at the beginning of this decade asks whether you have conflict of interest and whistleblower policies. Save yourself the embarrassment of answering “no” and add these policies to your manual.

  • Prepare for a disaster – A little over a year ago our neighbors in New York and New Jersey received a lesson in disaster preparedness named Superstorm Sandy. Before the big hurricane, blizzard, or manmade disaster hits Massachusetts, make sure you have procedures for paying employees and vendors and serving clients in the event your office becomes uninhabitable. If you have emergency reserves, have a policy and procedure to govern how you can draw them down.

  • Pay attention to grant requirements – As the pool of available grant funding (especially from governments) shrinks, grantors are examining nonprofit finances more closely to winnow the pool of potential grantees. The frequency of funding source audits is increasing as is emphasis by donors on compliance requirements. Make sure your policy and procedure manual addresses your grant compliance requirements before the auditors arrive.
3. Give Your Organization a Checkup

You’ve updated your Policy and Procedure Manual, but you’re not yet ready to put it back on the shelf. Here’s what you need to do to make your organization the best that it can be in 2014:

  • Check your vital signs – Review the policy and procedure manual to assess how well your organization follows the policies and procedures it has identified as best practices. Where you fall short of the best practice, implement corrective action and reassess progress every quarter to make sure you aren’t falling back into old habits. If you don’t think you can do this objectively, bring in an outside consultant to lead the process.

  • Improve your vital signs – You don’t operate in a vacuum. You are part of a community of nonprofits who all have policies and procedures. Engage with your community and compare your policies and procedures with those of similar organizations. Benchmark to the group consensus and align your policies with the benchmark. Your sector or regional nonprofit association or an outside consultant may have already done this. Check there first to avoid reinventing the wheel.
4. Exercise Your Right to Input on Accounting Standards

The Financial Accounting Standards Board (FASB) Nonprofit Advisory Committee (NAC) is expected to issue a discussion paper in the first half of 2014 to request input from nonprofits on proposed changes to accounting standards:

  • Net Asset Classifications – Most non-accountants, including many of your board members and donors, don’t understand the difference between unrestricted, temporarily restricted, and permanently restricted net assets and the impact of these classifications on how much money you actually have available to spend. The NAC is expected to present a proposal to reclassify net assets to make them easier to understand.

  • Cash Flow Statement – If you are not sure of the difference between an Investing Cash Flow and a Financing Cash Flow and whether this cash represents operating or extraordinary activities, you are not alone. The NAC is expect to propose a clearer method of categorizing cash flows and a direct (cash inflows and cash outflows) rather than indirect (changes in balance sheet account balances) statement presentation.

  • Impact – Evaluating the effectiveness of a nonprofit is no longer about the ratio of general and administrative expenses to total expenses. Today, effectiveness is about measuring the impact of the organization on its clients and community. Impact is a concept that cannot be accurately conveyed in financial statements. Therefore, the NAC is expected to propose that the financial statements be accompanied by a narrative in which management discusses the organization’s impact.
Paul Konigstein, a senior consultant with Accounting Management Solutions, has assisted nonprofits for more than two decades as a controller and chief financial officer. Contact him at pkonigstein@amsolutions.net.
December 2013

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