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Finance & Accounting Overview

Financial Management and Accounting OVERVIEW

Financial management and accounting are critical functions in every organization, and that is true of nonprofit organizations. Investors in for-profit organizations expect the organization to generate profits. The supporters, donor and contributors to a nonprofit assistive technology (AT) re-use organization expect the organization to demonstrate that it uses resources efficiently to meet the needs of prospective users. Both for-profit and nonprofit organizations use financial reporting to measure success. Success in the stated mission encourages additional investment (or support for) the organization.

 

Good financial management is key to the survival and sustainability of the nonprofit organization. It is essential to the retention of tax-exempt status under the Internal Revenue Code. Nonprofit organizations also are expected to comply with Generally Accepted Accounting Principles (GAAP), a collection of widely accepted standards and principles for maintaining and presenting accounting information.

 

Purpose

 

The purpose of this module is to outline the needs in the area of Financial Management and Accounting, and to point toward easily-accessible resources with current information. No attempt will be made to incorporate all of the necessary information into the module. General information will be offered with models of financial documents intended to save time for the user.

 

Who needs financial information?

 

There are many “customers” with an interest in the AT reuse center’s financial information.

The Board of Directors needs financial information to make decisions about organizational direction and fundraising. Administrators and managers need financial information to evaluate the needs and performance of the program operations. Donors and supporters want to know how their contributions are being used. Suppliers (who are sometimes creditors) want to know if the center will be able to pay its bills. Banks want to know if the organization is a good risk for a loan or line of credit. The Internal Revenue Service requires annual financial information to prove compliance with the regulations for tax-exempt status. Employees want to know about the stability of the organization and their jobs. Customers want to know if the program is able to sustain itself. The general public has a legal right to know how charitable funds are spent.

What is the Board’s responsibility?

 

The Board of Directors should have a standing Finance Committee to oversee financial planning and accounting operations. This committee should have primary responsibility for reviewing budgets and timely financial reports, even though the entire board receives this information. Members of the Finance Committee should have experience in dealing with financial management and/or accounting information. The Board should have an annual audit of financial operations by an external professional accountant.

 

If the organization is not large enough to have a knowledgeable professional on staff, then someone in a management role must have or develop accounting skills, and the services of a professional accountant may be needed part-time on a contractual basis. If several people are involved in accounting-related functions, duties should be assigned in a manner consistent with GAAP principles.

 

What is the role of financial management?

 

Financial management is primarily a planning function that includes budgeting and risk management. The goal is to frame a realistic operating budget and to mitigate potential financial risks faced by the organization. In addition, financial management should oversee the formulation of policies and procedures that comply with all state and federal laws regulating the organization, including records retention.

 

A budget is a working document that predicts all income and expenditures for the organization for a specific period – usually at least one year. The budgeting process enables the organization to forecast its needs, both for the current year and long term. The following accounting documents should be prepared and kept current every year:

Annual operating budget for current fiscal year Contingency plan:  Steps to be taken if circumstances change Three-year forecast budget Long-range capital expenditures budget

 Risk management allows the organization to protect itself from potential loss or harm through the acquisition of insurance. Few organizations are fully insured against loss, so the determination of types and levels of coverage balances willingness to take risk and suffer loss against the potential interruption of operations and/or financial liability. Types of insurance that should be considered are:

Property and casualty insurance (fire, theft and other damages) “Key person” insurance to protect against the loss of a key administrator Liability insurance to insure against adverse actions by directors, officers, employees and volunteers Vehicle insurance to insure automobiles and drivers (property and liability)

What is the role of the accountant or bookkeeper?

 

The role of accounting is to track financial performance of the organization in a manner consistent with GAAP, and to keep management and the Board of Directors informed about the financial condition of the organization. This includes tracking actual performance against the current budget. Accounting activities in the nonprofit organization can be grouped into the following major functions:

 

           Manage expenditures and cash disbursements       

Formulate purchasing policies and procedures Solicit bids from vendors and contractors Track accounts payable Review and approve employee expense reimbursements Manage payroll or outsource to third-party provider: track/verify time worked, calculate and pay employment taxes and other withholding, prepare payroll checks and direct deposit transmissions

             Manage donations, contributions and other accounts receivable

Value donations for inventory purposes Track contributions Process cash receipts Process credit card payments Track physical inventory of devices         

            Manage asset and liability accounts

Maintain cash journals Perform monthly bank reconciliations Track the location of the organization’s property and equipment assets Track prepaid expenses Track depreciation of organization’s assets Negotiate leases Negotiate loans or notes payable

            Report financial information

Report expenses at regularly-specified intervals Prepare monthly financial statements comparing performance to budget Prepare quarterly and annual financial statements Create regular reports for donors, contributors and partners Track costs by activity or service (outcomes measurement) Prepare annual tax filings Keep tax returns readily available for public access

What are some Quality Indicators for financial management?

 

            The following are indicators of quality and “best practices” for financial management and accounting.

1.      Policies and procedures are in place to comply with the IRS requirements for tax-exempt status.

2.      Policies and procedures for accounting activities comply with GAAP.

3.      Policies and procedures are in place to comply with state and federal records retention laws.

4.      The required records are readily available for public inspection as required by the IRS.

5.      Services are provided to users in a cost-effective manner.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTERNET LINK WARNING

Please note that by selecting an Internet link you will be directed to an external site, and the Pass It on Center does not control the content of the site.

 

DISCLAIMER

This work is supported under a five-year cooperative agreement # H235V060016 awarded by the U.S. Department of Education, Office of Special Education and Rehabilitative Services, and is administered by the Pass It On Center of the Georgia Department of Labor – Tools for Life.  However, the contents of this publication do not necessarily represent the policy or opinions of the Department of Education, or the Georgia Department of Labor, and you should not assume endorsements of this document by the Federal government or the Georgia Department of Labor.

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Other Information

Title: Finance & Accounting Overview
Module: Finance/Accounting
Author: Trish Redmon
Audience: Administrator
Sub Title: Importance of Financial Management and Accounting
Procedure:
Organization Source: Pass It On Center
Last Reviewed: 10-25-2009 7:19 PM