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February 14, 2014 By Eric Plato Leave a Comment

Preparing for the Audit

You have just come to the end of your fiscal year. Now it’s time to get ready for the audit. For many people this is the time they dread. It’s inconvenient, the auditors are nosy and ask too many questions, or they are worried about what they might find.  We’ve all felt this way at one time or another but with good preparation the audit can go smoothly.

The first thing you need to clarify is the role of the auditor coming to your business. Generally they are there to audit your financial statements not to do all the work to prepare them.  You should have audit working papers and draft statements ready when they arrive unless you have agreed to something else beforehand. You should also specify if you would like them to prepare your charity tax return which they will do for an extra fee of course.

Your auditor will give you a list of what they require before they come on site. Make sure you have these items ready as it will save you time during the on site work. You can expect that what they asked for the previous year audit, they will need again for the current year.  It’s a good idea to start getting things in order before the end of the year. For example they will want to see minutes of board meetings. You can set up a folder at the beginning of the year for this and add them as they are ready. You know they will ask to see copies of some invoices so make sure your filing is up to date and organized.

If you want to reduce some of the workload at the end of year,  preparing reconciliations on a monthly or at least quarterly basis will be very beneficial.  I am not just talking about the bank reconciliation which should be done very month, but the other balance sheet accounts. Very often so much focus is on the income statement revenue and expense accounts the balance sheets accounts are neglected.  Regular reconciliations will pick up omissions and errors earlier.  Prepaid expenses set up at the end of the previous year are sometime not moved to expenses in the current year until someone notices it months later.  Accrued payables or liabilities is another account that can have old items appearing that should have been cleared in the first month of the year.

Audit Preparation Eric Plato Training and Consulting

If you have capital assets in your organization you are sure to be asked for documentation on them.  Keep a file with the invoices for any capital assets you purchase. Have your policy on how you will depreciate assets for your organization available.  If you have leased equipment you should keep a file with the lease agreement along with the amortization schedule. If you have investments keep copies of the investment statements and any other documentation on income earned, capital gains or losses, and investment management fees.

The auditors will be asking questions about each of the lines on the audited statements. You can save yourself and the auditors time by having explanations prepared ahead of their arrival.  Basically you should be able to explain what each line on the statement represents and why the amount has increased or decreased from the previous year. These are the types of questions which can take a long time getting answers when the auditor is on site, so it makes much more sense to do this work before they arrive.

In summary you can anticipate what the auditor is going to want and ask for by looking back at to the previous year.  Also, if there is something you are really hoping they won’t ask about you can be sue they will.  Sort out the issues before they arrive.  Most importantly, you need to remember they the auditor is working for you.  Don’t be afraid to ask questions if you are unsure about something.  You are the client. They are providing a service to you.

 

 

 

 

Filed Under: Consulting, Training Tagged With: audit, audit preparation, Audited Statements, Not for Profit

February 8, 2014 By Eric Plato Leave a Comment

Cash Flow Budgeting in Not for Profits

One of the things I frequently noticed during my experience working with not for profit organizations is the lack of time given to managing cash flow.  Organizations may spend weeks or even months creating a balanced budget for board approval and leave cash management to chance.

Cash flow is just as important to manage as the operating budget. This is particularly true in small organizations or those where there is only one major funder. You can have a balanced budget and still face serious cash flow issues. Operating budgets show you the revenue and expenses planned for the year. Cash flow budgets detail the amounts and timing of  actual cash flowing in and out of the organization throughout the year.

Salaries are usually a large portion of the expenses for a not for profit organization. Full time staff are paid out at a regular rate throughout the year. However, your cash coming in may not be received on the same regular basis. Problems can occur if you have a major funder where you are paid based on the submission of a claim. If the claim is submitted after the end of the month and you have to wait 60 days for payment you may not have enough money to cover salaries and other expenses while you wait for the cheque to arrive.

Even if you have diversified funding sources there are likely to be months when cash flows coming in are high and others low. Fundraising dollars typically peak in the November to January period but dip during the summer months. The expense for your organization are not likely to follow the same pattern.

Purchases of capital items can have a enormous impact on cash flow. When you purchase a capital item the expense does not appear on the operating statement. It will be amortized over a period of years and you will only see a portion of the actual amount of the purchase. A  cash flow statement will reflect that that the cash to pay for this has left your bank account at the time of purchase.

Cash Flow Budgeting Eric Plato Training and Consulting

You need to be doing a cash flow projection as you prepare your operating budget. If you are able to identify potential cash flow issues before the year begins you are in a better position to take action.  If you are an organization with one major funder you could go back to them to discuss the issue to see if you can be given an advance to manage your cash flow issues. In fact I believe it’s always important to read carefully the payment terms on any contract you receive. This is something that is best negotiated before the final contract is signed. If you are unable to negotiate the payment terms you have the option of going to your bank to apply for a line of credit. Again it’s much better to be arranging for a line of credit months before a potential problem rather than a couple of days before payroll.

There are other factors that play a role in cash flow management. Two of the major ones are accounts receivable and accounts payable. Accounts receivable are amounts owed to you.  Aside from government funding you may have other individuals or funders who you bill for services.  You need to keep on top of these amounts to ensure you are being paid in a timely manner. On opposite side is accounts payable. These are payments you owe third parties.  It may be easiest to pay invoices when they arrive.  But many suppliers give payment terms of 30 days.  Are you taking advantage of this? Adjusting your disbursements to align with the payment terms offered may assist in easing your own cash flow issues.

We tend to focus on the cash flow shortfalls but cash management includes times when you have excess cash. Rather than having  excess cash sit in the operating bank account you could be using this cash to earn income either by purchasing GIC’s or possibly investing the funds.  These decisions depend on your future need for the cash and your tolerance for risk.  Your board should be involved in these types of decisions.

Conclusion

Cash flow budgeting is too often neglected in not for profit organizations.  The board is ultimately responsible for the financial health of the organization. They should be asking questions about cash flow as they approve budgets and throughout the year particularly when there have been issues in the past. There are various approaches to deal with cash flow issues which will vary depending on the complexity of the organization.  Remember, cash management includes both shortfalls of cash and excess cash.  The key is to be proactive. Make cash flow budgeting a part of the overall budget process.  Make cash flow management and reporting part of the overall financial management and reporting.

 

 

 

Filed Under: Budgeting, Consulting, Training Tagged With: budgeting, cash flow, Not for Profit

February 4, 2014 By Eric Plato Leave a Comment

Social Enterprise

Everyone seems to be talking about social enterprise these days. Many people think this is their solution to diversifying their revenue streams and solving funding shortfalls elsewhere. While starting a social enterprise can have many benefits, most organizations don’t realize the amount of work that goes into making a social enterprise successful.

Social enterprises are businesses operated by a not for profit with the dual purpose of generating income by selling a product or service in the marketplace and creating a social, environmental or cultural value.

social enterprise food plato training and consulting 6

Before you start a social enterprise make sure you’ve done your homework.  Assuming you have an idea for a business, is best to consult a lawyer who can give you an opinion if you will be in compliance with CRA.  A social enterprise is going to require an investment. A business plan will need to be done if your board is going to agree to this type of investment. The business plan will need the address the issues of what product or service you plan to offer, the skills and expertise needed to run the business, pricing, governance, and of course financial projections. The other key component of the plan is how you will measure success. Remember the measure of success for a social enterprise comprises both financial and social elements. Boards often focus solely on the financial measures the social impacts are neglected.  Determining what all the measures of success will be at the beginning will help keep you on track.

Operational Issues – Social Enterprise vs Not for Profit

Running a business requires people and skills that your current staff may or may not have. If you are selling goods or services you may be faced with taxation issues you never encountered before. Are your staff knowledgeable about taxes if you are selling across different provinces or outside the country? Do you have the accounting software to handle the transactions accurately and efficiently?

Financial decisions made in your not for profit may not be appropriate for your social enterprise. For example promotion and marketing are often one of the first cuts made when budgets are tight whereas cutting these budget lines for your social enterprise could be a critical mistake.

These are just a couple of examples of issues that may apply to your situation. Depending on your particular organization there are likely many more to consider that your business plan should identify and address.

Conclusion

There are many successful social enterprises but as in the profit and not for profit sector not all ventures are successful. Operating a social enterprise can be very complex. The key is to take the time to complete a business plan including your measures of success. Your financial measure of success may lag your social measures of success in the first couple of years so it’s important that you understand that this may happen and highlight the success you are initially achieving.  I’ll be talking in more detail about measuring social impact in the weeks to come. Stay tuned!

 

 

Filed Under: Budgeting, Consulting, Social Impact Tagged With: business plan, Not for Profit, social enterprise

January 23, 2014 By Eric Plato Leave a Comment

Gender Budgeting for NGO’s

While many of you may have heard of gender and gender budgeting, do you really know what it means? It’s more than just adding a line in the budget titled day care expense. To understand what is involved in gender budgeting there are a few basic concepts you need to understand.

Gender Equity

Gender equity means being fair to women and men. To ensure fairness, measures are often needed to compensate for historical and social disadvantages that prevent women and men from otherwise operating as equals. Equity leads to equality.

Gender Equality

Gender equality means that women and men enjoy the same status and opportunity to contribute to national, political, economic, social, and cultural development, and to benefit from the results.

Gender Budgeting and Equity Eric Plato Training and Consulting

Gender Budgeting

Gender budgeting is an assessment of budgets incorporating a gender perspective at all levels of the budgeting process and restructuring revenues and expenditures in order to promote gender equality.

Where to Start – Analysis

Before you get started with crunching numbers there are a few questions you should consider first.

Who is the target for the proposed program or project and have women been consulted?

Have they been involved in the development of this program or project?

Does the project challenge the existing division of labour, responsibilities and opportunities?

What specifically can be done to encourage women to participate despite what may be their subordinate position?

What is the long term impact of women’s increased ability to take action to solve problems?

Building the Budget – Considerations

You will need to gain an understanding of gender relations, the division of labour between men and women and who has access to and control over resources. It’s important to recognize the ways women and men work and contribute to the economy, their family and society.  Participatory processes should be used and include a wide rage of female and male stakeholders. Barriers to women’s participation and productivity need to be identified and you will need to gain an understanding of women’s practical needs and interest and how to support them. Consider the impact of the project on men and women and identify the consequences to be addressed. Finally you need to establish baseline date and set measurable targets while identifying expected risks and ways to mitigate them.

Summary

Gender budgeting is not just about the content but also the process involved in budget making. It’s about how decisions are made, who makes them, influences them and who is denied influence. A system which purports to be gender neutral but which is in fact gender blind or bias must be transformed to be gender sensitive and gender responsive. Gender budgeting requires ongoing commitment to understanding gender, which includes analysis, consultation, budget adjustments to take into account the changing needs of participants.

Gender budgeting is talked about in the NGO community which respect to overseas projects but concepts of gender budgeting can be applied in any project regardless whether it takes place overseas or here at home. Take a look at some of your previous projects and analyse if you took gender into account. Would you have done anything different? Something to think about during this next budget cycle.

Filed Under: Budgeting, Consulting, Training Tagged With: budgeting, gender, gender equality, ngos

January 16, 2014 By Eric Plato Leave a Comment

Not for Profit Budgeting – Reserve Funds

One of the most frequent topics I get asked about during financial training is what is a reserve fund and how much should we budget for this. The board of the organization should be taking an active role in developing this policy.

What is a reserve fund?

Organizations create reserve funds to set aside money for a particular purpose. Organizations that own a building or have significant dollars invested in equipment may have a capital or building reserve fund.  These funds are used specifically for capital projects. Most commonly found is a general reserve fund which is set aside for emergency use.

It is good practice for not for profits to have a reserve fund. If you were to lose a major funder the reserve will provide the money and time to replace the lost funding, reorganize, or in the worst case scenario wind down operations.

What is the Appropriate Level of a Reserve Fund

So how much should you have in a reserve fund? There is no published standard that your auditor will tell you but three months worth of operating funds is one level that is often quoted.

Is there a problem with having too much in a reserve?  If you had a full year of operating funds in a reserve you would likely get a lot a questions from funders.  Given the competition for funds they may look at your organization and think you don’t need the funding as much as other  organizations. Your donors may also question why you are taking their money and not spending it on charitable purposes.

Eric Plato Training and Consulting teaching about the importance of reserve funds

How to Build a Reserve Fund

It can be very difficult to build a reserve fund particularly if the majority of your revenue is generated from government contracts. You need to spend all the money received from government funded projects on the program or else it gets returned to them.  Sources of revenue that could be allocated to the reserve fund could be fee for service, interest earned on investments, other undesignated funds. During your budgeting process you can designate these amounts as surplus funds to be transferred to the reserve at the end of the year. Any other unexpected surplus could also be allocated be added to your reserve.

Other Considerations

Once you have a reserve fund established you will need to determine where this money will be kept.  It could be set up in another account with your bank.  Other options may include investing it in bonds or maybe even stocks. The decision will depend on when you think you may need to access this money and your risk tolerance.  The other key component of a reserve fund policy is what is the mechanism to withdraw money to operations.  Reserve funds should require approval from the board to be utilized.

Conclusion

Every not for profit organization should consider establishing a reserve fund if it does not exist already.  If you are a board member it’s important for you to know if a reserve fund policy exists and if not ensure one is created which addresses the questions of the purpose of the fund, the target amount you would like to have, how to build the fund, and approval process for withdrawing funds.

Filed Under: Budgeting, Consulting, Training Tagged With: Financial Strategy, Not for Profit, Reserve Funds

December 23, 2013 By Plato Training & Consulting Leave a Comment

About Eric

A Certified Management Accountant I started in the charitable sector in 1990 working at the YMCA of Greater Toronto and remained
in the sector ever since. Over the years I have held many roles in the accounting world most recently as Director of Finance at Frontier College.

In addition to working in the sector I served on nonprofit boards, often as Treasurer, for a number of years. Between board and work experience I have been involved with organizations with budgets ranging from under $100,000 dollars to over $100,000,000 dollars and in sectors including, social services, international development, health, environmental, cultural/heritage and employment.

In recent years I have become involved with social accounting researchers at the Ontario Institute for Studies in Education (OISE/University of Toronto) in applying social accounting concepts in the sector that can help organizations measure the impact they have on the communities they work with.

Throughout my career I have always enjoyed teaching and supporting staff in the area of financial management. I have delivered training to individuals, small staff groups and to larger groups of various nonprofit umbrella organizations. The format has ranged from one hour webinars to two day hands on training. Topics include best practices in budgeting, demystifying the audited financial statements, internal controls in a one person shop, how to spot signs of financial trouble, measuring what really counts, among others. In all cases my goal has been to deliver information in a way which makes participants feel more confident and comfortable about finances in their organization.

Filed Under: Consulting

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