Board and Staff Roles in Financial ManagementNeighborhood Partnership FundApril 19, 2007

Kay SohlTechnical Assistance for Community

Services

Board Financial Oversight

•What are you looking for?

•What are signs of financial health and effective financial management?

Key Financial Goals

•Use resources to fulfill mission

•Liquidity: cash when you need it

•Solvency: positive net worth

•Compliance with restrictions

Board and Management Financial Oversight

Challenges????

Financial Challenges

•Complex budgeting

•Accounting challenges

•Financial reporting

•Risks and opportunities

Multiple Lines of Business

•Real estate development

•Property management

•Asset management

•Tenant services

•Community economic development

•Other

Financial Planning

• Multi-function annual budget

• Real estate development budgets

• Property management projections

• Grant and contract budgets

Planning for Multiple Entities

•Operations and development within primary nonprofit

•Single asset entities

•Low Income Housing Tax Credit (LIHTC) projects

Accounting Challenges

•Cost center structure

•Tracking restrictions

•Multiple entities

•Dependence on work of outside entities

More Accounting Challenges

•GAAP accounting

•Accrual accounting in a cash focused world

Financial Reporting

Internal users:•Executive Director,

construction, program, and asset managers

•Board of Directors

External users:•Lenders, investors, funders, IRS

Controls and Compliance

•Preventing fraud and error

• Identifying compliance requirements

• Internal and external audit

Risks and Opportunities???

Risks• Not enough cash

• Cost overruns in development

• Development and lease-up delays

• Ineffective asset management

• Non-compliance

• Poor accounting

• Poor quality construction

Opportunities

•Real estate development

•Programs and partnerships

•Recruit/retain great staff

•Funders, donors, community trust

Financial Management Goals

•Manage risks

• Identify and maximize opportunities

•Enhance sustainability and resiliency

Financial Management Tools

•Budgets

•Cash flow projections

•Accounting

•Reporting

•Fiscal controls

Operating Budget

•All sources and uses of cash during the fiscal year

•Deals with non-cash items including depreciation and in-kind contributions

•Reflects impact of borrowing and investment in assets

Operating Budget- continued

•Cost centers for management, fund raising, and program functions

•Sub-cost centers for each project in development, operating property

•Revenues associated with cost centers

Development Budget

• All costs of acquisition, rehab or new construction

• All sources of funds- including debt, investments, contributions

Cash Flow Projection•Monthly or weekly

•Separate operations from development

• Impact of multiple entities on cash position

•Distinguish restricted/unrestricted cash

Accounting Policies

•Generally Accepted Accounting Principles

•Accrual accounting

•Treatment of restricted contributions

• In-kind contributions

Multi-entity Accounting Policies

•Relationship of sponsor nonprofit to projects owned by separate entities

•Disclosure versus consolidation

•Equity method for investment in for-profit entities

Required Financial Statements

Balance Sheet:

• Assets, Liabilities, and Net Assets

• Unrestricted, Temporarily Restricted, and Permanently Restricted Net Assets

• Comparative: two points in time

Required Financial Statements

Statement of Activities:

• Revenues and Expenses for specified time period

• Distinguish program, management, and fund raising expenses

• Distinguish unrestricted, temporarily restricted, and permanently restricted income

Statement of Activities

•Compares Revenues and Expenses to budget

•Presents current month and year-to-date

•Presents release from Temporarily Restricted to Unrestricted when restrictions are met

Required Financial Statements

Statement of Cash Flows:

•Explains increase or decrease in cash over time

•Distinguishes cash from operating activities, investing, and financing activities

Required for Voluntary Health and Welfare

NonprofitsStatement of Functional

Expenses:

•Matrix format

•Rows are line items – salaries, rent, etc.

•Columns are functions – management, fund raising, programs

Property Cash Flow Statements

• Cash received:– Rents– Fees and other income

• Cash expended—operating expenses

• Cash used for debt service

Property Profit and Loss Statement

• Accrual basis revenues and expenses

• Includes depreciation

• Does not include borrowing or asset acquisition or improvement

• Reflected in audited financial statements

Impact of Profits and Losses

• Directly owned properties

• Homeownership programs

• Nonprofit single asset entities- 202 and 811 projects, LIHPRA properties

• LIHTC partnerships or Llc

Directly owned rentals

•Revenues and expenses are included in organizational revenues and expenses

•Profit or loss directly impacts net income and net assets

Homeownership Sales

• Grant funding creates apparent profit in year received unless sale completed in same fiscal year

• Home sale may create apparent loss if sold below full amount invested in acquisition/construction

Single Asset Entities

• Consolidation of financial statements of sponsor nonprofit and sponsored project required if sponsor has control and economic relationship

• In consolidated statements, profits or losses of sponsored project impact net income and net assets of sponsor entity

LIHTC Projects

• Nonprofit has 1% or less ownership but functions as general partner

• Portion of Developer’s Fee may be Deferred- resulting in a receivable on nonprofit’s books

• Nonprofits may also advance cash to project, resulting in Note Receivable on nonprofit’s books

LIHTC Projects - Continued

• Equity method of accounting results in profits or losses of LIHTC project impacting sponsor nonprofit net income and net assets – generally low $$

• Nonprofit may be required to contribute cash if project has insufficient cash to service debt or meet operating expenses

LIHTC Projects - continued

•Nonprofit general partner responsible for compliance

•For profit partners are at risk for losing tax credits if project not managed properly

Property Performance Indicators

• Occupancy/vacancy rates

• Turn over time

• Aged receivables

• Cash flow

• Revenue and expense compared to budget

Board Role in Financial

Oversight?

Board Role

• Approve comprehensive annual budget

• Review monthly financial statements

• Establish finance committee for in-depth analysis of financial issues and selection of auditor

• Board or finance committee meet with auditors

Executive Director Role

•Hire and retain qualified financial management staff

•Require timely preparation of useful monthly financial statements

•Review financial statements for reasonableness

• Investigate unexpected results•Recommend strategies to Board

Executive Director - continued

• Insist upon adequate financial information from outsourced property management firms

• Review development pro formas carefully

• Ensure effective asset management

• Understand all funding and loan agreements and ensure compliance

• Work closely with the auditor

Your Next Steps?