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Board and Staff Roles in Financial ManagementNeighborhood Partnership FundApril 19, 2007
Kay SohlTechnical Assistance for Community
Services
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Board Financial Oversight
•What are you looking for?
•What are signs of financial health and effective financial management?
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Key Financial Goals
•Use resources to fulfill mission
•Liquidity: cash when you need it
•Solvency: positive net worth
•Compliance with restrictions
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Board and Management Financial Oversight
Challenges????
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Financial Challenges
•Complex budgeting
•Accounting challenges
•Financial reporting
•Risks and opportunities
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Multiple Lines of Business
•Real estate development
•Property management
•Asset management
•Tenant services
•Community economic development
•Other
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Financial Planning
• Multi-function annual budget
• Real estate development budgets
• Property management projections
• Grant and contract budgets
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Planning for Multiple Entities
•Operations and development within primary nonprofit
•Single asset entities
•Low Income Housing Tax Credit (LIHTC) projects
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Accounting Challenges
•Cost center structure
•Tracking restrictions
•Multiple entities
•Dependence on work of outside entities
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More Accounting Challenges
•GAAP accounting
•Accrual accounting in a cash focused world
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Financial Reporting
Internal users:•Executive Director,
construction, program, and asset managers
•Board of Directors
External users:•Lenders, investors, funders, IRS
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Controls and Compliance
•Preventing fraud and error
• Identifying compliance requirements
• Internal and external audit
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Risks and Opportunities???
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Risks• Not enough cash
• Cost overruns in development
• Development and lease-up delays
• Ineffective asset management
• Non-compliance
• Poor accounting
• Poor quality construction
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Opportunities
•Real estate development
•Programs and partnerships
•Recruit/retain great staff
•Funders, donors, community trust
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Financial Management Goals
•Manage risks
• Identify and maximize opportunities
•Enhance sustainability and resiliency
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Financial Management Tools
•Budgets
•Cash flow projections
•Accounting
•Reporting
•Fiscal controls
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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
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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
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Development Budget
• All costs of acquisition, rehab or new construction
• All sources of funds- including debt, investments, contributions
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Cash Flow Projection•Monthly or weekly
•Separate operations from development
• Impact of multiple entities on cash position
•Distinguish restricted/unrestricted cash
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Accounting Policies
•Generally Accepted Accounting Principles
•Accrual accounting
•Treatment of restricted contributions
• In-kind contributions
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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
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Required Financial Statements
Balance Sheet:
• Assets, Liabilities, and Net Assets
• Unrestricted, Temporarily Restricted, and Permanently Restricted Net Assets
• Comparative: two points in time
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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
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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
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Required Financial Statements
Statement of Cash Flows:
•Explains increase or decrease in cash over time
•Distinguishes cash from operating activities, investing, and financing activities
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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
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Property Cash Flow Statements
• Cash received:– Rents– Fees and other income
• Cash expended—operating expenses
• Cash used for debt service
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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
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Impact of Profits and Losses
• Directly owned properties
• Homeownership programs
• Nonprofit single asset entities- 202 and 811 projects, LIHPRA properties
• LIHTC partnerships or Llc
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Directly owned rentals
•Revenues and expenses are included in organizational revenues and expenses
•Profit or loss directly impacts net income and net assets
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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
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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
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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
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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
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LIHTC Projects - continued
•Nonprofit general partner responsible for compliance
•For profit partners are at risk for losing tax credits if project not managed properly
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Property Performance Indicators
• Occupancy/vacancy rates
• Turn over time
• Aged receivables
• Cash flow
• Revenue and expense compared to budget
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Board Role in Financial
Oversight?
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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
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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
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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
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Your Next Steps?