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New Year's Resolutions To Make Your Finances Fit for 2014

By Paul Konigstein

A new calendar year, which for many organizations 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 glance what you need to know, your chart of accounts may be the culprit. Check your chart of accounts for these common problems:

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

Are you all over the place? Like account codes should be grouped together to simplify report writing and summarizing data and reduce the risk of missing or double counting 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? Inactivate or delete accounts that are no longer relevant. For example, if you have closed a location due to the recession, 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 think that allergy sufferers avoid your office, your financial controls are likely falling down on the job. Make sure everyone is on the same page in regard to protecting your assets with these fixes:

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.

Nonprofits: 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. By the way, they are required by law for nonprofits in New York.

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

Pay attention to funder requirements – As the pool of available funding (especially from governments) shrinks, funders are examining finances more closely to winnow the pool of potential recipients. The frequency of funding source audits is increasing as is emphasis by funders on compliance requirements. Make sure your policy and procedure manual addresses your compliance requirements before the auditors arrive. If your organization is for profit, your manual should address any compliance requirements imposed by banks or venture capitalists. For nonprofits, address any compliance requirements associated with grants and contracts.

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 organizations 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 trade association or an outside consultant may have already done this. Check there first to avoid reinventing the wheel.

4.       Nonprofits: 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 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.

 

By Paul Konigstein, Senior Consultant, Accounting Management Solutions. He helps nonprofits improve finance and accounting.