Deconstructing the Overhead Myth: Using Financial Reporting September 9, 2014 CLAconnect.com
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About CliftonLarsonAllen A professional services firm with three distinct business lines Accounting and Consulting Outsourcing Wealth Advisory 3,600 employees Offices coast to coast Nonprofit group serves 6,000 clients across the country 4
Speaker Introductions Marie Caputo, Principal 23 years of experience, specializing in providing auditing, accounting and consulting services for nonprofit organizations Public Sector Group s Northeast regional lead Experience includes providing services to a variety of tax-exempt organizations, including social welfare organizations, associations, foundations, and others Adam Pyzdrowski, Senior Associate Four years of experience in public accounting with CLA Works exclusively in the nonprofit and government area serving religious organizations, colleges and universities, social service organizations, membership based organizations, cities, schools, and foundations. Has extensive experience with A-133 Single Audits of federal grant programs and preparation of Form 990 tax-exempt return. 5
Learning Objectives At the end of this session, you will be able to: Explain the overhead myth and misinformed nonprofit analysis Identify opportunities to improve nonprofit financial reporting to more clearly present your organization s program successes Recognize current best practices and tips to assist with improving financial reporting 6
The Overhead Myth How did we get here? 7
Financial Metric Focus: Tide of Change Significant advocacy and support from evaluating entities: TED Talk by Dan Pallotta OH Myth Letter Overheadmyth.com Stanford Social Innovation Review Guide Star Donor s Forum 8
Side Effects of Financial Metrics Starvation Cycle (Stanford Social Innovation Review) Focus on financial metrics results in funding that causes: Lack of infrastructure & monitoring Inability to compensate competitively and retain talent Inability to plan strategically 9
Tell us about your problems 1. Do you experience issues explaining financial metrics to donors? 2. How is your organization evaluated by contributors? 10
Where do we go from here? Change the focus of the conversation from overhead limits to long term, flexible funding for measureable results. 11
How do we get out of here? 12
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How do we get out of here? Management Discussion and Analysis Example 14
Other Comm. Best Practices FASB Review Meaningful information (strongly encouraged): Programmatic outcomes/ outputs Results of operations Economic, industry or other risk factors Liquidity measures and information Other potential disclosures: Segment information Financial strength/ health Mission Forward-looking (financial & programmatic) Key performance indicators (financial & non-financial) 15
Moving the Needle on Donor Analysis Management Discussion and Analysis (MD&A) section supplementary information not audited Revising Footnote One of financial statements part of audit opinion audited Attach a Cover letter to the financial statements Not part of audit report 16
Global Example MD&A Water For People Challenges identified: Questions about overhead and program expense ratios Unasked questions about financial analysis concerns of potential donors Donors only fund strictly programmatic activity Wanted to change the conversation 17
Global Example MD&A (continued) Developed a MD&A to include at the front of the financial statements (www.waterforpeople.org) Water For People MD&A Information Communicated "Who we are" Mission & program goals "Momentum building" Progress toward goals "Demand outpacing supply" Current year results "The (near-term) future" Forward-looking information 18
Global Example MD&A (continued) 19
How do we get out of here? Financial Statement Presentation Examples 20
Global Example Cost of Programs Report Water For People Challenges identified: Questions about overhead and program expense ratios Donors only fund strictly programmatic activity Wanted to show all expenses supporting programs Developed a cost of programs report Showed cost of program by programmatic cost category Considered to be unaudited supplementary information 21
Global Example Cost of Programs Report (cont d) 22
Example Presentation Options Consider changing the presentation of your financial statements Common challenges identified: Availability and use of assets Misconceptions about available resources Change presentation to show restrictions Operating versus non-operating activity Misconceptions about operating activity versus nonoperating activity Change presentation to show activity separately 23
Example Availability and Use of Assets Statement of Financial Position Presentation Traditional (below) Non-traditional Total 24
Example Availability and Use of assets (cont d) 25
Example Operating vs. Non-Operating 26
Example Operating vs. Non-Operating 27
The Way Forward 28
Be Proactive Be proactive and address challenges head on Use your financial statements Talk to your funders about challenges Change conversation 29
Questions? 30
Marie Caputo, CPA Principal, Nonprofit marie.caputo@claconnect.com 301.902.8518 Adam Pyzdrowski, CPA Senior Associate, Nonprofit adam.pyzdrowski@claconnect.com 303.439.6079 CLAconnect.com twitter.com/ CLA_Nonprofit facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 31