State & Local Programs

CASA: A Guide to Program Development

Section 1 - Planning a Quality Program (Chapters 1- 9)
Section II - Volunteers (Chapters 10- 12)
Section III - Managing the Program (Chapters - 13-15)

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Chapter 13: Financial Management

What is the Accounting Process?
Establishing an Accounting System
Establishing a Bank Account
Internal Controls
Financial Statements
Audits
Tax Returns

Regardless of its size or type of organization, every nonprofit, from a university hospital to a local CASA program, needs to maintain accurate financial books and records. In the initial stages of program development and operation, financial management can be very simple. As the organization grows and receives income from multiple sources and has more than one or two staff, accounting procedures and controls will necessarily become more complex. If you begin at the program?s outset by establishing a financial management system that is in compliance with generally accepted accounting principles (GAAP), few changes will need to be made in the future. It is a good idea to seek the advice and services of an accountant or someone with extensive knowledge of financial management when you are developing your system. The information offered is intended to offer some basic guidance. It is not intended as a thorough discussion of all the issues that must be considered to assure adequate financial accountability (see sample of Financial Policies & Procedures in the Tools section).

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What is the Accounting Process?

The accounting process encompasses the recording and reporting of transactions affecting the financial status of an organization. Processes and procedures must be implemented to generate useful financial statements and to secure the assets of the organization. Meaningful financial data cannot be produced without a mechanism to capture, record, review, summarize, and report information. This entire process is called accounting.

Bookkeeping is simply the recording of transactions. While accounting and bookkeeping are often used interchangeably, their differences are significant. Bookkeeping is just one facet of accounting and financial management. Accounting refers to the entire process of recording and reporting and requires that systems (automated or manual) be in place to facilitate bookkeeping and to produce accurate, meaningful financial statements and management reports.

The accounting process can be described as an ongoing, monthly cycle consisting of:

  • Cash receipts and disbursements;
  • Journal entries;
  • Closing procedures;
  • Financial statement preparation;
  • Review and analysis.

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Establishing an Accounting System

Establishing an accounting system, while not directly fulfilling the program?s mission, is nevertheless a critical administrative task. A well-designed system, even if it consists solely of manual ledgers, can mean the difference between timely financial information and incomplete, unsupported records.

Usually, the number of transactions (deposits, checks, and journal entries) will determine whether or not it is cost-effective to automate the accounting process. A new program that has only one or two funding sources and limited assets may simply "keep the books" in a checkbook supplied by the local bank or a check register accounting system in which checks are manually recorded in a ledger at the same time they are prepared. This combination of checkbook and expense distribution journal provides a simple way of recording receipts and disbursements while maintaining your checkbook balance.

It is strongly advised the organization move to an automated accounting system as soon as funds are available. An automated system does not have to be complicated. There are numerous software applications available that do not require any previous accounting or bookkeeping experience. Most accounting programs will run on the most basic computers and are easily installed and maintained. The factors to consider in determining which software will meet your program?s needs include:

  • Does it do what you need it to?
  • How easy is it to use?
  • Is it easy to install?
  • What reports can be produced?
  • Can data be uploaded and downloaded to diskettes for use in other applications?
  • Is the cost reasonable?
  • Is training and support available?

Check with other CASA programs to see what programs they have found effective.

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Establishing a Bank Account

If you have not already done so, you must open a bank account so funds can be deposited and vendors paid. Most new CASA programs have relatively simple banking needs. This does not mean the decision to use a particular bank should be taken lightly. First, you must decide the program?s basic service needs. They usually encompass deposits, withdrawals, and obtaining bank balances. More extensive banking services could include direct deposit for payroll, debit and credit transactions processed through the Automated Clearing House, lockbox services, credit card accounts, lines of credit, and online access to bank account information via your personal computer.

Most banks can provide all of these services. Assuming all banks appear to be the same, how can you find the bank that is right for the program? One good way to start is to contact other groups of a similar size that might have the same service needs as CASA. Using references from other nonprofits is an excellent way of identifying a bank that offers services to meet your needs. The bank you use personally or that serves for-profit firms may not be the best for serving nonprofits. Visit the bank and discuss your expected needs with the bank officer.

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Internal Controls

The objectives of internal financial controls are to safeguard the organization?s assets, to ensure the reliability of financial records and reports, to promote operational efficiency, and to encourage adherence to policy. A good financial control system should have written policies which describe:

  • Clear lines of authority and responsibility;
  • Separation of duties;
  • Procedures for authorization;
  • Procedures for record keeping;
  • Physical control over assets and records;
  • Accurate documentation and sufficient audit trail;
  • Independent review and audit of finances.

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Financial Statements

There are many possible kinds of financial statements that can be prepared, but the ones most commonly required include the following:

  • Balance Sheet. The balance sheet summarizes the assets, liabilities, and fund balances of the organization. It is a snapshot taken at a specific point in time, presenting the financial position of an organization on a specific date.
  • Statement of Activity. This report measures, in fiscal terms only, the effectiveness of your program?s ability to carry out its mission. It reports the actual revenues and expenses and compares the results to the current budget.
  • Statement of Functional Expenses. This report, reported for the same period as the statement of activity, shows expenses by category such as salaries, rent, postage, etc.
  • Statement of Cash Flow. Also prepared for the same period, this report shows the cash receipts and cash payments during that time frame.

It is generally not necessary to provide the board with a full set of financial statements each month. At a minimum, however, they should receive a statement of activity each month which follows the same format as the approved budget, calculating variances, explaining the reason for the variances, and offering suggestions for corrective action if needed. Other reports may be requested by the board on a quarterly basis and a full set of financial statements must be prepared at the end of the program?s fiscal year.

Financial information should be provided to the board as soon as possible after the designated reporting period ends so that necessary corrective action can be made in a timely manner. Of course, it takes some time to prepare the statement, but most programs should be able to produce a monthly report within two weeks after the end of the month. A full set of financial statements for the year should be available within five or six weeks after the end of the year. If your accounting system cannot meet these deadlines, something is wrong and should be corrected.

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Audits

Although your organization may not be required to have an audit, it is generally recommended that an audit be performed, even if your funders do not require it. An audit opinion stating that the financial statements accurately present the balances and results of operations is critical in fundraising and receiving grants. Internally, an audit assures financial statements are accurate and complete.

An auditor will perform tests of your accounting system, review the internal accounting controls, examine your documentation, perform analytical review procedures, and confirm cash accounts and other balances in order to render an opinion on the financial statements taken as a whole. The audit will also include a review of the accounting principles being followed and the financial statement format to determine whether or not they comply with generally accepted accounting principles.

There are several levels of audit and audit reports that can be done by an accountant. A full audit includes an opinion, a statement of financial position, a statement of activities, a statement of cash flows, and footnotes. The footnotes disclose the nature of the operations, a summary of significant accounting policies, a description of significant events, and detailed information on the organization?s commitments and contingencies. For a full audit, the auditors will require a management representation letter addressed to them that acknowledges management?s responsibility for the fair presentation of the financial statements. Usually, the executive director and a member of the board are asked to sign the letter. In addition to the audited financial statements, the auditors should provide you with a management or internal control letter in which they discuss any suggestions they have for improving your financial policies and procedures.

A lower level of audit is a review of financial statements. The resulting review report indicates the testing performed is less than that of a full audit and that only analytical review procedures were applied. A review provides only limited assurances that the financial statements are complete. This type of audit may be appropriate when the program is new and cannot afford a full audit.

The lowest level of service auditors can perform is a compilation. This type of report states the account balances presented are those provided by management. The auditor takes no responsibility for the accuracy of the numbers. This type of audit is appropriate only for programs that have a CPA prepare their monthly financial statements.

The cost of a full audit can be several thousand dollars, a real burden on programs that have minimal funding. You may be able to negotiate for a lower than normal fee, particularly if you are able to have the work performed in off-season. Another possibility for a lower fee is to obtain the services through the local chapter of the Association of Certified Public Accountants.

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Tax Returns

There are various reporting requirements for nonprofit organizations at the local, state, and federal levels. Filing of IRS Form 990, Return of Organization Exempt from Income Tax, is required if the organization has gross revenue in excess of $25,000 per year. nonprofit 501(c)(3) organizations are also required to file the 990-Schedule A. The filing must be done by the 15th day of the fifth month after the end of the year. A penalty of $10 per day is assessed late filing or incomplete forms.

If the program has raised more than $1000 from an unrelated business such as some types of product sales, Form 990-T must be filed. Some types of income derived from unrelated business are subject to federal tax (and possibly state tax). The filing and payment of any taxes due must be paid by the 15th day of the fifth month after year-end.

If an extension is needed, IRS Form 2758 may be used to request it. The program is required to maintain a copy of your Form 990 tax return on file and available for the public?s inspection.

Once the program employs paid personnel, it is required to file federal payroll reports, including a W-4 for each employee to claim exemptions for federal withholding and a W-2 for each employee at the end of the year to report income and deductions.

The director may want to ask the auditors to complete the annual tax return and request an extension when necessary. They can also advise you on other state tax filings required.


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