Financial Management

As a new arts organization, you are dealing with several different areas of your venture.

A commonly overlooked area is the financial management of the organization.

The finances and accounting are just as important as marketing and programs. Many good business ventures have failed due to poor financial management.

Making sure the money's flowing in and out in an orderly fashion is as important for your business as it is for yourself. Many arts organizations struggle with accounting. But there's no reason for you to dread the process, especially since so many tools are available to you to keep your books in order.

If you can't find what you're looking for in smARTstart, try here:

Alliance for Nonprofit Management - Financial Management
Frequently Asked Questions about Financial Management

Basics of financial management

When people give us money, they are entrusting that we will use that money wisely and for the purposes for which it was intended.

In order to make sure that happens, donors, the board, and the government require that you keep track of your income and expenses. Having a good accounting system facilitates your capacity to do this as it provides the methods to help your organization comply with the legal requirements and is an excellent business management tool. Additionally, a bank account is essential and an accounting software package can be invaluable.

Setting Up an Accounting System
Businesses base their systems on one of two accounting methods, cash or accrual.

The cash method is the most simple in that the books are kept based on the actual flow of cash in and out.
The accrual method is a little more complex, due to the fact that income and expenses are recorded as they occur, not necessarily when the cash changes hands. The accrual method incorporates accounts receivable and accounts payable, which are discussed elsewhere. The large majority of small organizations use the cash method.

Accounting has a simple definition of a system which tracks money coming in vs. money going out. The system will help you to operate your venture proactively concerning important financial decisions. Every accounting system has several key components.

Even if you choose to farm out all your bookkeeping to an outside accountant or computerize your system, you will need to understand the basic elements of an accounting system. While some may vary depending on the type of business, these components typically consist of the chart of accounts, the general ledger and internal controls.

Bank Accounts
You need a checking account in order to operate effectively. All money coming in or going out of your business should flow through the bank account. This provides an excellent paper trail and a source of backup documentation.

To open a bank account you need to be incorporated, have officers and obtain signatures of those officers.
The officers are legally accountable for the money that goes through these accounts.

Resources:

Learn more about nonprofit accounting: http://www.managementhelp.org/finance/np_fnce/np_fnce.htm#anchor1608850

Differences between for profit and nonprofit financial accounting and reporting

The Alliance for Nonprofit Management answers the key questions concerning the differences between the basic accounting practices of nonprofits and for-profits. There are several key differences to be aware of, mainly in the areas of:

Accounting for Contributions
Capitalizing and Depreciating Assets
Use of Cash- and Modified Cash-Basis Accounting
Functional Expense Classification

Resource:

Frequently Asked Questions about Financial Management: Alliance for Nonprofit Management

Role of the treasurer and the board

Briefly, Board Source outlines the board treasurer job description as:

A member of the board.
Responsible for the management of organizational finances.
Creates annual budget for approval by the board.
Administrator for fiscal matters of the organization
Develops and maintains financial policies and procedures of the organization.

Resources:
For more details on the role and responsibility of the board treasurer, review the following links:

Job Description
Does an NPO need a treasurer?
Board Source - the premiere voice of nonprofit governance, is dedicated to increasing the effectiveness of nonprofit organizations by strengthening their boards of directors.

Budgeting

From an annual budget to a project budget, a detailed account of projected income and expenses lets your funders know your plans are well thought out. Your budget is your fundamental guide to your organizations annual operations.

Resources:

www.civicus.org - you'll find a detailed and easy to follow guide to creating a budgeting from
Additional budgeting resources from nonprofiexpert.com

Managing cash flow

Running an organization with expenses and sinking money into productions that have yet to open and begin earning their keep demands a solid handle on your organization's cash flow - money coming in and money going out. Poorly understood cash flow strategies and mismanaging income to expenses can lead to financial crisis resulting in bad credit history, angering your contracted help and maybe shutting down your doors. There are too many examples of arts organizations getting behind and never catching up. Start off on the right foot or start creating your cash flow plan now. Here's an excellent guide to cash flow that covers projections, strategies and lays out a sample cash flow budget.

Resource:
What is cash flow and how should it be managed?

Financial reporting

Sooner or later someone’s going to ask you, “So, how are we doing financially? Did we put that grant to good use?” They aren’t asking how much is in the checking account. They want to see three different statements:

Key Things You Need to Report

Income vs. Expenses - tells us if we are covering our costs
Cash Flow - tells us if we can pay our bills (now). Learn more
Balance Sheet - tells us what we have right now

Resource
Financial Statements of Not-For-Profit Organizations

Operations and internal controls

People who are trustworthy want to insure that there is no chance that anyone can accuse us of impropriety. Also, we want to insure that our employees, volunteers and donors are never put in a situation that might compromise their integrity. That’s why we need to be extra careful that we have proper controls on all our organization's money and assets.

The importance of a good set of internal controls cannot be emphasized enough as a method for protecting the organization’s finances. Several Chicago based arts organizations have been set back due to employee theft or embezzlement. Specific concerns to consider in creating internal controls include:

Creating a written set of documents which describes your internal controls in detail.
Periodically reviewing the internal control policies and update when needed.
Requiring all employees to take a week's vacation each year as this greatly helps uncover any fraudulent activity.
Cross-training all employee job duties to provide coverage when employees are sick or on vacation. This also helps to uncover fraudulent activity.
Performing background checks before hiring new employees.
Separating accounting duties. Use dual control in job functions, such as having one person prepare check payments while another signs the checks and reviews vendor invoices.
Asking your outside accountant to perform unannounced spot audits.
Thoroughly investigating your outside accountant, just as you would hire a new employee.
Backing up your computer system regularly.
Using qualified, trained and trustworthy employees to monitor the cash-related procedures.

The Basics

Internal controls for non-profits

Internal controls checklist

Resource

Internal Controls and Financial Accountability for Not-for-Profits (.pdf)

Taxes

Just because you are a not-for-profit doesn’t mean you don’t have to file a tax return. Once your receipts (all the money you take in from any source) exceed $25,000, you need to file a return. You may also owe tax on any unrelated business income.

Word of warning - do not fool around with IRS requirements. Be diligent about filing the required paperwork and paying appropriate taxes. Many an organization has gotten itself in considerable hot water by not adhering to stated requirements and had its nonprofit status threatened.

Resources

Accounting software

Accounting software makes it easy to keep track of the comings and goings of your money. It also makes it easy to create reports for others to see that you have done what you promised. Accounting software packages generally include a thorough tutorial in helping to set up your system.

Choosing Accounting Software: click here for questions to ask
Don’t be cheap here, the software will save you in accounting and audit expense. Consider QuickBooks Premium for Non-Profits.

The software system you select must meet three criteria.

It must be accurate, meaning the numbers must be right. Although the software is automated, it cannot ensure accuracy. You need to check the numbers in your accounting system.
It must be relevant, meaning it produces information that is required and needed.
It must be user-friendly, meaning you should be able to operate the system and understand the information it produces.

Special topics

Here are some direct links to help with these special topics:

Donations
http://www.nonprofitexpert.com/donations.htm

Pledges
http://www.compasspoint.org/askgenie/details.php?id=61

Tax Deductibility
http://www.allianceonline.org/FAQ/financial_management/what_is_tax_deduc...

Depreciation
http://www.allianceonline.org/FAQ/financial_management/what_is_depreciat...

Cash Reserve
http://www.compasspoint.org/askgenie/details.php?id=65