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Financial Responsibilities of a Chapter Board

Michael M. Tryon, CPATate & Tryon, CPAs & ConsultantsWashington, DC

All content © 2015, Tate & Tryon

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Financial Responsibilities of a Chapter Board

• StewardshipInternal controls

• Financial Oversight

Financial and Tax Reporting

• Strategic Management

Budgeting and Reserves

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Stewardship

Internal Control - key principles

Cash receipts cycle (revenue)

Cash disbursements cycle (expense)

More good control practices

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Internal Controls - Key Principles• Segregate cash receipt and disbursement duties – a “dual

keys” concept; when possible

• WRITE DOWN standard policies and procedures for processing transactions AND have the Board review and approve them

• This is especially important when oversight changes frequently – you want continuity

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Cash Receipts . . . Recommended procedures:

• Endorse all checks “For Deposit Only” upon receipt

• Keep checks in a locked area until deposited in the bank

• Get checks into the bank ASAP

• Anytime actual cash is received, TWO people should be present to collect and count it

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Cash Receipts . . .• Apply analytic procedures to financial statement revenue

items - example:

• 200 people bought our brochures at $5.00 each. Why do we show only $850.00 of brochure sales on our income statement?

200 x $5.00       $850.00 

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Cash Disbursements . . . Recommended procedures:

• Always require supporting

documentation, such as a receipt or

• vendor invoice, before issuing a check

• Process all payments through one individual – don’t have different people writing checks from different accounts

• Document who has the authority to approve what types (and amounts) of expenses for payment

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Cash Disbursements . . .• On an annual basis, update your bank account signature

cards – you may be surprised at who is on them!

• Use an outside payroll service, it should make your life easier

• Review the payroll and tax filing reports for accuracy

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Cash Disbursements . . .• Set up a policy: checks over “X” amount require at least two

signatures – and let your bank know about the policy

• Compare actual expenses to the budget and prior year & investigate significant differences

• Don’t issue too many credit cards

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More Good Control Practices . . .• Have a Board member review and initial the unopened bank

and investment statements or provide on-line access

• Issue complete financial statements to the Chapter Board on a monthly basis

• Reconcile your bank and investment accounts to the general ledger on a monthly basis

• Back-up all accounting files regularly

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Financial Oversight

Financial Reporting

Financial Statements

Tax Reporting (Form 990)

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Financial Reporting• A good recordkeeping system is THE key to keeping track of

all of your financial relationships

• Your Chapter’s recordkeeping system should be uncomplicated,reliable, accurate, and should easilygenerate understandable reports

• If it’s not . . . consider changing systems

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Financial Reporting“But,” you say, “we hire that stuff out to a bookkeeper.”

• Good records are YOUR business!

Your financial decisions are only as good

as your records

• Cash is usually THE most vulnerable

aspect of your Chapter’s operations

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Financial ReportingWhat’s involved? Usually . . .

Monthly financial statements distributed to Chapter management

Assisting chapter management with the interpretation of the financial statements

Preparing “Ad Hoc” reports when needed

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Financial Statements• Financial statements can be. . .

• Cash Basis

• Accrual Basis

• Some combination of the two

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Cash Basis• Simplest basis of accounting

• Revenues and expenses are recorded ONLY when CASH is received or disbursed by the organization

• Although simple to use, cash presents an incomplete financial picture . . .why? No accounts receivable or

No accounts payable

are recorded.

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Accrual Basis• More difficult basis of accounting

• Revenues and expenses are recorded when they are earned or incurred REGARDLESS of when CASH is received or disbursed

• Although more difficult to implement, presents a complete financial picture - detailing all assets and liabilities

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Financial Statements• Two main financial statements:

• Balance Sheet, or “Statement of Financial Position” – your assets and liabilities at a single point in time.

• Income Statement, or “Statement of Activities” – what you took in and what you spent, during a given period of time.

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Balance Sheet• The Balance Sheet is a SNAPSHOT of one moment in time – it does

not tell how an organization arrived at that moment

• Important balance sheet items:• Assets

• Liabilities

• Net Assets (“net worth”)

• For Chapter’s, focus is most likely:– Cash on hand

– Payroll liabilities

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Income Statement• Presents a record of the Chapter’s

revenue and expense for a specified period of time.

• Shows what happened during a certain period – where did our resources (revenues) come from and where did we use them (expenses)?

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Stay on Top of Things!• Monthly: prepare a balance sheet and an

income statement

• Monthly: prepare a written analysis of significant financial events

• Periodically: ask the Board what financial information it needs (but is not receiving)

• Non-preparers: read your Chapter’s financial statements at least every quarter . . . but preferably every month

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What to File?2014 Tax Year and later(Filed in 2015 and later) Form to File

Gross receipts normally ≤ $50,000Note: organizations eligible to file the e-Postcard may choose to file a full return

990-N

Gross receipts < $200,000, andTotal assets < $500,000

990-EZor 990

Gross receipts ≥ $200,000, orTotal assets ≥ $500,000 990

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What’s With This Form 990?

• Form 990 is your Chapter’s report to the IRS – both financial and non-financial information

• The 2014 990 is a 13 page, 12-part CORE form with 16 Schedules

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Form 990 – What’s Important?• Two sections warrant your close attention:

• Part VI – Governance, Management & Disclosure

• Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors

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Governance . . .• IRS wants to know about these policies:

• Conflict of interest policy• Whistle-blower policy (Sarbanes-Oxley)• Document retention and destruction

policy (Sarbanes-Oxley)• Investment and/or joint venture policy• Gift acceptance policy • Compensation policies: salary and

benefits

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Governance . . .• IRS also suggests these procedures:

• Contemporaneous documentation of board and committee meetings

• Full board review of Form 990 prior to submission to IRS

• Board composition reflecting broad public interest, and minimizing potential for misuse

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Compensation Questions . . .Schedule J asks questions that apply to persons listed in Part VII:

• List and explain “perks” - first class or charter travel, discretionary spending account, etc.

• Explain how CEO’s compensation is determined

• Explain severance payments, equity-based compensation arrangements

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Form 990-EZ . . .• Much easier than the full 990…why?

• 4 pages (2014) instead of 13

• Compensation section requires much less than the full 990 does

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Form 990-N . . .• What information do you need to file?

• EIN, tax year end, legal name and mailing address

• Any “DBA” names used

• Name and address of a principal officer

• Web site (if there is one)

• Termination/liquidation information (if applicable)

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Form 990-N . . .• Due date is May 15th of each ear

• Fiscals: due by the 15th day of the fifth month after year end

• No penalty if filed late, BUT if you do not file one for 3 years running, you will lose your Federal tax exemption

• IRS has begun revoking exemptions

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Strategic Management

Budgeting

Reserves

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Budgeting• Budgets are extremely important --

they serve two primary purposes:

• They are tools for assessing an organization’s performance

• They provide a “map” for an organization to follow to achieve its strategic goals

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Budgeting• Budgets can be prepared based on prior historical data . . . or

“zero-based” (start from scratch)

• Historically-based budgets are easier to prepare but may be less accurate

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Budgeting• Budgets should be realistic.

• Pragmatism rules: most budgets start by looking at the past with an eye towards the future

• But! Don’t allow the past to become automatically self-replicating

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Budgeting• Prepare your budget as early in the fiscal

year as possible AND get it reviewed and approved by either the Board or the Finance Committee

• Budgets are not effective unless they’re followed . . . so . . .

• Review “budget vs. actual” performance on a monthly basis

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Budgeting• Investing during financial uncertainty

• You should have an investment policy!

• If you do not, formulate one ASAP!

• If you have an investment policy, follow it!

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Budgeting• Investing during a financial crisis –

• If your board wishes to deviate from the policy, obtain independent expert advice

• Keep your Board continually informed of investment performance, so it can make timely decisions

• Take advantage of FDIC coverage for your cash wherever you can

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Reserves – Why ?

Volatility of operations

Economics of industry or profession

Legislative/regulatory environment

How much is too much?

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Reserves - Defined Does the organization have formal reserve policy or objective?

Yes = 70% No = 30%

If yes, are reserves defined as total net assets (assets less liabilities)?

Yes = 54% No = 46%

What is the reserve target as a percentage of annual operating budget?

50%

Source: ASAE Operating ratio Report (14th edition © 2012)

Yes

No

Yes

No

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10 Year Trend Revenue and Expense

14,745 15,441 

17,063 

18,343 

18,464 

16,549 17,207 

18,822 19,567 

21,270 

15,944 

17,605 

19,842 

18,537 

18,024  16,900 

18,881 

18,367 

21,870 

23,738 

$14,000

$15,000

$16,000

$17,000

$18,000

$19,000

$20,000

$21,000

$22,000

$23,000

$24,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Expense Revenue

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10 Year Net Income Trend

($500)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

$1,469  $2,164  $2,779  $194 ($440) $351  $1,674  ($455) $2,303  $2,468 

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10 Year Net Asset Trend

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

6,28

8

8,45

2

11,2

31

11,4

25

10,9

85

11,3

36

13,0

10

12,5

55

14,8

58

17,3

26

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Adequacy of Net Assets(Net Assets as a % of Annual Expense)

20%

30%

40%

50%

60%

70%

80%

90%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

37

%

37

%

53

%

53

%

53

%

53

%

53

%

53

%

53

%

53

%

42

%

54

%

66

%

62

%

48

%

65

%

75

%

67

%

76

% 79

%

ASAE ORR ABC Assn

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Adequacy of Net Assets(Net Assets as a % of Annual Expense)

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%

ABC #1($14M)

ABC #2($13M)

ABC Assn($22M)

ABC #3($10M)

ABC #4($4M)

42%52%

67%80%

123%

58%

71% 76% 85%

112%

2012 2013

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Questions???

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A Word or Two About Insurance:• Two words: have it

• Seven words: If you don’t have it, get it

• Don’t be penny-wise and pound-foolish

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Insurance:• General liability insurance

• Products

• Premise

• Operations

• “Directors and Officers” (D&O) insurance

• Wrongful termination

• Discrimination

• Sexual harassment

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