Useful Past Tips: ACCOUNTING: Your balance sheet tells all GAAP versus Tax Accounting - Picking The right Auditor Earned Income - Inventory control is vital

1. Your balance sheet tells all
It may seem obvious that a balance sheet can tell you a lot about your organization's financial stability. According to Susan Kenny Stevens in the book All the Way to the Bank: Smart Nonprofit Money Management, a balance sheet can also provide a few subtle clues about an organization's fiscal health.

Among the small clues that may offer big answers:

• Are your organization's assets greater than it liabilities? If so, your net asset position will be positive. If negative, then you are in a deficit position. In an economy with little slack, most nonprofits cannot afford the luxury of annual or accumulated deficits.
• Do you have enough cash to pay for current liabilities? Healthy organizations have enough cash in savings, checking and collectable receivables to cover each dollar of outstanding current liabilities.
• Are you building rich but cash poor? Buildings, inventory and uncollected receivables are important assets, but they don't pay the bills.
• Have you received funds that are meant for future activities? If so, they will be noted in the liabilities section as either "deferred revenue" or "refundable advance." Both terms refer to earned funds that are received but must be returned if an organization cannot perform either the contract or the grant.

Large deferred revenues without corresponding cash assets are a sure sign that you are robbing Peter to pay Paul.

2. GAAP versus Tax

There are a number of issues to consider when looking at Generally Accepted Accounting Principles (GAAP) versus taxes, according to Terry Miller, a San Francisco consultant. He presented his report at a recent nonprofit accounting conference.

"Nonprofits, being tax exempt, are creatures of the tax code. GAAP requires that professional judgement be exercised to avoid misleading financial statements that technically conform but distort nonetheless," according to Miller.

The issues include: government awards; cost-sharing arrangements; gifts of property; prepaid fundraising costs, and free market value (FMV) on investments.

When it comes to government awards, the GAAP view is that it does not require that they be treated as exchange transactions while the tax view is that they are a payment to enable the nonprofit to provide a service and therefore taxable.

For cost-sharing arrangements, the GAAP view is that those who use it are reluctant to combine dissimilar tax types and if not combined, GAAP sees it as revenue, while tax sees it the same. A nonprofit manager should talk over the implications with an auditor and fully disclose all information on the Form 990.

When dealing with gifts of property or service, the GAAP view is that gifts of tangible assets should be recorded at fair market value and the tax view is the same.

With prepaid fundraising costs, tax differs from GAAP in that it allows prepaid fundraising costs to be expensed over the life of the effect of the effort. GAAP requires that there be expensing of all promotional costs and Tax requires that they be reported on the Form 990.

For fair market value on investments, according to Miller, GAAP requires that investments be recognized at FMV, but ax makes it optional. When preparing tax forms and using FMV, a nonprofit should report its unrealized gains and losses on the Form 990 and when not using FMV, it should show the variance in income/expense on GAAP reconciliation form.

3. Picking The right Auditor

The first step for an organization in getting its money's worth from an auditor is to make sure it hires the right one. In her book All the Way to the Bank: Smart Nonprofit Money Management , published by the LarsonAllen Public Service Group, Susan Kenny Stevens offers four steps to find the right firm or individual for the job.

• Narrow the field. Develop a list of several reputable CPS firms that have experience providing financial services to other nonprofit organizations. To narrow the list, find firms that have experience with organizations in your specific field.
• Interview potential firms. After you have received proposals, set up interviews with the firms you believe will provide your organization with the desired results. Find out about the individual who will oversee and perform the audit. Is that person willing and able to assist with questions that come up during the rest of the year?
• Evaluate costs. Keep in mind that you often get what you pay for, so don't automatically choose the lowest bid. A pro bono audit may be free but often is not timely. It may also raise concerns with funders if the accountant performing the audit does not understand nonprofit issues.
• Put the agreement in writing. Ask for an engagement letter that details the following:
  
  1. The work they are agreeing to perform,
  2. The price of their services,
  3. Any other items agreed on, such as work may need to complete before the audit can begin.

4. Earned Income - Inventory control is vital

Many nonprofits supplement their cash flow through the sale of products. This can be a lucrative way of raising money, but for nonprofit organizations it can mean headaches in terms of government regulations and in terms of assuring control of the inventory.

In their book Bookkeeping for Nonprofits, Murray Dropkin and James Halpin acknowledge the value of sales of products, but they warn that organizations need to know the proper level of inventory to maintain as well as keeping accurate records of such materials.

For management of inventory, Dropkin and Halpin suggest several essential points to consider:

• The need to employ effective purchasing strategies and to obtain favorable prices, delivery and payment terms.
  
  
• The need to use reliable suppliers to ensure quality products and responsive service.
  
  
• The need to maintain a low total inventory to minimize the resources invested and to minimize potential loss from deterioration of products in stock.
  
  
• The need to use drop-ship (fulfillment) arrangements when possible, in which the supplier maintains the inventory and arranges for shipment to customers on a per-order basis.
  
  
• The need to optimize ordering versus holding costs by determining the economic order quantity, a calculation designed to minimize the costs associated with maintaining an inventory.
  
  
• Establish controls to reduce shrinkage or theft of products from the inventory.

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