Basic Finance &

Accounting

John Walker

Basic Accounting
Balance Sheet
Income Statement
Basic Finance & Accounting Chart of Accounts

Budgeting
Key Principles
Methodology
Recommendations
John Walker Cashflow
Management
Principles & Tools
Echoing Green Methodology

Targets
New Fellows’ Conference Non-Profit
Essentials
Setting Up
Restricted Funds

The Board

social change
starts here
 Basic Finance &
Table of contents Accounting

John Walker

Basic Accounting Basic Accounting

Balance Sheet Balance Sheet
Income Statement Income Statement
Chart of Accounts
Chart of Accounts
Budgeting
Key Principles
Budgeting Methodology
Key Principles Recommendations

Methodology Cashflow
Recommendations Management
Principles & Tools
Methodology
Cashflow Management
Targets
Principles & Tools
Methodology Non-Profit
Essentials
Setting Up
Targets Restricted Funds

The Board
Non-Profit Essentials
Setting Up
Restricted Funds

The Board
 Basic Finance &
Financial Statements Accounting

John Walker

Basic Accounting
◮ Balance Sheet Balance Sheet
◮ The resources you control at a point in time Income Statement
Chart of Accounts

◮ Income Statement Budgeting

Key Principles
◮ Measures net income over a period of time Methodology
Recommendations
◮ Cashflow Statement Cashflow
Management
◮ Explains the net change in cash over a period of time Principles & Tools
Methodology

Targets

Income Statement, 01/01/09 to 12/31/09 Non-Profit

Essentials
Setting Up
TIME
Restricted Funds

The Board

Balance Sheet, 01/01/09 Balance Sheet, 12/31/09

 Basic Finance &
Cash vs. Accrual Accounting Accounting

John Walker

Basic Accounting
Balance Sheet
◮ Difference between Reliable and Relevant Income Statement
Chart of Accounts
◮ Reliable: concrete - cash is tangible, and we can verify
Budgeting
exact cash level Key Principles
Methodology
◮ Relevant: recognize the commitments made by the Recommendations
organization that will eventually involve cash e.g. Cashflow
Management
placing an order, or receiving a pledge commitment
Principles & Tools
Methodology
◮ Reliable = Cash , Relevant = Accrual
Targets
◮ In the initial stages, working on a cash basis is fine Non-Profit
Essentials
◮ Switching to accrual really depends upon creating scale Setting Up
in the following: Restricted Funds

The Board
◮ Incurring liabilities
◮ Prepaid expenses
◮ Building receivables
 Basic Finance &
The Balance Sheet Accounting

John Walker

Basic Accounting
Balance Sheet
◮ What you own Income Statement
Chart of Accounts
◮ Assets Budgeting
◮ What you owe Key Principles
Methodology
◮ Liabilities (to Creditors) Recommendations

Cashflow
◮ Equity (to Shareholders) Management
Principles & Tools
◮ In a Non-Profit, the state owns the assets, and the term Methodology

Net Assets is used to refer to the equity Targets

Non-Profit
◮ Why use the term balance ? Essentials
Setting Up

Assets = Liabilities + Shareholders ′ Equity Restricted Funds

The Board
Assets = Liabilities + NetAssets
◮ This is the fundamental basis for financial accounting
 Basic Finance &
Balance Sheet Structure Accounting

John Walker

Basic Accounting
Assets Liabilities & Equity Balance Sheet
Income Statement

what you own what you owe Chart of Accounts

Budgeting
Cash & Equivalents Key Principles
Methodology
Stocks & Shares Recommendations

Prepaid Expenses Accrued Expenses Cashflow

Management
Accounts Receivable Accounts Payable Principles & Tools
Methodology
Pledges Receivable Grants Payable Targets
Property, Plant & Equipment Long-Term Loan Non-Profit
Essentials
Retained Earnings Setting Up

Shareholders’ Equity Restricted Funds

The Board
Σ of Assets Σ of Liabilities & Equity

Remember, Σ(Assets) = Σ(Liabilities) + Σ(Equity )

 Basic Finance &
Income Statement Structure Accounting

John Walker

Basic Accounting
Revenues, what you earn Balance Sheet
Income Statement
Donations & Grants Chart of Accounts

Earned Income Budgeting

Key Principles
Stock Returns & Bank Interest Methodology
Recommendations
Σ of Revenues Cashflow
Management
Expenses, what you spend Principles & Tools
Grants & Stipends Methodology

Targets
Salaries & Benefits
Non-Profit
Rent & Office Essentials

Insurance Setting Up
Restricted Funds

Σ of Expenses The Board

Net Income

NetIncomet = Σ(Revenues)t − Σ(Expenses)t

 Basic Finance &
Designing the Chart of Accounts Accounting

John Walker

◮ Example handout: A1 Basic Accounting

Balance Sheet
◮ Design it around the business/activity Income Statement
Chart of Accounts
◮ Think about how to track and examine the data
Budgeting
◮ Don’t just treat it as a necessary evil: it’s a critical Key Principles

source of information Methodology

Recommendations
◮ Think about evolution - build a structure that Cashflow
accommodates the future dynamic Management
Principles & Tools
◮ Direct & indirect costs, allocations Methodology

Targets
◮ Seek to understand the true cost of each activity
Non-Profit
◮ Direct : e.g. program consultancy, event staffing Essentials
Setting Up
◮ Indirect : not specific to a single activity e.g. office Restricted Funds

rental, vehicle loan, telephone The Board

◮ Allocate the indirect costs proportionally over the
segments, based upon chosen allocation method
◮ Nonprofits: Use the Unified Chart of Accounts as a
starting point: http://nccs.urban.org/projects/ucoa.cfm
 Basic Finance &
Segmented Accounting Accounting

John Walker

Basic Accounting
Balance Sheet
Income Statement
Chart of Accounts
◮ It’s just a table. . . really. Budgeting
◮ Generic expense accounts, the rows Key Principles
Methodology
Recommendations
◮ What was the expense
Cashflow
◮ e.g. airfare, meal, taxi, grant paid Management
Principles & Tools
◮ Program-based segments or divisions, the columns Methodology

◮ Why was the expense incurred Targets

◮ e.g. development, program A, program B Non-Profit

Essentials
◮ Increased complexity at transaction entry stage Setting Up
Restricted Funds
◮ But(!), vastly improved information for managerial The Board
decision making
 Basic Finance &
Segmented Chart of Accounts Accounting

John Walker

◮ Example: Basic Accounting

Balance Sheet
Income Statement
Expense Code Program A Program B Total Chart of Accounts

Budgeting
Indirect Expenses Key Principles
Salaries 30 45 ... 75 Methodology
Recommendations
Benefits 30 45 ... 75
Cashflow
Insurance 10 12 ... 22 Management
Direct Expenses Principles & Tools
Methodology
Consultancy 30 45 ... 75 Targets
Supplies 30 45 ... 75
Non-Profit
Travel 10 12 ... 22 Essentials
Meals 10 12 ... 22 Setting Up
Restricted Funds
Total 150 216 366 The Board

◮ Segments could be Programs, Divisions, Subsidiaries,

etc., even Departments
◮ Note: the method of indirect allocation is flexible
 Basic Finance &
Budgeting - Why Bother? Accounting

John Walker

Basic Accounting
#1: Planning is everything Balance Sheet
Income Statement
#2: The activity of planning itself is paramount Chart of Accounts

Budgeting
Key Principles
Planning & budgeting give you the essential understanding Methodology
Recommendations
of the organizations dynamics, enabling:
Cashflow
◮ you to build confidence what actions are the most Management
Principles & Tools
appropriate or beneficial - ties outcomes to tasks Methodology

Targets
◮ you to make decisions on-the-fly and better estimate the Non-Profit
resulting impacts - improved reactivity during change Essentials
Setting Up
◮ you to compare what you said would happen against Restricted Funds

The Board
what actually did
◮ people to see that you (look like you) know what you’re
doing and where you’re going
 Basic Finance &
Basic Budgeting Workflow Accounting

John Walker

Basic Accounting
1. Strategic Goal Definition reassess goals
Balance Sheet
Income Statement
Chart of Accounts

Budgeting
C Key Principles
Methodology
Recommendations

2. Task Assessment & Planning Cashflow

Management
Principles & Tools
Staffing & resources Methodology
Specific costs
Targets

Non-Profit
Essentials
3. Estimation & Costing A Setting Up
Restricted Funds
Indirect & The Board
direct expenses

B
4. Budget Aggregation
Suitable toolset. . .
 Basic Finance &
Some Recommendations Accounting

John Walker

Basic Accounting
◮ Iteration is fundamental Balance Sheet
Income Statement
◮ You never get it right first-time Chart of Accounts
◮ Honing the answer builds understanding Budgeting
Key Principles
◮ Involve everyone Methodology
Recommendations
◮ Buy-in is essential Cashflow
◮ People need to agree they can achieve the outcomes Management
Principles & Tools
with the resources at their disposal Methodology

◮ Scenario analysis Targets

◮ Model for more than just most likely outcome Non-Profit

Essentials
◮ Explore sensitivity in the potential outcomes Setting Up
Restricted Funds
◮ Monitor & revise The Board
◮ Have easy way of comparing performance vs. budget
◮ Revise the budget formally when necessary
◮ Example handout: A2
 Basic Finance &
Essentials Accounting

John Walker

You will/should always feel overextended, in terms of com- Basic Accounting

Balance Sheet
mitments outweighing definite income - it’s natural Income Statement
Chart of Accounts

Budgeting
◮ Cashflow mgmt is a mix of science and art Key Principles
Methodology
◮ But it does benefit from rigorous analysis and solid Recommendations

Cashflow
understanding of the economics of the organization Management
Principles & Tools
◮ Challenge #1: matching prudent estimation of Methodology

potential income with expense commitments Targets

Non-Profit
◮ Challenge #2: knowing when to spend to make more Essentials
Setting Up
◮ Understanding the income pipeline is a critical factor Restricted Funds

◮ Develop a staged pipeline for fundraising/revenue The Board

opportunities - staged according to likelihood of success

◮ Avoid percentage weighting, unless it makes sense
◮ And know your burn rate. . .
 Basic Finance &
Methodology & Recommendations Accounting

John Walker

Simple structure: Basic Accounting

Balance Sheet
Income Statement
CashIncome(t) − CashExpense(t) = ∆Cash(t) Chart of Accounts

Budgeting
EndingCash(t−1) + ∆Cash(t) = EndingCash(t) Key Principles
Methodology
Recommendations

◮ Monthly period probably most relevant - although Cashflow

Management
sometimes weekly or bi-weekly, depending on situation Principles & Tools
Methodology

◮ Watch for payables/receivables - this is not about Targets

expense or revenue recognition, this is about CASH Non-Profit

Essentials
◮ Keep it simple - develop it yourself - as with any model, Setting Up
Restricted Funds

to use it you need to understand it The Board

◮ Know where you have flexibility - payables you can

extend, receivables you can accelerate
◮ Example handout: A3
 Basic Finance &
The Importance of Targets Accounting

John Walker

Basic Accounting
◮ Targets are a critical management tool Balance Sheet
Income Statement
◮ Focus efforts on meeting your plan; they are the tactics Chart of Accounts

to fulfil the strategy Budgeting

Key Principles
◮ Your budget makes assumptions on revenue & cash Methodology
income - you need to fulfil those assumptions Recommendations

Cashflow
◮ Defining a small set of good, simple targets is a very Management
Principles & Tools
important step Methodology

◮ E.g. Revenue: Targets

Non-Profit
◮ Secure $100k by mid-year & $250k by year-end Essentials
◮ Caution: know the difference between revenue vs cash Setting Up
Restricted Funds
◮ E.g. Cash coverage: The Board
◮ Minimum 3 months cash in hand
◮ Number of months depends on dynamics. . .
◮ Targets offer the opportunity to reward your workforce
 Basic Finance &
NFPs: General Recommendations Accounting

John Walker

Basic Accounting
◮ Track the specific segments: Balance Sheet
Income Statement

1. Program: Programmatic activities, split into Chart of Accounts

Budgeting
subprograms as necessary Key Principles
2. Development: Fundraising & donor cultivation Methodology
Recommendations
3. Administration: True overhead and general Cashflow
management Management
Principles & Tools
◮ Develop a pledge recognition process; manage the Methodology

Targets
pledge receivables
Non-Profit
◮ Implement a grant management process - monitor the Essentials
Setting Up
reports, especially if milestone payments are report Restricted Funds

dependent The Board

◮ Find yourself a good non-profit accountant and/or

bookkeeper - get recommendations
 Basic Finance &
Handling Restricted Funds Accounting

John Walker

Basic Accounting
◮ Restricted funds: tied to specific expenses Balance Sheet
Income Statement
◮ direct, itemized costs Chart of Accounts

Budgeting
◮ proportional allocation e.g. from salaries Key Principles
◮ How do you know? Pledge/gift provided with restrictive Methodology
Recommendations
language. . . Cashflow
Management
◮ Check with accountant/auditor if it appears vague Principles & Tools
Methodology
◮ Find donors that understand the necessity of overhead Targets
◮ Build in an overhead cost coverage into your grant Non-Profit
applications wherever possible Essentials
Setting Up
◮ using a fixed percentage is usually acceptable, say 10% Restricted Funds

The Board
◮ Write-up a process for how you handle the
income/expense side of restricted funding - benefits you
in the long-run
 Basic Finance &
Recommendations with Boards Accounting

John Walker

Basic Accounting
Balance Sheet
◮ A board is there to help you make financial decisions - Income Statement
Chart of Accounts
use it accordingly Budgeting
Key Principles
◮ Deliver financial data, in advance of the meetings and Methodology
Recommendations
in an easy-to-read format
Cashflow
◮ Focus the data presentation on the salient issues you Management
Principles & Tools
need to discuss Methodology

Targets
◮ Identify the financial guru - seek their involvement and Non-Profit
buy-in prior to meetings Essentials
Setting Up
◮ Typical, basic board pack: Restricted Funds

The Board
1. Historicals: income/expense, balance sheets (asset list)
2. Projections: revenue and expense, cashflow
3. Specifics; notes