Finance for Association Professionals

Finance For Association Professionals

Texas Society of Association Executives

Presented by

Max Muller and Associates, LLC

FINANCE FOR ASSOCIATION PROFESSIONALS

Table of Contents

1. The Accountant’s Toolbox - How The Process Works and Why You Should Follow It Personal Assessment The Three Equations The Accounting Cycle Basic Principles and Concepts of Financial Management Ten Rules for Classification Cost Tracking Capital Budget/Expenditures Definitions Capital Budget Checklist Depreciation

2. Understanding the Purchase Order Process and Legal Issues Why Have A Purchase Order System What is UCC-Article II and How Does It Apply To My Company What Needs To Be Included In A Purchase Order or Contract

3. Budgeting For A Realistic Future – Not A “Pie In The Sky” Financial Reporting Statement of Revenues and Expenses Example Budget Reporting Seven-Point Budgeting Outline Six-Point Budget Checklist

Appendix

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: The Accountant’s Toolbox

Personal Assessment Take an inventory of your financial skills by answering the following questions with a True, False, or Maybe (T,F or M)

1. The accounting equation is Assets + Liabilities = Equity. 2. Under normal business operations, current assets represent assets that may be reasonably expected to be liquidated into cash, sold or consumed within a one-year period. 3. The balance sheet is a listing of assets, liabilities and owner equity as of a specific date; while an income statement is a summary of revenues and expenses for a specific period of time. 4. Both direct and indirect expenses are charged to the department in which they were incurred because they are under the control of the department manager. 5. Breakeven point is achieved if revenue per unit is greater than variable cost per unit. 6. Working capital represents the excess of current assets over current liabilities. 7. Flexible budgeting is a means by which the effects of volume changes are factored into the budget system. 8. A complete set of financial statements includes only the balance sheet and the income statement. 9. An increase in accounts receivable turnover generally indicates an improvement in collection practices. 10. Establishing a mission statement is the first step in the budget process. 11. The accounting process looks forward to the future. 12. The journal entry for recording a check written on the organization’s account is a credit to the cash account. 13. In cash accounting, an expense is entered as occurring when a product is ordered. 14. Equipment financed through an operating lease is depreciated over the term of the lease. 15. Current ratio is current assets divided by owner equity. 16. Profit margin is net income divided by net sales. 17. Profit is good.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: The Accountant’s Toolbox

The Three Equations

1. Accounting Equation Assets = Liabilities + Owner’s Equity

2. Profit Equation Revenue - Expenses = Profit

3. Tax Equation Revenue - Deductions = Taxable income

GAAP (Generally Accepted Accounting Principles) - the sets of standard that govern how most business manage their accounting

Four Common Financial Statements

1. Balance Sheet

2. Operating Statement (aka Profit and Loss Statement)

3. Retained Earnings Statement

4. Cash Flow Statement

HOT TIP!! Assets must always equal the total of liabilities plus owner equity

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: The Accountant’s Toolbox

The Accounting Cycle

Journal entries record business transactions entered into the “books” of the organization from source documents.

Adjusting entries record business activities of the organization that are not triggered by source documents.

Closing entries bring all operating statement accounts to a balance of zero at the end of an accounting period. The net result for the period (net profit/loss) is then transferred to the balance sheet through the retained earnings account.

“T” accounts are used to illustrate double-entry bookkeeping techniques.

Three Common Rules for “T” Accounts • There are five major categories of accounts • Debits means left; credits mean right • Every debit entry must have an equal credit entry and vice versa

Asset Accounts Liability Accounts Equity Accounts Debit Credit Debit Credit Debit Credit

Income Accounts Expense Accounts Debit Credit Debit Credit

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: The Accountant’s Toolbox

Basic Principles and Concepts of Financial Management

Debits and Credits

Table of Debit and Credit Entries Type of If the transaction increases the If the transaction decreases Account account, enter it as a ….. the account, enter it as a ……

Balance Asset Debit Credit Sheet Accounts Liability Credit Debit

Equity Credit Debit Operating Statement Income Credit Debit Accounts Expense Debit Credit

Two Methods Used to “Recognize” Expenses and Revenue

Cash Revenue is recognized (recorded) when cash is received Expense is recognized when cash is paid.

Accrual Revenue is recognized when a sale is made (title passed) or When the product is shipped Expense is recognized when good are received (title passed) or When services are received.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: The Accountant’s Toolbox

Basic Principles and Concepts of Financial Management

Ten Rules for Classification

1. Asset accounts normally have debit balances.

2. Liability accounts normally have credit balances.

3. Equity accounts normally have credit balances.

4. Revenue accounts normally have credit balances.

5. Expense accounts normally have debit balances.

6. All debits must equal all credits for the accounting equation to be in balance.

7. Debits represent increases to assets and expenses.

8. Credits represent increases to liabilities, equity and revenue.

9. Debits represent decreases to liabilities, equity, and revenue.

10. Credits represent decreases to assets and expenses.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: The Accountant’s Toolbox

Cost Tracking

Characteristics of Direct vs. Indirect Expense or Cost A direct expense or cost is directly traceable to a specific line item in an economical way Example Responsibility

______

An indirect expense or cost is not directly traceable to a specific line item in an economical way. Example Responsibility

______

Characteristics of Fixed vs. Variable vs. Semi-Variable Expense or Cost A fixed expense or cost remains the same over a relative broad range of service or sales volume, or production level. Example Responsibility

______

______A variable expense or cost increases and decreases in proportion to changes in service or sales volume or production level Example Responsibility

______

______A semi-variable expense or cost has both fixed and variable characteristics Example Responsibility

______

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: Accountant’s Toolbox

Revenue Expenditures Organizational Costs Prime Costs Overhead Classify the following expenditures Direct Direct Labor Direct Other Indirect Indirect Labor Indirect in relation to a product by category Materials Materials Other Facility Rent Supervision Salaries - administrative Salaries - crew workers Employer Taxes Fuels Electricity Depreciation Property Taxes Office Equipment Small tools

Cost Behavior Classify the following direct expenses as Fixed Variable Semi- fixed, variable, or semi-variable. Variable Salaries - sales personnel Salaries - administrative Salaries - crew workers Salaries - janitorial Utilities Depreciation - straight line Direct labor Supplies Rent - office Property insurance Maintenance equipment Taxes - payroll

Five Key Points on Fixed and Variable Costs 1. As volume changes, total fixed costs remain the same within a relevant range of activity 2. As volume changes, fixed cost per unit changes 3. As volume changes, total variable costs change 4. As volume changes, variable costs per unit remain the same within a relevant range of activity 5. Any semi-variable cost should be examined for its fixed and variable characteristics.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: Accountant’s Tool Box

Capital Budget/Expenditures Definitions

Actual Cost - The bottom line cost of an asset after taking into consideration the “Six Elements Included in a Capital Budget” and Four Elements Not Included in a Capital Budget”

Useful Life - This is the period of time that an asset is considered to be useful. This is determined by a period of years. This information is determined by and accessible through the IRS.

Salvage Value - This is what the asset will be worth at the end of its useful life.

Capital Expenditures - Three Minimum Criteria 1. Tangible asset 2. Minimum useful life of one year 3. Meet the minimum monetary cutoff in accordance with organization’ capitalization policy

Six Elements Included in a Capital Budget 1. Net purchase price 2. Insurance cost on shipping 3. Installation cost 4. Sales tax 5. Shipping cost 6. Costs that extend useful life

Four Elements Not Included in a Capital Budget 1. Service contracts 2. Insurance after shipping 3. Startup supplies 4. Employee training

Financing Capital Expenditures Benefits of Purchasing Benefits of Leasing Save finance costs Save capital for other investments Ownership Reduce risk of obsolete equipment

Operating Lease • Recorded as rental expense and included in operating expenses • Title remains with lessor throughout lease period • Cost of execution usually absorbed by lessor

Capital Lease • Recorded as a capital expenditure • Capitalized costs allocated over future periods • Title may revert to lessee depending upon covenants • Cost of execution usually absorbed by lessee

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: Accountant’s Toolbox

Capital Budget Checklist

Review organization guidelines on capitalization policy

Review equipment inventory to determine items scheduled for retirement.

Sort equipment needs between new and replacement

Within each category of equipment, select priorities in the following order: urgent, necessary, economically desirable, desirable.

For each equipment request, identify the associated cost elements to be considered for capitalization

For each equipment request, determine the associated noncapital expenditures

For each replacement request, identify trade-in or net salvage value of the item being replaced

Calculate payback to determine if the capital request is within the organization’s guidelines.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 1: Accountant’s Toolbox

Depreciation

Two Methods of Depreciation

1. Straight-line depreciation method allocates costs uniformly over the assets estimated useful life. This is the most common method.

Depreciate per period = Total project or asset cost - Salvage value Useful Life

Example: A piece of electronic hardware has an initial cost of $41,000 and $5,000 salvage value at the end of its estimated useful life which is 5 years.

Annual depreciation expense would be: 41,000 - 5,000 = 7,200 5

2. Accelerated depreciation method results in a shift of depreciation toward the beginning of an asset’s useful life. It applies a relatively large amounts of depreciation expense in the first years and smaller amounts in later years.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 2: Understanding the Purchase Order Process and Legal Issues

Importance of a purchase order system

Any accounting auditor will tell you – their biggest concern for misstatement of financials is the internal control process of the accounts payable area. This is where the most fraudulent activity occurs. If there is a loop-hole – someone will find it and use it. Lack of internal controls leads to a misstatement of the financials which then ultimately lead to the materiality principle.

Materiality Principle

Materiality is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users. Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision making needs of the users. A unanimous FASB agreed to return to the definition of materiality from Concepts Statement (CON) No. 2, Qualitative Characteristics of Accounting Information, which defines materiality in the context of “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.”

For Internal Control Purposes

1. What was ordered – services or goods or both 2. Who ordered the service or goods 3. Who is authorized to order the service or goods 4. Was the service or goods received 5. Was the invoice received and approved 6. Did accounts payable pay the invoice

A Good Purchase Order System Should

Include “segregation of duties”  The person who orders the service or goods should not be the person who receives it.  The person who receives the service or goods should not be the person who approves the invoice.  The person who enters the invoice in the system should not be the person who pays the check.  The person who pays/signs the check should not be the person who does the bank reconciliation. And so on, and so on………

FINANCE FOR ASSOCIATION PROFESSIONALS

What Is UCC-Article II and How Does It Apply To My Company

Uniform Commercial Code – Article II

• A contract or PO takes precedence over everything else o Once a company accepts a contract or PO – you are accepting their terms, conditions, etc. o Net 30 means – payment is due 30 days from RECEIPT of invoice or RECEIPT of services or goods, whichever is later. o If there is no contract…… • The invoice becomes the contract - the document used by Accounts Payable to pay the vendor or contractor according to stated terms on the invoice. • In the absence of an invoice – the verbal or, in today’s world, the on-line statement becomes the contract or PO – electronic “signatures” are now accepted in court. Once you order and pay on-line – it is hard to argue later in court that you did not agree with the terms and conditions.

FINANCE FOR ASSOCIATION PROFESSIONALS

A Contract or Purchase Order should include the following information:

1. Specifically what is being ordered a. Description of service or goods b. Quantity (size, number ordered, etc.) c. Quality of service or goods expected

2. Date expect delivery a. Try to be very specific with date b. Method of delivery c. Shipping terms – this determines the possibility of sales tax issues

3. Payment Terms and Acceptable Methods of Payment a. Keep in mind UCC-Article II b. Do they accept ACH, credit cards, physical checks

4. Return Policy a. Specific terms for return of goods or cancellation of services b. Rules for change orders c. Who has liability if something goes wrong

5. Other basic information a. Vendor/Contractor name and address b. Where to send payment c. Contact person – phone number, email address, etc. d. Signatures of both parties (if applicable)

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 3: Budgeting For A Realistic Future – Not A “Pie In The Sky”

Financial Reporting

Eight Financial Reporting Objectives 1. Information is relevant 2. Information is understandable 3. Numbers are verifiable 4. Information is timely 5. Format allows for comparison 6. Reporting is consistent 7. Numbers are complete 8. Reports are adequate for shareholder or owner legal disclosure

The Financial Statements

Financial Reporting Components

1. Balance Sheet 2. Operating Statement (P & L Statement) 3. Retained Earnings Statement 4. Statement of Cash Flow

Performance Report Components • Statistical data • Financial data • Current month • Actual vs. Budgeted

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 3: Budgeting For A Realistic Future – Not A “Pie In The Sky”

Statement of Revenues, Expenses, and Changes in Fund Net Position

This table displays a summary of revenues recognized for a specific period as well as costs and expenses charged against these revenues for a non-profit agency.

Farm Convenience Loan Fund Tourism Totals Enterprise Store Enterprise Operating Revenues Gasoline, food, beverage and $ $3,300,000 $ $97,000 $3,397,000 merchandise Rental Income 15,000 15,000 Hunting permits 420,000 420,000 Other permits 63,000 63,000 Farming and ranching 1,738,000 1,738,000 Interest 169,160 169,160 Total Operating Revenues 1,738,000 3,300,000 169,160 595,000 5,802,160

Operating Expenses Cost of sales 1,100,000 2,000,000 55,000 3,155,000 General, administrative and 280,000 990,000 91,160 360,000 1,721,160 selling Depreciation and 160,000 80,000 33,000 80,000 353,000 amortization Other 150,000 25,000 175,000 Total Operating Expenses 1,690,000 3,070,000 124,160 520,000 5,404,160

Operating Income 48,000 230,000 45,000 75,000 398,000

Nonoperating Revenue (Expenses) Interest 1,200 1,200 Total Nonoperating Revenue 1,200 1,200 Change In Net Position 49,200 230,000 45,000 75,000 399,200 Total Net Position, beginning of year 3,312,800 2,160,000 2,456,000 1,345,000 9,273,800

Total net position, end of year $3,362,000 $2,390,000 $2,501,000 $1,420,000 $9,673,000

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 3: Budgeting For A Realistic Future – Not A “Pie In The Sky”

Profit and Loss (Income) Statement

This table displays a summary of revenues recognized for a specific period as well as costs and expenses charged against these revenues for a for-profit company.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 3: Budgeting For A Realistic Future – Not A “Pie In The Sky”

Budget Reports

Budget: A written expression in statistical and financial terms of the goals and objectives of an organization.

10 Elements of Good Budget Performance Reports 1. Appropriate

2. Consistent in form and content

3. Prompt and timely

4. Periodic

5. Easy to understand

6. Concise

7. Inclusive

8. Analytical

9. Comparative

10. Assumptions are attached

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 3: Budgeting For A Realistic Future – Not A “Pie In The Sky”

Seven-Point Budgeting Outline

1. A Management Plan includes the organizational mission/vision statement, long-term objectives, short- term objectives, assumptions and mathematics.

2. An Operating Plan includes the operating statement and operating statement support budgets.

Types of Budgets

Production Budget - Direct labor budget Administrative Budget - Overhead budget Sales/Revenue Budget - by territory, product, service, etc.

3. A Financial Plan includes the budgeted balance sheet and the balance sheet support budgets.

4. Variable-expense budgets

5. Statistical budgets

6. Performance reports

7. Unit-indicator reports include break-even point and cost-volume-profit analysis.

FINANCE FOR ASSOCIATION PROFESSIONALS

Section 3: Budgeting For A Realistic Future – Not A “Pie In The Sky”

Six-Point Budgeting Checklist:

1. Include the proper personnel in establishing the budget

2. Establish a Variance Report

3. Allow adequate preparation time

4. Manage miscellaneous accounts

5. Develop a Flex-Budget for problem areas

6. When an area of the budget runs out of money… STOP spending!

FINANCE FOR ASSOCIATION PROFESSIONALS

Appendix A

GAAP - Is Generally Accepted Accounting Principles

Account - A form used to record additions and deductions for each additional asset, liability, capital, revenue and expense. Accounting cycle - The principal accounting procedures employed to process transactions during a fiscal period. Accrual - An expense or revenue that usually increases with the passage of time. Asset - Resources acquired and owned by the business. Budgeting - A process of establishing specific goals for future operations and making periodic comparisons with actual results. Budget performance report - A report comparing actual results with budget amounts. Chart of Accounts - An organized listing of all the business’s accounts Current asset - Cash or another asset that may reasonably be expected to be realized in cash or consumed, usually with a year or less, through normal business operations. Current liability - A liability due within a short time (usually one year or less) to be paid out of current assets. Departmental margin - Departmental gross profits less direct departmental expense. Direct cost – A cost that touches the service or product and cannot be overlooked. Salary payments would be a direct cost to a company. Direct labor - Wages of workers who convert materials into a finished product. Direct-labor time variance - A cost associated with the difference between the actual direct-labor hours spent producing a commodity and the standard rate for the commodity Fixed expense - An expense that stays fixed in accordance with set perimeters In-direct cost – not directly traceable to a specific line item – Overhead expenses for the rent may be an indirect cost to the production department. Net Income - A final figure in the income statement when expenses exceed revenues. Other expense - An expense that cannot be associated directly with operations Other income - Revenue from sources other than the principal activity of a business. Profit Margin - The profit margin after taxes. Revenue - The amount charged to customers for goods sold or services rendered. Semi-Variable expense - An expense whose characteristics are both fixed and fluctuating. Variable expense - An expense that tends to fluctuate in accordance with activity variations

FINANCE FOR ASSOCIATION PROFESSIONALS