Know your numbers, to know your business.
Click here to watch video Video content and live links to state forms are listed below.
Hey, it's David Drake and I'm sitting here with Kathy Emerson in my house, around my kitchen table, fighting with my financials because…. that's what I do.
Kathy: Because that's what we do. I'm Kathy Emerson I have my own company Kathy Emerson LLC. I'm a CPA. I help people set up their books and records to meet recording requirements and so they understand what's going on with their business. “If you know your numbers, you know your business”
David: OK, so the goal of today's meeting is to outline a couple of things:
- We're going to show how to properly report your income and expenses.
- Where these numbers show up and
- Why you need to know them.
Kathy: When we start to set up your company's business, we start with a chart of accounts. Your chart of accounts should really be set up to work with how you need to report those numbers. So, what we're looking at for a nonprofit is a short form and a long form for nonprofits. David, do you want to talk about that?
David: Right, the short form for reporting is if you make under $25,000. As a not-for-profit properly registered in the state of Florida, if you make under $25,000 you can be exempt from the cost of registering in the state of Florida. The paperwork that's required for registration in the state of Florida for a small charity is different for a charity that makes over $25,000. We have the short form for the small charity and the long form for the bigger charity, anyone who is filing a 990 and making over $25,000 is going to file the long form. There's another video explaining registration for that.
The state of Florida puts together a Check-a-Charity site, several different states have a similar service where they put their registered charities on a site so that the general public and investors can go and learn more about the financial history of that charity. So, if you log into the State of Florida Check a Charity site, you are going to see this format. I’ve pulled up one of my favorite charities Swim Safe Forever as an example.
Basically, what this screen does is show you a breakdown of the ratios of program service expenses, administrative expenses, and fundraising expenses, so that you as a consumer can see and judge how you think the charity is performing.
Kathy: OK, so what we're going to do is look and see how they really calculate these percentages [so we know how to use them properly].
When you're talking about the program service expenses, the administrative expenses and the fundraising expenses, you see the numbers 40% 22% and 38% respectively. These percentages refer to the total of all the expenses [They add to 100%].
So, the way to increase your program services expenses, based on this formula, is to decrease your administrative expenses and fundraising expenses. That's [Program service expanses] what you're measured on as a nonprofit. How much of these expenses are actually going to be spent on your project?
So, let's take a look at what really goes into these expenses. When you have program services expenses that support the program, management and general expenses are expenses that don't support the program and fundraising expenses are allocated to putting on a fundraiser.
If you move to the top of the revenue section of the form, there's an ability to net the revenue expenses into you're [upper] revenue, effectively removing those expenses from the [lower] expense portion of the form.
So, [if any portions of] this management and general expense is supporting the program [you can reallocate it against the revenue it produced] if you're actually using it to support fundraising. Or if you're selling product and you have a cost occurring [to produce] those products, you're going to put in the upper section of the form.
By putting it in the upper section it's not appearing in the lower section, so these lower section expenses will more accurately divide against [the total] to lower total expenses and you'll have a higher percentage of program service expenses which is what gets published on the website!
David: OK, so if you [laughing] sat through that and was just as confused as I was, I'm going to have Kathy break it down again.
Basically, the name of the game here is to allocate as much of my expense to a specific fundraising event [as I can] so I get it out of the total expenses line. Is that correct?
Kathy: That's correct, Yes!
David: OK…. Why is that important?
Kathie: That's important because of how the percentages are calculated. When your non-for profit is looked at for saying how much of your income is used as expenses for your programs.
If you have special fundraising expenses that are listed as general fundraising expenses, that is going to cause your percentage of your program expenses to be less. So get those fundraising expenses that are associated with special events out of that category! Put that in the top part of the form.
David: OK so we’ll go back to those forms again. Let's go back to this magical form here… [Financial Form] These are the expenses: the program service expenses, administrative expenses and fundraising expenses that the state sets up for individuals who are investigating you to see how efficient you are with your money. It's their donation, it's their money. They want to see where they're investing the money and what you're going to do with it! If they feel too much is going towards administrative expenses, they're probably going to donate to anybody to somebody else.
Kathy: If you are being evaluated on how much money goes into your programs, you're ultimately going to want to reflect that in the numbers.
So, if your program expense is 40%. 40% of all your spending goes to the program that's what your judged on. In this calculation [example] the first columns are what was actually reported. If it could be deemed that part of that fundraising effort was really specific for special fundraising events, then it's not [going to be] reported in the expense line.