Not-for-Profit Budgeting and Financial Management / Edition 4

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Continuous budgeting, as explained in Edward McMillan's trenchant Not-for-Profit Budgeting and Financial Management, offers a system that is not only easy to use and monitor, but also ensures true fiscal accountability in the complex not-for-profit arena.

Continuous budgeting breaks down time-consuming annual budgeting processes into twelve easy-to-manage increments that produce more accurate and effective resource allocation, the author explains how to: separate controllable, semi-controllable, and fixed expenses; take corrective actions during the year to offset budget shortfalls; define the roles of the CEO, CFO, the staff, and volunteer leaders; establish expense reduction plans before they are needed; and prepare and present such top-notch budget documents that budgets will be approved the first time.

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Product Details

  • ISBN-13: 9780470575413
  • Publisher: Wiley
  • Publication date: 6/28/2010
  • Edition number: 4
  • Pages: 220
  • Sales rank: 1,328,465
  • Product dimensions: 8.40 (w) x 10.80 (h) x 0.70 (d)

Read an Excerpt

Not-for-Profit Budgeting and Financial Management

By Edward J. McMillan

John Wiley & Sons

Copyright © 2003

Edward J. McMillan
All right reserved.

ISBN: 0-471-45314-5

Chapter One

Basic Accounting and
Financial Operations

A WELL-RUN ORGANIZATION must have an efficient financial operation in place to
implement an effective budgeting program. An effective financial operation should
integrate the following:

* Accurate financial data

* Understandable financial statements that meet the organization's needs

* Timely financial statements

* Actual versus budget figures for the period presented

* An annual audit by an independent certified public accountant (CPA) firm

Accurate Financial Data

Financial statements are prepared by one of two accounting methods:

* Cash basis of accounting-recognizes revenues when cash is received and expenses
when cash is disbursed.

* Accrual basis of accounting-recognizes revenues when they are earned and
expenses when they are incurred. The actual receipt and disbursement of cash
generally does not result in recognizing revenues and expenses. Accrual accounting
also attempts to match revenues with corresponding expenses in the proper
accounting period.

Unless an organization is very small or is a true cash business, the accrual
method of accounting results in muchmore accurate and meaningful financial statements
than the cash basis does. Accrual-based financial statements are more difficult
to prepare, but the resulting accuracy is crucial to good budgeting.

Understandable Financial Statements

Financial statements should be constructed to provide management with what it
needs to effectively control the organization. The statements should compare actual
versus budget data for both the current month and the year to date. They should be
understandable to nonaccounting management and easy to interpret. In addition,
the statements should be streamlined, relatively brief, and not bogged down with
unnecessary detail that will frustrate the reader.

Timely Financial Statements

Internal financial statements should be prepared and distributed monthly and
within 10 business days after the close of the prior month. When the statements are
prepared other than monthly and it takes longer than 10 days to prepare and distribute
them, management's ability to take well-thought-out action to correct problems
diminishes. Rather, decisions are likely to be based on old data, problems may
worsen, and valuable time that could have been used to correct the problem will
have been lost.

Internal financial statements should include, at a minimum, the two primary
financial statements:

* The Statement of Financial Position (the balance sheet)

* The Statement of Activity (the income statement)

Statement of Financial Position

The Statement of Financial Position shows the overall financial health of an organization
at a point in time by comparing the organization's assets, liabilities, and net
assets. It usually does not reflect actual versus budget goals. The Statement of Financial
Position illustrates an organization's solvency and cash position but does not
reflect profitability. A sample Statement of Financial Position for a typical not-for-profit
organization is shown in Exhibit 1.1.

Statement of Activity

The Statement of Activity shows the profitability of an organization for a specific
period by comparing revenues and expenses. It does not reflect the organization's
solvency. The Statement of Activity illustrates both current-month and year-to-date
figures to help management understand the financial condition of the organization.
It also serves as a budgeting tool. A sample Statement of Activity for a typical not-for-profit
organization is shown in Exhibit 1.2.

Annual Audit

An effective budget is based on accurate financial data. Management can ensure
records are accurate by having the records audited by an independent CPA firm. The
audit process requires the CPA firm to advise and make recommendations to management
as to weaknesses and problems with accounting systems. Management may
not be aware of these problems, and the audit will afford an opportunity to correct
deficiencies. In addition, an audit will include an internal control survey and a management

* An internal control survey is designed to expose weaknesses surrounding the
safeguarding of cash and other assets and is an annual requirement of a CPA's
auditing standards.

* A management letter is the vehicle CPA firms use to alert management to inefficiencies
that come to light during the audit. The management letter also includes
recommendations for improvement.

Organizations that cannot afford a full audit should at least consider a less costly
review or compilation.


Excerpted from Not-for-Profit Budgeting and Financial Management
by Edward J. McMillan
Copyright © 2003 by Edward J. McMillan.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

List of Exhibits
Ch. 1 Basic Accounting and Financial Operations 1
Ch. 2 Effective Use of Footnotes and Financial Ratio Calculations for the Statement of Financial Position 7
Ch. 3 Controllable and Uncontrollable Expenses 13
Ch. 4 Controllable, Semi-Controllable, and Fixed Expenses 17
Ch. 5 Noncash Expenses 21
Ch. 6 Natural and Functional Statements of Activity 25
Ch. 7 Internal Financial Statements 29
Ch. 8 Budgeting Philosophy 37
Ch. 9 Continuous Budgeting System Overview 39
Ch. 10 The Executive and the Budget Process 43
Ch. 11 Expense Reduction Plans 47
Ch. 12 The Monthly Budget Process 51
Ch. 13 The Cash Flow Budget 65
Ch. 14 Getting the Budget Approved 69
Ch. 15 Suggested Format of Budget Documents for an Approving Body 71
Ch. 16 The Role of the Budget Coordinator 87
Ch. 17 Accounting and Budgeting for Fringe Benefits 91
Ch. 18 The Capital Budget and Depreciation 93
Ch. 19 Inventory Purchases and Calculation of Cost of Goods Sold 97
Ch. 20 Accounting and Budgeting for Dues 99
Ch. 21 Capital Assets: Lease-or-Buy Decisions 105
Ch. 22 The Long-Range Plan 107
Ch. 23 Financial Ratios 109
Ch. 24 Zero-Based Budgeting 113
Ch. 25 Putting It All Together 115
Glossary 133
Index 139
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