For most nonprofits, the end of February is their financial year-end. This is a period when nonprofit leaders are busy preparing their annual reports. It is a very testing time for them as the state of their finances and liquidity status will be exposed to everyone to see.
The Financial Accounting Standards Board (FASB) introduced an accounting update that simplifies how charity organizations should classify their net assets and what kind of information to be included in financial statements. Organizations are expected to disclose their liquidity status as well.
For the past 13-years, nonprofit financial statements have been prepared using the same model. Most CFOs were so used to the old model that they could unconsciously prepare with their eyes shut. In 2017, the new liquidity disclosure will make things a little different.
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What is accounting liquidity?
Not every charity leader is well-versed in accounting practices. To those who are wondering what animal this “accounting liquidity” is, don’t despair, you’re not alone. In laymen’s terms, accounting liquidity is the process of measuring how charities meet their financial obligations. The purpose of it is to assess how quickly a financial asset can be converted into cash.
For example, the availability of financial assets such as donations can be affected by: the restrictions imposed by donors, a binding contract with vendors and financial restrictions set by the board of directors. All such information should be clearly stated in 2017’s financial statements.
What changes should charity organizations expect?
There are several changes to nonprofit reporting, worth noting are:
- Improvements to the presentation and disclosures for net assets classes from the previous three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) to two classes (without donor restrictions and with donor restrictions).
- Allowing free choice between the direct method and indirect method in presenting cash flows.
- Providing better information about functional expenses and disclosures about how expenses are allocated to management in general.
- Augmenting disclosures on underwater endowment funds. An endowment fund is said to be “underwater” when its value is less than the average amount at the time of original funding.
- Enhancements to information provided about the liquidity and availability of financial resources should be clearly stated.
Being accountable and transparent is key
The new liquidity disclosure requirements force nonprofit organizations to be accountable than ever before. The financial statements are expected to be a true reflection of their financial position.
Organizations have to devise ways of being consistently accountable and transparent to donors. This may mean making sure that annual reports are easily accessible on their websites. This will be impossible when using an inefficient bookkeeping system.
You may ask: how do I make sure that all accounting transactions are properly recorded? Organizations should consider the following:
- Make sure that the efficiency rate of your accounting software is high. Charities that still record their accounting transactions manually will have a challenge in producing accurate financial reports. Invest in a user-friendly accounting software that enables your organization to record all your transactions.
- Monitor purchases in real-time. You can’t expect to produce a clean audit while purchases are still left unmonitored. Opportunities for fraud and corruption abound when organizations are still using a paper-based PO system.
Charity organizations still using paper-based system tend to waste donated funds on unnecessary purchases. Their attempts to spending within budget always fail. This is because it’s difficult to monitor purchases while still using a paper-trail system.
Liquidity disclosure requirements force you to use an efficient PO system
New liquidity disclosure requirements force charities to tell the world the story of how they meet their financial obligations. Donors will get a good picture of how their donations have acquired assets and how much has been wasted.
It goes without saying that only an efficient purchase order system makes drafting financial statements seem as easy as “thanks for your donations”. Let’s take a look at Procurementexpress.com, a purchase order system that allows charity leaders to breathe a sigh of relief. This PO system makes budgeting feel like a hobby. Even technophobes find Procurementexpress.com to be too easy to use.
With Procurementexpress.com you are assured that:
- All purchase requests are approved quickly.
- COOs and CFOs can approve, reject or comment on POs and get an instant view of budgets, even while on the road.
- Wasted spend comes to an end in 2017 as charities get to see who is responsible for misspending donated funds.
If you’d like more info about how to end wasted spend visit Procurementexpress.com (an automated purchase control system), alternatively contact one of our ninjas: [email protected]
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