An Introduction to Assessing Control Risk

By Bob Swetz
Controller Consultant | Tier One Services, LLC
All organizations, no matter the size, should have adequate internal controls. Internal controls are things like having multiple staff count cash so that no one person has sole access at any given time.
One thing that may be overlooked is establishing a process of assessing control risks on a regular basis.
What is Control Risk?
To put is simply, control risk is the risk that the internal controls in place will not meet the organization’s objectives. According to the AICPA AU-C Sec940.05, A Control Objective is “the aim or purpose of specified controls. Control objectives address the risks that the controls are intended to mitigate.” In the example above the control objective over counting cash may be to deter the risk of employee theft.
Risks can arise out of a given set of circumstances, or they can be inherent in the nature of the transaction or function.
How and When to Assess Internal Control Risk
How and when to assess internal control risk depends on the nature of the risk or a situation that may arise and cause an increase in risk that did not previously exist.
Let’s look at cash counting again. Because if it’s nature, cash is inherently risky. Assuming the organization’s cash inflows are consistent this risk could be assessed on an annual basis. The risk assessment would involve addressing the possible ways cash could be stolen and determining if the controls in place sufficiently address that risk.
Other types of risks may arise based on circumstance. For example, one of the church’s weekly cash counters just filed for bankruptcy. That situation would give rise to the need for risk assessment at that time, not merely at the end of the year. In this case, the church’s management should consider whether the situation creates additional risk in the cash counting function. A simple way to do this is to list all the possible ways cash could be stolen and whether the controls currently in place (given the situational change) still reduce the risk of employee theft to a reasonably low level.
These are just a few simple examples but should be enough to get you started in developing a plan for risk assessment that makes sense for your organization.
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Should Your Organization Have an Accounting Policies & Procedures Manual?

 

By Bob Swetz
Controller Consultant | Tier One Services, LLC
Yes, and thank you for reading.
Well, I suppose you know where I stand on this, but let me expand a bit. This topic can be broken into 2 groups, both with the same outcome but perhaps for different reasons.
You have a small organization with a 1-person accounting department
This group might be leaning towards a NO answer, but that couldn’t be farther from the truth. A small organization with a 1-person accounting department should have a manual that documents their policies and procedures for continuity if nothing else. When all of the processing steps are in this one person’s head, what happens if they leave suddenly, get sick or are off for an extended period of time? I’ll tell you what happens if there is no documentation, mass chaos. On the other hand, if the policies and procedures are in a written document, the owner, manager or director can pick up right where the other person left off. There may be a bit of a learning curve, but at least there is a good starting point.
You have a large organization with a multi-person accounting department
This group is probably leaning towards a YES answer, but why? The general perception is that a larger organization is a bit more rigid in terms of their policies and procedures and would most likely have them in a written document. This document is critical for such an organization for several reasons. To name a few…
1.      There is a tendency to move staff from one position to another
2.      There can sometimes be high turnover
3.      With many hands in the cookie jar it is important to know who is doing what
The accounting policies & procedures document will help ensure a smooth transition from one position to another, a smooth intake for new employees and protection for staff when errors or irregularities occur.
Once you get on board with the need for such a document you will also realize the importance of keeping the manual updated on a regular basis, at least once or twice a year.
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

How Does Receiving Grants Affect Internal Control?

By Bob Swetz

Controller Consultant | Tier One Services, LLC

Using proper internal accounting controls is important for any type of organization. However nonprofit and governmental entities that receive grant funding typically have at least one additional layer of controls to consider. These controls can be mandated at the Grantor, State or Federal level.

Grantor Level Requirements

If your organization does not fall under federal or state guidelines you may still be required to have specific procedures and controls in place that are stipulated by the grantor. It is extremely important to carefully review the grant documents to make sure your procedures are in compliance with the grant.

State Level Requirements

Some grants are funded with state money but do not fall under federal guidelines. In this case, it is important to understand the overall guidelines of the funding state department to ensure that your controls and procedures meet any specific requirements. As discussed above, you should also carefully review your grant documents to ensure compliance.

Federal Level Requirements

Organizations receiving more than $500,000 in federal funds are held to a completely different standard. If your organization falls into this category, you are not only required to have the proper internal accounting controls in place for audit purposes, but you must have controls in place to ensure compliance with federal laws and regulations related to the grant. Auditors will use the OMB Compliance Supplement for the appropriate CFDA# related to your federal grant, so it is important to be current with applicable laws and regulations.

At the end of the day, your organization needs to have good accounting controls in place that work for you. Just don’t forget that when you receive grants, others are watching.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Creating Financial Order in Small Nonprofit Organizations

A $100,000 organization is large enough to go under by blowing member trust and public reputation.

And it’s small enough to experience bookkeeper & Treasurer turnover…as well as difficulties in getting clear, complete, accurate, and timely financial information on an ongoing basis.

So about getting your org’s financial house in order, here is the quintessential problem:
* The stakes are high enough that the org *cannot* afford drama and waste in finance.
* But the org is too small to afford a high-end expert doing year-round bookkeeping AND board reporting AND internal controls (helping to protect organizational assets)
* So your org isn’t alone, a ton of $100K orgs rely on a volunteer Treasurer or a low-paid bookkeeper or even an intern. Result: Turnover, mess, or both. $100K is too large for a volunteer.

The solution:

[1] First, you get the books fixed by an expert. A one-time project. If you don’t do this, old incorrect balances will roll forward forever and haunt you (there should be no drama in accounting, remember?)

[2] Second, have the expert set up systems for automation of correct accounting and reporting. In accounting, never pay a human being to do what a computer can do. Let the computer run this thing on automatic.

Reserve the human beings for what we do best:
Exercising judgment, innovating, and creating connection with other living beings.

[3] Third, contract with an expert *just* for those functions. To exercise judgment (quality control), innovate by automating and streamlining processes, and to create connection with other living beings (preparing board-friendly reports, setting up financial information flows between key people), and to defend the organization’s assets and reputation (“internal controls” – jargon alert!).

Don’t have a CPA write checks and do the books; never have the same person write checks as doing the books. But there are ways to both automate/streamline payments and making the payments more secure than paper checks anyway. You handle the payments, or your Treasurer, and your expert makes it easy. Have the CPA or other qualified person monitor the quality of the books and prepare reports so YOUR board understands them and can make decisions based on them.

To create a success map, contact one of our team members! Start with (844) 844-3766.

Cash Crunch! Nonprofit Edition

 

The best paths out of a cash crunch depend on the cause of the problem. Some examples are below; I hope one or more is helpful.

We’re going to skip the obvious “Get more grants! Do more fundraising!”

Cause: Solution

Embezzlement: Plug the leak, make them give it back, get a line of credit if necessary to see you through until you do.

Unreimbursed grant expenses: Speed up your processes so you can invoice faster. Engage in faster communications with grantors so they don’t forget about you. Set up electronic inbound payments for the grant funds.

High monthly burn not covered by grants: Take a look at any expenses that aren’t providing the organization with value and cut them. Start with the largest ones, not your deluxe paper clips.

Typical seasonal flux: Consider a line of credit. This financing tool is what a lot of seasonal organizations use to get them through the predictable, seasonal tough times if they haven’t saved up from the abundant times. And next season when the organization has plenty of cash, squirrel more of it into a savings account and then you’ll be your OWN line of credit!

Disallowed grant expenses: Use technology to collect backup documentation so you can submit all of those documents to grantors. For example, use Expensify or Entryless so authorized employees can snap a photo of their receipts or scan them, and send them ultimately to the accounting system. And review grants/authorizations with everyone empowered to spend so no one spends on something not covered by a grant.

Overspending grants: Quickly realign your authorization policies for spending as well as the clarity of your accounting on a grant-by-grant basis. Even basic accounting systems such as QuickBooks and Xero are able to produce an income statement by grant if you set them up to do so.

How can a startup nonprofit create a budget needed to apply for its first grant?

 

A budget isn’t a guarantee. It’s a plan, a target.
Just because your nonprofit is a startup doesn’t mean you can’t have a budget.
Even for long-running nonprofits, no one can say what the future is. You don’t have to have guaranteed revenues in order to have a budget.
As you learn more about what revenue streams are available to you and what is available for your mission as a result, consider designing a target revenue portfolio.
Consider how some revenue sources come with rules about how to use the money (i.e. grants) and some don’t (individual contributions). Consider that come with easily definable costs (i.e. product sales) and some have costs that are less easily definable (i.e. sponsorships).
Use that information to shape up the expense side of your budget that corresponds to your revenue portfolio.
Then you’ll have your budget.

Accepting a Payment Plan from a Donor or Customer

 

If you accept a payment plan in any situation for any reason, bear in mind that risk is something you can play with and not just be subject to.
A payment plan introduces risk into the equation, because it’s replacing a certainty with an uncertainty.
So if you do ever accept a payment plan, propose terms that then reduce your organization’s uncertainty and/or compensate for the additional uncertainty.
Examples:
* AutoPay only
* Weekly payments, not monthly payments
* Pull from their bank account instead of the credit card account – lower fees for your organization – and only pull from the cc account if the bank account pull bounces, and of course if so then include that fee to get reimbursed plus a surcharge to cover the cc fees (check your state’s laws on this).
* Charge a financing fee
In my experience, a lot of organizations suffer for lack of training about how to identify and counter financial risks. My life certainly suffered for it. I did what I knew…and when I knew better, I did better.

How do you deal with a difficult co-worker?

 

Although it might seem strange to see this topic on a CFO blog, knowing why it’s here might might place it in context and help this to be more valuable to my readers.
[1] In smaller organizations, the Human Resource function often falls under the Office of the CFO. There is intersection with both compensation and compliance.
[2] We looove efficiency. And there’s nothing that will take a bite out of organizational efficiency than human drama. So those of us who fulfill the CFO role for a combo of hard & soft skills and not just for being geekier than everyone else are really great at this stuff.
How do you deal with a difficult co-worker?
Language is our access to high performance. Language is access to reaching our potential. Language shapes how we view the world and what actions we take.
The question has two powerful words in it and a powerful assumption, and none of these lead to making mission and none of them lead to joy.
There is no winning answer to the question as asked.
The second word (stay with me) is ‘difficult.’
The assumption is that a person is fixed and unchangeable, and this assumption is revealed by the language ‘a difficult co-worker.’
The first word is “deal.” If I do not have the ability to create relatedness with others and create transformation in relationships and in performance, I will need to ‘deal’ with people for the rest of my life.
As long as I continue to believe that a co-worker IS difficult, as if that were a fact, I will never be successful in ‘dealing’ with that person.
The key is to see the world as my co-worker sees it. To be able to describe life, work, mission, a challenge as my co-worker would use language to say it.
Once I can do that, and my co-worker knows that I can do that, change is possible.
Does my co-worker need to change?
No such assumption.
Miracles come out of communication like this. Possible results include:
* I use language more effectively because I can communicate in the way that my co-worker needs
* My co-worker creates a new relationship with life, with work, with mission, with me
* A loyalty is created between us, because I cared to get someone else’s world. Loyalty and high performance go hand in hand.
This list is only the beginning of what happens when in the face of ‘deal,’ ‘difficult,’ and an assumption of unchangeability we instead create relatedness and transformation.
Author Richard Bach wrote: “When you ask the question properly it answers itself.”
The only way to ask the real question obviates the need for the question because it illuminates the solution.
“How do you create transformation in a professional relationship with someone whom you currently do not know very well?”

“Compensating” Volunteers in Your Not-For-Profit Organization

Volunteers have their own reasons for devoting their time to your organization. If you’d like to offer them some perks but need to watch the cost of those perks, watch out.
If you have someone in charge of volunteers, it can be tempting for that person to start creating a lot of rules around those perks. Although some people will do this for a power trip or because that’s the only example they know, most people do it out of a well-intentioned desire to keep costs low for the organization.
However, beware: This will chase away volunteers, guaranteed. Don’t overcomplicate and overadminister something that is a huge arbitrage opportunity.
If your organization provides meals, for example, giving a free meal and beverage is a tiny price to pay for the labor required to make it all happen. Tiny. There’s your arbitrage, turning a tiny financial cost into a huge benefit. Don’t go making rules about which food they can eat or how many cups of coffee they can drink.
Find other ways to increase revenues and reduce costs. When reducing costs, choose expenditures with the greatest financial impact and the least benefit impact.
Start by looking at your financial statements for the greatest cost areas.
Typical cost areas that are worth looking at include:
* office supplies
* leases
* number of users for a technology subscription
* memberships that aren’t being utilized
* items that get renewed automatically on a monthly or annual basis
* insurances
* penalties being paid for being out of compliance
* bank fees
* costs related to having everything on paper instead of paperless back-office operations
* income tax preparation and/or independent audit services – can cost less if your internal staff does work that doesn’t require correcting by the tax preparer and/or auditor (who typically cost more)
* any outside services for which you are paying someone hourly – this is a misalignment of the service provider’s interests with your organization’s interests
* lost opportunities to get not-for-profit rates on technology, products, and services
Which areas might be available to help your not-for-profit save some money this budget cycle?

Course Corrections and Your Board of Directors

Shocking news: Life doesn’t always go as planned.

Where does this leave a not-for-profit organization with a board-approved budget and a mid-year realization that something has changed.

So how does one approach this conversation with the Board?

Go with the high-level points of the journey:
* because of [a] we had envisioned [b] * when we observed/learned [c], we realized that [d] * we made a financial plan in order to create workability in making mission
* the principal differences from the original budget include [e], [f], and [g].
* here is the updated plan, and we have tactical plans in place to make this a reality.

It’s important to be committed to the mission, not attached to a circumstance, process, or goal that you realize is an unreality.

So keep your eye on the prize, develop new strategies and tactics and include a financial plan for workability. Inspire your board and go after that mission!