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In this edition

February 2024

The Importance of Establishing Operating Reserves

Prepare for Your Nonprofit Organization Audit: 5 Steps to Take

The Crossing of Manitowoc County: A Healthy Family for Every Child

Executive Director Q&A: Belinda Esquinas

The title “not-for-profit organization” can be somewhat deceiving and leads many to believe that these types of organizations are not allowed to make a profit. While not-for-profit organizations are prohibited from private inurement, this does not prohibit a not-for-profit organization from making a profit from their exempt purpose and activities. 

Private Inurement? 

The IRS rules state a section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

Paying reasonable compensation to employees of your organization is always allowed but private inurement is something your not-for-profit will want to avoid as this could jeopardize your not-for-profit status. There are several other reasons that could jeopardize an organization’s not-for-profit status that will not be covered in this article. 

Operating Reserves Provide Short-Term Relief

One of the reasons why generation of profit is important to not-for-profit organizations is to set aside funds for an operating reserve. Operating reserves can serve a valuable role in helping organizations during times when income is reduced or withdrawn temporarily. The COVID-19 pandemic is a very recent scenario that taught us the importance of keeping an operating reserve. Overnight, many organizations experienced shutdowns of their programs that caused drastic declines in their income. The use of operating reserves gave short-term relief to many organizations allowing them to continue operating without implementing staff layoffs or drastic changes to their operations.

The amount of operating reserve to aim for can vary between organizations. A standard recommended amount is to cover 3 to 6 months of expenses. However, there are other factors that you may want to consider that could mean a larger reserve is needed. While not inclusive, here are a few scenarios your organization may want to consider:

• Grant funding – are there any substantial grants that your organization receives that may not be available in the near future due to legislation or federal and state budget changes?

• Significant donors – are there any significant donors that your organization regularly receives funds from and how long is that expected to continue?

• Contracts – are there any material contracts that your organization holds that may not be renewed that could result in declines in income? 

• Future economic uncertainty – are there expected future economic events such as a recession or increased unemployment that may impact a donors ability to give funds to your organization or in circumstances where an organization provide services or goods, the ability of customers to purchase services or goods?

 It is important that an organization establish an operating reserve policy to assist in building and maintaining an operating reserve. It is recommended that your policy addresses the following:

• The purpose of building and maintaining the reserves
• A calculation of the target amount
• The intended use of the reserves
• Who will have the authority over use of the reserves
• How the reserve account will be monitored
• A plan for replenishing the reserve balance.

If you have any questions regarding operating reserves, please contact your Hawkins Ash CPAs representative.

Whether it’s your first time going through an audit or you are a seasoned pro, there are a few steps you should take prior to the audit starting. By taking the time to prepare you will be setting the stage for a smooth audit as well as setting yourself up for a limited number of audit adjustments. Below are a few suggestions on ways to prepare.

Step 1: Record Period End Adjustments

Certain adjustments may naturally happen a few times, or even once per year and can easily be overlooked or forgotten. 

Cash to accrual entries

• Adjusting accrued salaries and wages and accrued paid time off typically come to mind when thinking of cash to accrual entries, but this category also includes recording accounts payable and accounts receivable. 

Review payroll accruals for possible adjustments and review receipts and disbursements made after year end to determine if a payable or receivable should be booked.

Non-cash entries

• Recording non-cash entries can include depreciation, in-kind contributions, and bad debt expense. 

Review outstanding receivables for possible doubtful accounts and adjust the allowance account and bad debt as necessary, discuss in-kind contributions with donors to determine the fair value, and use the prior year depreciation balance to estimate current year if your auditor keeps the fixed asset schedule and you aren’t sure of the exact amount yet. You could also ask for a schedule of projected depreciation to use for this entry. 

Repairs & Maintenance vs Capital Asset

• A common audit adjustment is moving a purchase from expense to asset or from asset to expense.

First review your organization’s capitalization threshold policy and then review the current year activity in the fixed asset accounts and repairs & maintenance, technology, supplies/minor equipment expense accounts to determine if purchases were recorded in accordance with the policy. 

Step 2: Reconciliations

A reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement.

Bank Reconciliation

• Compares the register balance and the bank balance.

If you can, complete in your accounting software. Be sure to enter the period end date on the bank statement rather than the date you are completing the reconciliation.

Net Assets

Compare in total and by each restriction.

• In total: The total of all net asset accounts shown in the trial balance should equal the total net asset balance shown on the prior year’s statement of financial position.

• By Restriction: Have a record (a simple spreadsheet often works great!) of the beginning balance of the restriction, the date and amount of any restricted donations received, the date and use of any restricted funds that were spent, and total to find the remaining restriction as the end of the period.

Donor Database vs General Ledger

• Because these two software programs have different purposes, they will often show different contributions received.

Reconcile the contributions by considering receipts on pledge revenue recorded in previous years, in-kind contributions, receivables recorded in the current year.

Step 3: Supporting Documentation

Your auditor will likely request a variety of supporting documentation and to alleviate some of the stress on fieldwork days, some of these items can be gathered ahead of time. If you aren’t sure what your auditor is asking for, don’t be afraid to reach out and ask questions ahead of time. 

Invoices

Your auditor will likely request invoices for disbursements happening just after year end as well as invoices for disbursements occurring during the audit year. 

Payroll Records

Gather annual summaries as well as a payroll summary of the first payroll of the following fiscal year (to support payroll accruals) and be ready to provide timesheets and approved pay rates for a sample selected during fieldwork.

Contribution support

Support can include letters from donors, grant agreements, and images of checks deposited to the bank.

Step 4: Review Prior Year Audit Adjustments

If one of your organization’s goals is to reduce the number of audit adjustments, a good place to start is reviewing the prior year audit adjustments.

Questions to ask yourself

Does the situation apply again this year? If yes, should I record a similar entry for this year?

Have I already addressed the situation through period end adjustments or reconciliation adjustments?

Does this prior year entry need to be reversed? 

Step 5: Know Your Accounts

Your auditor will likely ask questions about why the current year is the same or different from prior years and the budget.

Knowledge of account balance

Complete a high-level review of each account in the trial balance and have a basic knowledge of why that account has the balance that it does.

Knowledge of changes

Complete a high-level review of each account in the trial balance and have a basic understanding of why that account may differ from the budget and prior year.

Each organization is unique and will require different preparation procedures. If you have questions on how to best prepare for your upcoming audit or how to reduce the number of audit entries, please reach out to your Hawkins Ash representative.  

The Crossing of Manitowoc County strives to provide the education and support parents need to build strong, resilient families. The Christian-based organization provides no-cost services to nearly 300 clients per year. It’s core programming includes one-on-one parenting classes, access to baby supplies, car seats and clothing, and medical services. There are no eligibility requirements, and the organization welcomes parents facing pregnancy in a variety of situations. 

Belinda Esquinas, Executive Director for The Crossing, gave a brief history of the organization. “The Crossing was founded in 2006 and through community support and its generous donors remodeled its current facility in 2022 to improve privacy and efficiency for clients and volunteers.”

The Crossing’s Earn While You Learn program provides parents, both men and women, education and coaching on topics such as prenatal development, infant health, parenting techniques and life skills. Volunteers walk clients through video-based courses and meet with them regularly to provide the support needed. Program participants earn “dollars” that can be redeemed for baby supplies and clothing from the organization’s Boutique and Pantry. Through this program, clients may also receive referrals and resources for housing, financial assistance, support for domestic violence, adoption, spiritual growth, and employment. 

Esquinas remarked that the Babies Ride Safe program provides convertible car seats that grow with the child from four to 65 pounds. 

The medical clinic at The Crossing performs free obstetrical ultrasound exams, including 3 and 4D Ultrasounds. Additionally, pregnancy testing/treatment, STI/STD testing/treatment, adoption referrals and after abortion healing care are provided free of charge. In the coming year, The Crossing will implement new, add-on services such as perinatal support and hospice for difficult pregnancies. 

Learn more about The Crossing online.

Belinda Esquinas is the executive director for The Crossing. Belinda Esquinas is a native of Spain, where her entire family still lives. After finishing her bachelor’s degree in education, she moved to the United States to learn English and continue her education in Missions and Biblical Studies. In May 2014, Belinda began working at The Crossing of Manitowoc County, and she was promoted to the position of executive director in 2018. Belinda's leadership style focuses on serving others and creating a culture of empowerment and opportunity for everyone around her. Belinda is also a board member of LTC, Manitowoc Noon Rotary, and Pickleball Connection Club. Her hobbies include fitness, good food, leadership development, and spending time with her husband and family, which often involves traveling.

What are some things you know now that you wish you knew when you first started as a nonprofit leader?

I have learned that trusting my intuition is important as it is usually right. However, it took me some time to realize this. Looking back, I wish I had understood the significance of making timely decisions, specifically when it comes to holding the team accountable and not being afraid of having difficult conversations.

What has been your biggest source of pride as executive director?

As an executive director, I take pride in helping others grow. It brings me immense happiness to witness the volunteers and staff finding their niche within the work we do and thrive with meaning and purpose while serving our clients. I am also proud of the compounded effect of many people that has led to the growth of our organization. The board members, staff and volunteers have played a pivotal role in the growth and success of The Crossing.

What are your three biggest accomplishments in your career as a nonprofit leader?

For me, creating and maintaining a positive and flourishing work environment is of utmost importance. It is crucial to prioritize the safety and satisfaction of our clients, as well as providing exceptional service. Equally significant is ensuring the welfare of our team members, recognizing their value, and understanding that their happiness and success are integral to achieving our overall mission.

Securing the funds, planning and executing the remodel, and moving into our new building have been milestones for The Crossing, and I'm very proud of them.

What are the dominant challenges that you see nonprofit organizations facing and what do you think would be viable solutions?

One of the major challenges faced by non-profit organizations is attracting and retaining talented staff. Salaries in the nonprofit sector are generally lower than in for-profit organizations, which makes it difficult to offer competitive compensation packages. As nonprofit leaders, we must strike a balance between paying a livable wage and recognizing the value of skills, accomplishments, and overhead costs. Nonprofits are working to solve complex problems in our communities, and we need top-tier employees to achieve our goals. I particularly like Dan Pallota's quote that says, "Our generation does not want its epitaph to read, ‘We kept charity overhead low.’ We want it to read that we changed the world."

I believe diversifying our revenue streams and educating our donors is crucial in making progress on this issue.

What aspects of nonprofit accounting do you find most challenging?

I am not an accountant, so there are many aspects of nonprofit accounting that I find challenging. Thus, I heavily rely on the expertise of professionals in the field. Effective communication and trust are crucial in such a scenario. The team at Hawkins Ash has been fantastic in all regards.

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