Why is my budget different from my cashflow?

A budget captures revenues and expenses that “belong” to a certain year. A cashflow shows money flowing into and out of your bank account.

Most revenues are received, and most expenses are spent, during the year to which they belong. However, in the early days of this year, you might still be collecting some of last year’s money (e.g. grant holdbacks and other receivables), and paying some of last year’s bills. In the later days of this year, you might start to receive or spend money in preparation for next season. And you’ll probably find that some of this year’s transactions just can’t be settled till the early days of next year.

Besides these timing issues, cashflow involves tax transactions that are not part of your revenues and expenses. For instance, everywhere in Canada we pay GST or HST (depending on your province) on the purchase of goods and services. Cash flows out to pay the sales tax – but for most organizations it’s partly or fully recoverable. Only the non-recoverable part is an expense.

The budget document doesn’t care about the timing of cash payments: it is based on the idea of accrual accounting, where revenues and expenses are “accrued” to the year where they belong, and the actual exchange of money might happen either earlier or later.

The cashflow document is all about the timing of cash, without respect to which year various things belong.

Creative Trust Gives the Young Associates Website a Stamp of Approval

Staff Post
by Anna Mathew

Creative Trust is a collaborative capacity building organization that helps Toronto’s mid-size and small performing arts companies develop skills and achieve financial health and balance. We’ve enjoyed working with them for a while now – Heather Young, Principal, is their Finance Manager.

These folks are leaders in the Toronto arts management scene. They have seen it all! That’s why we are absolutely thrilled here at Young Associates that Creative Trust featured us in a blog post titled Finances matter, cheering “the launch of a made-in-Canada website on financial matters and management in the arts” and daring anyone “to try to find anything as useful and interesting on the topic from anywhere else in the world.”

We’re blushing!

Thanks to Jini and the folks at Creative Trust for their stamp of approval. The Young Associates website is a work in progress and we could not be more excited about it. We promise we are working hard to get more content ready. Stay tuned for answers to FAQs, more tip sheets, more curated news, and a library of useful and relevant articles from around the Web. Join us on Twitter, LinkedIn and Google Plus if you would like to help spread the word about our free resources.

Heather Young to speak at Feb. 29 Workshop in Toronto: Building a Strong Bottom Line

Staff Post
by Anna Mathew

Our Principal, Heather Young, is one of three speakers slated for a February 29, 2012 workshop entitled Financial Management: Building a Strong Bottom Line. Along with consultant Jessa Agilo-Copeland and General Manager Kendra Fry, Heather will help participants from the arts sector increase their financial literacy, with tips for understanding finances, hands on techniques for dealing with private and earned revenue, donor cultivation, deficit reduction, recovery from financial collapse and balancing artistic choices vs. management choices. Using real case studies, the speakers will walk participants through financial statements and assist them in analysing the financial health of an organization so that they walk away from the workshop with practical tools to implement in their daily work.

This professional development workshop is part 2 of a 4 part series generously funded by the Ontario Arts Council, and offered by the Canadian Dance Assembly (CDA) in partnership with the Dancer Transition Resource Centre (DTRC), the Dance Umbrella of Ontario (DUO) and the Professional Association of Canadian Theatres (PACT) – with the support of, Creative Trust and CCI – Ontario Presenting Network.

Visit this page on the CDA website for more information on the series and how to register.

CADAC is looking out for you

Staff Post 
by Jerry Smith

A new riff on an old thought:  Big Brother is, how shall I put it, . . . looking out for you, especially when it is in the shape of CADAC, a web based application dedicated to the collection, dissemination and analysis of financial and statistical information about Canadian arts organizations, and in essence a centre of expertise to help monitor the health of the arts sector across Canada.

Young Associates recently hosted representatives from CADAC in order to stay ahead of the curve and assist clients in taking the stress and confusion out of filing their financial and statistical data with CADAC.

Launched in December 2008, CADAC’s objectives include attempt to lighten the burden for arts organizations, improve the accountability and transparency of Canadian arts organizations, as well as developing a significantly enhanced database for research, planning and policy development. Young Associates’ work with clients during the initial ‘CADAC years’ has made us aware of the challenges around changing an organization’s financial data practices to meet CADAC requirements. But as we have all gotten more accustomed to the new CADAC environment, it has become apparent that storing financial data with CADAC has some great information benefits, including comparative analysis with other organizations in the sector.  Our session with CADAC revealed that pulling meaningful comparative reports from the system is becoming much easier.

As part of our ongoing leadership in developing resources to assist clients, Young Associates was particularly pleased to explore the key elements of CADAC’s reconciliation process and how it could apply to clients.  While no-one wants to be categorized as non-compliant and have their CADAC account red flagged to a funder, it most often simply means there is some data missing, and the staff at CADAC would like to assist you in getting back up to speed.

When in doubt, ask; here it is better to ask for permission than forgiveness!

Ten Tips for Analysing Your Organization’s Operating Statements

Understanding your organization’s financial statements is essential to controlling the purse strings. These ten tips are intended to help you better assess and interpret your Statement of Operations – a.k.a. Income Statement, Statement of Revenues and Expenses, Profit and Loss Statement (P&L).

Your operating statement captures revenues and expenses, and the difference between them: a breakeven (revenues = expenses), or a surplus (revenues > expenses), or a deficit (revenues < expenses). This statement mirrors your day to day activities. Understanding it is essential to making sound operational decisions for your charity.

1. Understand your financial documents. Formal financial statements (including those prepared by professional accountants and those generated by commercial software programs) are designed to be understandable by people who’ve made a reasonable effort to learn how to read them. It’s worth taking the time to become familiar with the layout and terminology. Read your operating results regularly. The more familiar you are with your organization’s reports, the better you’ll become at spotting good news and bad news, and knowing how to address potential problems.
2. Read with a critical eye. If you’re the manager, and you’re not “hands-on” with the bookkeeping, it’s important for you to be alert for accounting errors. Even the best bookkeepers finger-slip from time to time. Does a certain number look surprisingly high or low? Ask about it! Your constructive feedback supports and encourages excellent staff work.
3. Relate your revenues and expenses. The operating statement is designed to compare revenues to expenses, and tell you whether you’ve made or lost money. Within that, though, much can be learned by comparing specific revenue and expense items. For instance, what is the difference between Fundraising Revenue and Fundraising Expenses? Are you getting a satisfactory return from your investment in fundraising? Similarly, compare program revenues to program expenses. Do your various activities net to a financial gain or a financial investment? (Either can be fine!) Comparing revenues and expenses by area will help you to evaluate whether you’re maximizing opportunities, and deploying your resources effectively.
4. Relate this year to your overall financial position. This year’s operating result is Revenues minus Expenses, leading to a surplus, deficit or breakeven. The Balance Sheet shows your organization’s “lifetime” result – the accumulated surplus or deficit – in the Net Assets section. This year’s revenues contribute to the accumulated surplus or deficit, and this year’s expenses reduce it. Reading your operating statement without ever looking at the Balance Sheet can be a dangerous business! Consider: your operating statement might show that you’re in good financial shape this year – but if you have a huge accumulated deficit from the past, you might still be in trouble. You would only know that by reading the Balance Sheet. By the same token, your operating statement might show big financial problems for the current year – but if you’ve got a bigger accumulated surplus from the past, you might still be ok. (NB: see also “Ten Tips for Analysing Your Organization’s Balance Sheet.”)
5. Variance analysis – don’t look at this year’s results in isolation. A single column of numbers showing this year’s operating results can actually be quite uninformative! Compare your revenue and expense actuals to the budget, to assess whether you’re meeting your goals – and whether you need to change tactics. Create this variance analysis column in your report using the formula (Actuals – Budget = Variance). Similarly, compare this year to the same period from last year, to learn how your results stack up against past accomplishments. This can help you to evaluate how you’re managing within an ever-changing environment. Create this variance analysis column using the formula (This Year – Last Year).
6. Ratio analysis – percentages highlight the “weight” of numbers. Using spreadsheet software, it is quite straightforward to calculate each revenue item as a percentage of total revenue, and each expense item as a percentage of total expense. Use the formulas Revenue Item / Total Revenues x 100, and Expense Item / Total Expenses x 100. These ratios can be easier to scan than the “hard numbers,” because they’re all on a common base of 100. You can use a separate column to create another set of ratios that will convert your variance analysis to percentages. For instance, in the previous bullet-point you read about creating a budget variance column using the formula Actuals minus Budget. You can convert this to a percentage using the formula (Actuals – Budget) / Budget x 100. It is easy to scan the percentages and tell at a glance where the high and low rates of change are – and to focus your attention on the items that need it most.
7. Trend analysis – past data has predictive value. Your past accomplishments offer guideposts towards your future. If you know you’ve achieved a certain result before, you can assess whether you’re likely to pull it off again. If you’ve never achieved a certain objective, be careful about counting on it as part of this year’s forecast! You need at least three years of results (ideally more) to identify trends. (A year over year change could be a “blip.”) This can be done easily in a spreadsheet: use Column A to list your revenue and expense categories, and Columns B onward to record past operating results. Each year, add a new column of results to your spreadsheet, to build a picture of your charity’s financial history. Most spreadsheet software will readily convert your table of numbers into helpful graphs, to provide visuals of your financial trends.
8. Comparative analysis – keeping an eye on the Joneses. It’s very easy to be immersed in your own organization’s day to day challenges, and lose sight of what’s going on in the sector as a whole. Knowing how your charity stacks up against comparable organizations can help to validate your results – or it can galvanize change. Networking with colleagues can be very informative. Some sectors of the charitable world have associations that gather and disseminate comparative data to help you assess your progress.
9. Use publicly available comparative research data. All registered charities in Canada must file a T3010B Charities Return within six months of their financial year-end. These returns (minus certain confidential information) are publicly available on the Canada Revenue Agency website, at www.cra.gc.ca/charities. Do you want to know how another charity is doing financially? On this website, you can access a summary version of their financial statements, plus general information on their activities, fundraising practices, staff and board.
10. Go beyond the numbers. Financial figures only capture so much. You need to understand the organization’s context in order to interpret them accurately. It’s important to supplement financial documents with information on your operating environment. Internal factors might include human resources issues and future obligations (e.g. the operating report shows this year’s rent expense, but doesn’t indicate how long the lease is, or what annual escalations you are expecting). External factors might include economic, taxation and regulatory circumstances.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

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Ten Tips for Better Financial Planning

If bookkeeping is the bricks and mortar of your financial reporting system, then financial planning is the architecture; effective financial planning can better prepare your organization to respond whatever happens on a daily basis.

1. Failing to plan is planning to fail. It’s an old saw, but a good one! You wouldn’t start on a long trip without a road map and a destination; by the same token, you shouldn’t launch a new year of activities without a financial plan that lays out some sensible goals – and boundaries. That plan is your annual operating budget – a statement of your programs and activities in dollars and cents. The budget is your financial road map, a key operating document approved by your board as a current-year operating policy, defining and quantifying your targets for spending and raising money.
2. Put it in writing. Your plans will undoubtedly change as the year unfolds, and you respond to changing circumstances (a budget is an adaptable planning tool to help predict your future; financial statements are historical documents that record where you’ve been). However, keeping a clean copy of that initial budget is important! It serves as a yardstick for measuring your progress in fulfilling your plans – and your success at adapting them to your organization’s evolving situation. A written document provides a solid basis for comparing plans to results. It is also an excellent tool for sharing information amongst your organization’s leadership and staff.
3. Share responsibilities effectively among your staff, board and volunteers. What’s effective depends on the nature of your organization and the individuals involved. For some charities, financial planning is staff’s hands-on responsibility, with board members in a governance role, approving the results or requiring changes. In other charities, board members – e.g. the President or Treasurer – take an active role in planning. Some have a Finance Committee, where volunteers outside the board contribute to the process. Often, smaller organizations need more volunteer support, and larger ones delegate more responsibility to staff. Consider what will work best for your organization at this moment in its life cycle.
4. Identify and use all resources. Chances are, you recruited board members based on the skills, connections and support they could bring to your charity. Are your directors fulfilling those roles for your organization? If not, have you talked to them about stepping up to the plate? Consider, too, that your directors may be able to recruit colleagues or friends to provide pro bono support for specific needs. If your organization has an annual financial audit, don’t forget to use your auditor for accounting, planning and tax compliance advice. Your banker, broker, government funding officer and others should be able to contribute planning advice on trends and opportunities for your organization.
5. Think about how to share financial information. Personal data such as staff compensation must, of course, be treated with care. More broadly, though, it is important to think about who needs to know about your charity’s financial situation, and at what level of detail. You wouldn’t want staff or volunteers to be worrying needlessly.But, if you need their input, you must provide enough information for them to offer an informed opinion. You can share financial data in a controlled way by preparing mini-statements by program or activity, as well as a complete operating statement. You can also prepare both detailed and summary (“high-level”) financial statements, to be disclosed depending on people’s level of engagement with the challenges at hand.
6. Secure board buy-in to your plans. A charity’s board of directors is legally responsible for the organization. In situations where staff are front and centre in terms of running the show, board members may become complacent – but they are still on the hook! Staff should ensure that board members receive – and read – and understand – budgets, cashflow projections, financial statements and other key financial planning documents. It’s important to be clear with your directors where the risks lie in your plans for the year. If those plans go awry, you need them to stand behind you and back you up. The organization’s financial plans must be the board’s plans too.
7. Secure staff buy-in to your plans. Staff are instrumental in carrying out the plans for the year. The more they feel ownership of the targets set for their position or their department, the more invested they’ll be in achieving those goals. If belt-tightening is in order, you need your staff, especially those in leadership, purchasing and revenue generation roles, to be fully on board with whatever needs to be done. Develop appropriate ways to bring them into the process of brainstorming, generating options, and making decisions.
8. Follow an annual planning agenda. If an organization is very project-driven, each year may be quite different from last year and next. However, many organizations have a well-understood annual routine. In these cases, financial planning should also follow a well-defined pattern where the tasks associated with creating, reviewing and adjusting plans happen in the same order, within about the same time frame, with the same participants each year. A written annual planning agenda (for instance, setting out key tasks by month) can be used to ensure staff and board understand what will be expected from them. Your planning calendar will also help you identify and meet external reporting deadlines, e.g. funding applications and tax returns.
9. Create time for planning. Make sure your work schedule allows time to read and analyse financial reports, think about the implications, consider your options and prepare well-researched plans for your programs and overall operations. This is even more important for Board members who meet intermittently; get the financial statements to them before they need to act on them. The worst decisions are often the ones made under pressure in the midst of a crisis. If you’ve invested time in contingency planning – anticipating problems and brainstorming “what-ifs” and possible responses – you will be much better prepared to give a measured response and a sound decision.
10. Take the long view. “Now” always seems to be the imperative. Staying on top of today’s demands can take all your time. However, this year is just one more milestone in your organization’s life. You need to consider this year’s plans in context with medium- and longer-term objectives. This year’s operating budget carries through from last year’s results, and it should help your charity achieve its plans for the future. Situating each year’s budget within a multi-year strategic plan is an excellent way to anchor your financial planning.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

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