Domain 1 | Strategic Management Flashcards
segregation of duty
No individual should control all four aspects of any financial transaction: • Initiation (check requests) • Authorization (approval to pay) • Asset custody (keeping the checkbook) • Recording the transaction (posting)
audit: clean vs unqualified
_Clean audit: an opinion providing the highest level of assurance that the Statement of Financial Position fairly presents the organization’ s financial position, the Statement of Activities fairly presents the results of the organization’s operations, and the Statement of Cash Flows fairly presents its cash flows.
_Unqualified audit: an opinion providing the highest level of assurance an audit can provide. Attention is given to a particular matter and provides for disclosure of additional financial statements provided or draws attention to an additional important matter.
balanced scorecard monitoring
Associations are adopting this popular for-profit means of expressing strategy in measurable terms. Board performance is measured in four categories that can provide a more “balanced” perspective: financial performance, customer satisfaction, process efficiency, and, at the time, innovation.
branding
A marketing process that incorporates a singular look, feel, and message in building a belief about your association and its products. It creates in the mind of the prospect the perception that there is no product on the market quite like yours. The power of a brand is its ability to influence purchasing behavior.
budgeting, strategic program
A budgeting best practice, allocating salaries and other overhead to a program budget to know the true profitability of the program’ s products and services. It is achieved through conducting a systematic study relating allocation of staff time to program categories, then applying the calculated prorated share of overhead expense to the programs identified.
dashboard indicators for monitoring chapters and components
The dashboard concept identifies the critical variables that determine a chapter’s success and a system for measuring with full, safe, low, and warning levels. The first step in adopting a dashboard approach is to define the indicator values that fit your association. Once the relevant values are identified, set up your dashboard.
There are five basic steps:
- Revisit the mission and vision of the national organization and the chapter Icomponent.
- Define the gauges as they relate to the mission.
- Establish methods to measure success.
- Conduct a chapter assessment to establish initial dashboard readings.
- Assign a staff member to regularly monitor the gauges.
financial controls: annual audit
Management is responsible for the organization’s financial reports and the information contained within; the auditor’s role is to verify the amounts included in the reports. In its fiduciary capacity, the board hires the external auditor and receives the report. It is a conflict of interest for the CSE or CFO to hire the auditor. Financial records must agree with the financial report certified by the auditor. Any changes the auditor deems necessary are subject to acceptance by management. The Sarbanes-Oxley Act has created regulatory requirements for corporations related to the audit function.
financial controls: essential factors
Four factors essential to good internal financial controls:
- Clear lines of authority
- Clear definition and acceptance of responsibility
- Authority commensurate with responsibility
- Proper training
financial controls: Sarbanes-Oxley
Only two provisions of Sarbanes-Oxley directly impact nonprofits: the whistle-blower protection provision, which prohibits interference with a person who reports a potential infraction to a federal law enforcement agency, and the prohibition of document destruction upon the commencement of a federal investigation. However, many nonprofits are moving toward creating a separate Audit Committee, drafting conflicts of interest and fraud policies, and being much more transparent.
Audit Committees establish procedures for processing whistle-blower complaints by employees:
_A code of ethics for financial officers
_Increased penalties for document destruction or alteration
_Certifications by the CEO and the chief financial
officer regarding the financial condition of the company and internal controls
Nonprofit recommendations include:
_A code of ethics for the Board of Directors
_A whistle-blower policy
_Regular board training
_Regular board self-evaluations
_Audit Committee members who are financially literate
financial controls: segregation of duty
At the heart of any internal control system is having no single individual able to control all essential aspects of any transaction: initiation, authorization, asset custody, and recording. Other steps include a well-designed record-keeping and information system, a sound budgetary process, and an independent audit.
financial key indicators
Selected by leaders, these quantitative measurements are of strategic importance to indicate a fairly accurate picture of the organization in relation to its strategic plan. Indicators might include the number of new members, accounts, new business starts, and organizational members participating in programs, plus percentage of retained members.
types of financial policies
Among the kinds of financial policies commonly found in associations are investment and reserve policies, a budget policy, and operational accounting policies.
financial projections
A forecast of future financial results, usually presented in a pro forma statement, that is generally speculative.
Investors are cautioned to recognize that the projections are not guarantees of performance. Sound financial projections should be based on credible assumptions, a conservative projection of revenue, and an aggressive projection of expenses.
financial statements: cash and accrual statement
In a combined statement, certain transactions are recorded on an accrual basis and others are recorded on a cash basis.
Usually, unpaid bills are recorded on the accrual basis and uncollected income is recorded on the cash basis. Many organizations keep books on the cash basis and convert them to accrual at the end of the month for accounting purposes.
financial statements: management letter
Issued by an independent auditor, the management letter communicates those areas that management needs to address in order to come into compliance with GAAP accounting practices.
financial statements: reporting capital gains
Capital gains or losses should be reported in the unrestricted class. There are two exceptions to the rule:
_Gains must be reported in the restricted class if there are explicit donor restrictions on the gains. _An applicable state law exists that is judged by the organization's governing board to require the retention of some or all of the capital gains/losses in the restricted class.
financial statements: statement of activities
Shows the organization’s financial activity by the month and on a year-to-date basis. It reports revenue generated, expenses incurred, and results in net income or net loss. Previously called the statement of revenue and expenses or the profit/loss statement.
financial statements: statement of cashflows
Provides relevant information about cash receipts and cash disbursements from operations, investments, and financing activities during a period of time. The statement helps creditors and others to assess the organization’s ability to generate positive future cash flow to meet its obligations and its need for external financing. Since cash is the single most liquid asset, cash plays an important role in maintaining an organization’ s financial health. Sufficient cash, along with the ability to readily convert other assets into cash, is important for maintaining an organization’s financial flexibility.
financial statements: statement of financial position
Summarizes the financial makeup of the organization at a specific point in time. The statement reflects assets, liabilities owed by the organization, and residual net assets representing net worth. Formerly called the balance sheet.
financial statements: accrual vs cash accounting
Accrual-basis accounting recognizes revenues when earned and expenses when incurred. Cash-basis accounting recognizes revenue when cash is received and expenses when cash is expended. The best practice in association accounting is to use accrual accounting, allocating dues when earned monthly, rather than recording a lump sum when received. Accrual accounting gives a much better financial picture and cash flow projection than cash accounting.
financial term: association reserves
Net assets minus net liabilities. This is the surplus, or “rainy day” fund, for an association. Reserves are usually protected by the board. Some organizations budget to contribute to the reserve fund annually; others contribute if they have extra cash at the end of the year.
financial term: capital budget
The financial plan for long-term expenditures such as land, buildings, or equipment, including depreciation.
financial term: capital expenditures
Requirements for long-term objectives, such as major equipment purchases, major improvements, or additions to the physical facilities.
financial term: chart of accounts
A system for organizing financial data: a listing of all the line item accounts being used by the organization. Numbers are assigned to each account to facilitate identification.
Accurate and appropriate entry into correct accounts is the key to sound financial management and reporting.
financial term: financial narrative
Tells a story about how all the elements relate. It must provide more than just numbers and must highlight key financial issues, concerns, and trends. Numbers have meaning only in context.
financial term: financial ratios
_Liquidity ratio: measures the organization’s ability to pay its short-term obligations.
_Current ratio: measures the current assets divided by current liabilities.
_Profitability ratio: measures the profits (losses) over a specified period of time.
_Coverage ratio: measures the projections for the interest and principal payments to long-term creditors and investors.
_Activity ratio: measures the resources required to carry out certain activities, sometimes referred to as the efficiency ratio.