Too often organizations get caught-up in making their plans just right.  The focus is on the result and not the most valuable part, the process. As the year progresses, these organizations find they are not achieving the goals set out in the plan nor is the staff engaged in achieving the plan.  These two factors suggest it is time to look at the process.

Here are eight steps to improve your planning process:

1. Plan from the bottom-up versus the top-down.

Failure to involve the front-line managers and staff, the people responsible for the execution of the plan, can doom the plan to failure.  Who knows better the whims of the constituents or specific operating issues of the organization?

Involving managers and staff creates more reliable information while developing the professional skills of your staff.  In a time when professional development is often seen as a luxury, this is a low-cost way to grow in-house talent.

During my early tenure as the CFO of a museum, I changed the long-held tradition of the accounting department preparing the budget and then handing it out to the departments.  Working with managers with backgrounds in art and education, while challenging, yielded improved information for decision-making as their perspectives changed how senior management and the board viewed museum operations.

2. Build the plan from zero.

The best plans are prepared with well-documented assumptions and are built from zero so every expense and revenue item is understood and explainable.  While it is hard to resist using the prior year figures and increasing them by a percentage, doing so perpetuates bad assumptions and unhelpful information.

Building a plan from the “ground-up” every year requires going outside the organization for information and input.  External input increases the reliability and credibility of the plan.

3. Lose the financial jargon and make formats usable.

Make it basic.  People relate to cash, what is coming in and what is going out.  Explain revenue and expenses in these terms.  Use terms people might use in their personal budgeting.

Keep the Excel worksheets to a minimum. Non-financial staff can find worksheets overwhelming. Receiving supporting schedules in Word is a sign your staff is having problems with the format. Consider coaching your staff through the planning process.

At the museum, I held a refresher budget preparation session each spring.  We reviewed the basics of Excel and how to develop sound assumptions.  I also made a point to meet with department heads throughout the two-month process, as they completed their budget, answering specific questions and teaching them the nuances.  But I never prepared their budget.  If I had, they would not have owned the implementation.

4. Tie the plan to individual and departmental strategic objectives.

Again, keep it basic, i.e. “This is the goal.  This means your department needs to achieve X.” How the numbers relate to the operational and financial goals must be crystal clear so that the lowest ranked employee can articulate how her activities will or won’t help attain the projected revenue and expenses. The staff needs to know what’s in it for them if the plan is attained.  Here is where it becomes real for them. Make sure to include what the bonus or perk structure could look like if plan is achieved.

5. Develop staff knowledge around the organization’s key metrics.

Under-educated employees will cost you in productivity, efficiency and strategy everyday.  You want your staff to know and own the key metrics.  To achieve this may require some form of open book management and a financial reporting format that is understandable.

At the museum, we had a key metric we referred to as “feet through the door” which represented attendance at new exhibitions.  Performance organizations have one called “butts in the seats” for how many people are in the audience for any given performance. This information can be shared in a one-page dashboard report along with the other metrics that need to be reviewed.  Just like the dashboard of your car this report gives you a progress report on how the organization is performing.

6. Have a “Plan B.”

Understand that nothing ever goes as budgeted and that most budgets are only good for the first three months.  If your organization is not large enough to justify forecasting periodically, it is important to develop several budget scenarios at the start of the year.  These budget scenarios provide reference points when the organization is faced with a mission-critical issue and can prevent knee-jerk reactions.

7. Document all the assumptions used to develop the plan.

Write it down. Documentation can be in the form of bullet points, long narratives and additional worksheets. Few people remember how a revenue or expense amount was developed months later.  It saves you from seeming like you “pulled the numbers out of thin air.”  Strong documentation makes the budget more credible when submitted to the Finance Committee and Board.

8. Analyze the positive results.

Do you understand why the results are better than expected? So often analysis is done only when results are negative, i.e. an expense is over or revenue is under, net income is not on plan, and cash flow is tight.  It is just as important to understand why revenue has exceeded plan and why an expense is below plan.  If something good is happening, you want to repeat it which means you need to understand why.

Adopting any or all of the above recommendations will improve the planning process while increasing the financial intelligence of the staff and board.  The organization will be more proactive then reactive to the external factors beyond its control and potentially weather the continued tough economy better.

Susan C. Hammond, Principal of scHammond Advisors, consults with small to mid-size nonprofit organizations on board governance, strategic planning, improving financial intelligence, and the formation of advisory councils.  She is a business advisor, facilitator, speaker, and author with hands-on experience as the co-founder of two organizations and as a member of the senior management team of others. Her experience spans nonprofit, professional services, and technology. Susan recently published the Advisory Board Kit: A Comprehensive Guide to Establishing an Advisory Board.  To learn more visit www.schammond.com.

In September 2008, the Financial Accounting Standards Board issued what was known at the time as Statement of Financial Accounting Standards No. 157 (SFAS 157) Fair Value Measurements. Although accounting standards have since been Codified with new references (SFAS 157 and related Fair Value accounting guidance is now known as ASC Topic 820), for purposes of simplicity, we will refer to SFAS 157 in this discussion by its original reference, SFAS 157.  This particular standard raised more questions than the ones it addressed, and today many are still unclear about exactly what has changed.  The issuing of this standard, together with the convergence over the past few years of US GAAP to International Financial Reporting Standards (IFRS), which is generally perceived by some to be “more geared towards fair value accounting,” has led to a lack of clarity among many accountants who don’t normally have to deal with any fair value accounting.

So what did SFAS 157 do?  We should all be clear that US GAAP remains almost exactly the same as it was before the standard.  US GAAP is still largely based on historical cost, not fair value. However, what the standard did is to bring us much clearer guidance for applying fair value accounting in those few areas of financial reporting where we do have to use fair value.

What are these few special areas in accounting where fair value is required?  More importantly, what is fair value and how do we go about measuring it?  SFAS 157 answers these questions and removes what were some inconsistencies in the approach, treatment and reporting of those assets or liabilities which had to be reported on a fair value basis.

Key areas of GAAP that require fair value accounting include certain recurring measurements such as goodwill, which is required to be tested for impairment, and investments in certain debt and equity securities.  Other areas that require the application of fair value accounting include assets and liabilities acquired in a business combination and long-lived assets that are impaired, which both require application of fair value accounting on a non-recurring basis.  Other areas include certain disclosures that have to be made about the fair value of certain assets that are legally restricted to settle an asset retirement obligation.

SFAS 157 defines fair value as “the price that would be received to SELL an asset or paid to TRANSFER a liability in an orderly transaction between market participants at the measurement date,” and further describes fair value as the “exit” price in the entity’s principal (or most advantageous) market.  Let’s break that down:  “Orderly transaction” means no fire sale; and “selling price” means (not the buying price) in the principal market.  In other words, even if the price is temporarily higher in some other market, one must look to the principal market.  The standard also goes on to clarify that we should exclude transaction costs (which are tested separately) and adjust the value downwards for any transportation costs.  The standard explains the concept of “market participants,” who are defined as being independent and knowledgeable and who are able and willing (and not forced to transact).

“Exit price” is the price that would be received for selling an asset, or the price that would be paid to transfer a liability.  For example, consider the following facts:  A truck was acquired as part of a business combination and that same truck from a dealership would cost $10,000.  The truck could also be sold in the same market for $8,000.  Under SFAS 157, the buyer (or acquirer) should value that truck at $8,000, the exit price.

SFAS 157 also prescribes exactly what approach we should take in measuring fair value.  The standard introduces the concept of “fair value hierarchy,” consisting of three levels of inputs, explaining that “observable inputs,” such as quoted market prices, are always preferable, but allows for the use of unobservable inputs when observable inputs are not available.

The main message for us all is that US GAAP has not “changed” to fair value accounting.  Rather, we now have much clearer guidance for those instances when we’re required to account for an asset or liability at its fair value.

The Internal Revenue Code section 465 at-risk rules are oftentimes overlooked by taxpayers when they are tax planning or contemplating an investment in a real estate activity.

Every year when you receive Schedule K-1’s from investments in real estate activities your tax advisor is confronted with the task of determining the tax treatment of any losses and tax credits that may be reflected on those forms.  In order to be deductible, the losses and credits must survive a series of limitations imposed by the Internal Revenue Code (IRC) rules and regulations.

Previously the Code excluded real estate activities from the at-risk rules of IRC section 465.  The Tax Reform Act of 1986 changed this and held that the at-risk limitations would, in fact, be applied to such investments.  The goal of the changes was to ensure that a taxpayer actually incur an economic risk in order to deduct a loss from the activity.

IRC section 465 provides that an individual may deduct a loss from an activity only to the extent that the individual is at-risk. To simplify and summarize the Code, a taxpayer is considered at-risk with respect to (1) the money and the basis of property he contributes and (2) amounts borrowed with respect to the activity to the extent that the taxpayer is personally and primarily liable.

How do common financing arrangements affect the at-risk rules of IRC section 465 for deducting losses reported on the K-1’s you receive from Partnerships and LLC’s for your interests in real estate investments?

Some of the common financing arrangements associated with the at-risk rules are recourse financing, non-recourse financing, qualified non-recourse financing and guarantees.

Under IRC Section 465, a taxpayer is not considered at risk for any amounts that the taxpayer is “protected against loss through non-recourse financing, guarantees, stop loss agreements or other similar arrangements”.  One significant exception involves holding real property financed by qualified non recourse financing.

Recourse financing is financing where a party is primarily and personally liable for the debt with no right to indemnification, reimbursement or contribution from another party. Recourse liabilities meet the definition of at-risk.

Non-recourse financing is debt where no party is personally liable for the debt and only the property securing the debt can be utilized to satisfy the debt. Generally non-recourse debt does not meet the definition of at-risk as the individual has no personal or primary obligation to repay the debt.

Qualified non-recourse financing is defined in IRC section 465 as  financing borrowed by the taxpayer from a qualified person with respect to an activity holding real property,  secured by the real property used in the activity, for which no person is personally liable and that is not convertible debt.

A guarantee exists when one party agrees to be personally liable to pay the debt of another if the primary obligor does not satisfy the obligation.  There has been controversy as to whether a guarantee constitutes an at-risk amount as the guarantor is secondarily liable and not primarily liable.  Under IRC section 465, to be considered at-risk for a liability a person must bear the ultimate risk of loss for the liability as the “obligor of last resort”.  Pertinent case law provides that to be at-risk, a party must bear the ultimate liability without right of indemnification, reimbursement, or contribution.  The particular facts and circumstances should be examined when a guarantee is in place to determine the amount and party at-risk.

Choice of entity and the at-risk rules of IRC section 465

In a general partnership, all partners are general partners and are fully liable for debts and obligations of the partnership. The partners would be at-risk for all the recourse debt not otherwise guaranteed.  They would not be at risk for non-recourse debt unless they are under a guarantee arrangement to repay it.

In a limited partnership there is at least one general partner and one limited partner.  The general partner is fully liable for the debts and obligations of the partnership and would be at-risk for all the recourse debt not otherwise guaranteed.  They would not be at risk for non-recourse debt unless they are under a guarantee arrangement to repay it. The limited partners are generally at-risk only for capital contributed. They are generally not at-risk for any liabilities unless they are under a guarantee arrangement to repay it.

LLC members have no liability and are not at-risk for the debts and obligations of the LLC unless they are under a guarantee arrangement to repay it.

IRC section 465 does provide the exception for qualified non-recourse financing- a taxpayer (a general partner, a limited partner, a member of an LLC) is considered at-risk for his share of qualified non-recourse financing.

Conclusion:

Often the amount at-risk and a partner’s basis may be different. A partner’s basis is determined under Subchapter K of the Internal Revenue Code.  IRC section 465 at-risk rules limit the deduction of certain losses.  The application of the at-risk rules to basis, financing arrangements and entities must be considered when determining the deductibility of losses.

In order to improve communication regarding internal control matters, The Auditing Standards Board (ASB) issued Statement on Auditing Standards No. 115 (SAS 115), Communicating Internal Control Related Matters Identified in an Audit, in October 2008, which is effective for audits of financial statements for periods ending on or after December 15, 2009.

Summary of SAS 115

SAS 115 defines three categories of deficiencies which may be identified during an external audit: control deficiency; significant deficiency; and material weakness.  A material weakness is defined as a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected (by management) and corrected on a timely basis.  This standard also requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses which are identified in an audit.

SAS 115 includes a list of deficiencies that are indicators of material weaknesses.  Identification of the following items during the completion of an external audit will result in the issuance of a material weakness finding:

• Occurrence of fraud by senior management (regardless of amount);
• Restatement of previously issued financial statements, resulting from correction of an error or fraud;
• Identification of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control;
• Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance.

When preparing for the annual audit of the organization’s financial statements management and those charged with governance should review the internal control policies and procedures relative to the major transaction cycles (i.e. cash disbursements, payroll, cash receipts, billing, etc).  Upon review, management should fully describe the process for each cycle and more importantly, the controls that are in place within each process to mitigate the risk of fraud or errors.

In a perfect world, management would hire a significant number of employees so that no one employee would be handling multiple tasks and total separation of duties could be achieved.  However in the real world, it has become more difficult for the small to medium size organizations to afford the salaries and other expenses of employing a large accounting/finance staff.  Funding of many not-for-profit and governmental entities has been reduced while the services being provided are sustained or increased.  Therefore, cost savings are often being obtained by reducing management and general expenses such as staff and overhead.

How can your Organization Prepare for SAS 115?

An organization should consider establishing an active internal audit committee to perform periodic tests of the financial records.  If this process is initiated and followed, the internal audit committee would be acting as part of the system of internal controls.  Development and compliance with effective internal audit procedures should help mitigate the risk of fraud or errors in financial reporting and therefore reduce the likelihood that the organization will receive a SAS 115 letter from the external auditor.

The following are examples of procedures which can be implemented by an internal audit committee (can be comprised of members of the Board or other volunteers) to help mitigate the risk of fraud, irregularities, errors, and financial statement misstatement:

• Cash Disbursement Cycle – Obtain, review, and approve the monthly bank statement and reconciliation.  The balance identified on the monthly bank reconciliation should agree to the cash balance reported in the internal financial statements/general ledger.  Scan all canceled checks for proper signature and randomly select several checks and require management to provide the applicable support documentation.  Review ACH and other debit transactions to ensure that the transactions are applicable to the organization and properly reported.

• Payroll Cycle – Review payroll registers to search for: fictitious employees; excess compensation paid to an employee; compliance with federal and state tax requirements; compliance with pension plan requirements; and direct deposit activity.

• Cash Receipts – Review the policies and procedures established by management to report cash receipt transactions.  Require that pre-numbered, duplicate page receipt books be utilized.  Obtain the books on a periodic basis to ensure that all receipts are accounted for in the bank deposits.  Perform a budget to actual comparison for all revenue accounts and identify the reason for any significant deviations.

• Billing Cycle – Review the policies and procedures over billing.  Establish a test of those procedures to ensure that management is billing for goods and services provided by the organization.

It is important to remember that your external auditor is required to obtain an understanding of your internal control system.  If the auditor determines that your internal controls are deficient, they are required to issue the required SAS 115 correspondence to management and those charged with governance, whether or not any errors or irregularities were noted during the audit.  Implementation and documentation of the completion of the above procedures (and/or other procedures established to mitigate the risk of fraud, errors, or financial statement misstatement) should provide your external auditors with some level of comfort that mitigating controls are in place to compensate for the lack of separation of incompatible duties.

Please contact Braver PC at (401) 421-2710, if you have any questions on internal controls, establishing an audit committee, or would like assistance in evaluating your organization’s current internal control system.  We would be pleased to assist you in developing sound internal controls and establishing internal audit functions that will help reduce the risk of errors, irregularities, and financial statement misstatement.

Changes for Small Businesses

This is an election year, which may require small business and individual taxpayers to keep a close eye on tax developments as the year comes to a close. Next year will be critical for small businesses, resulting from the continuing recovery of our economy. However, many small business owners may find themselves facing substantially larger tax bills.

One of the most common small business tax deductions is the code section 179 deduction, which allows for an immediate write-off of eligible equipment acquisitions (subject to certain limits). In 2010 the write-off is limited to $250,000, although this limit is scheduled to decrease in 2011, by one tenth of its current amount, to $25,000.

Taxpayers have typically evaluated accelerating necessary equipment purchases into the current year. The lower limit in 2011 enhances the value of the acceleration and could lead to increased equipment acquisitions in the fourth quarter of 2010.

Two Major Changes Taxpayers Should Evaluate

The major shift in the year-end planning process may be the incentive to accelerate income into 2010. In general it is in the taxpayer’s best interest to defer income, resulting in deferred income tax to the next year. However, that may not be the case this year.  There are two major changes that taxpayers will need to evaluate relative to their own tax situations.

First, the Obama administration has proposed raising the top two individual tax brackets for 2011 from 33% to 36% and from 35% to 39. 6%.  Below is a table that shows the history of individual federal income tax rates.

U.S. Federal Individual Income Tax Rates History

Secondly, the preferential tax rates given to capital gains and dividends are scheduled to expire in 2010. While capital gains are currently taxed at 15%, they will revert to 20% in 2011. This raises the planning dilemma or opportunity to accelerate capital gains transactions into 2010. At this time, it does not appear that Congress (as currently constituted) will extend the 15% rate.

Qualified dividends are currently taxed at 15%; in 2011 dividends will be taxed the same as all other ordinary income and will accordingly be taxed at the taxpayers’ marginal rate, which could be as high as 39.6%.  Although there may not be any immediate tax planning impact from this increase, this is certain to have a bearing on the valuation of dividend paying stocks caused by the reduction in the after tax rate of return of the dividends being paid.  This could in turn lead to a drop in value of dividend paying stocks.

If you’re a small business owner or individual tax payer, clearly year-end tax planning will require you to closely monitor ongoing developments. Make sure to consult with your tax preparer in advance, to determine how these changing tax laws could influence your own circumstances.

Many entrepreneurs choose to also own the real estate where their business operates, which allows them to have greater control over their location and the possibility of receiving rent income, should they choose to sell their operating business.

The three major components of an investment in income producing real estate are:

1.    Acquisition value
2.    Tax structure
3.    Financing

Acquisition Value

When considering a real estate investment, it is important to perform property specific due diligence with the help of your CPA and real estate professional.  This is performed, because money is either made or lost on real estate once you purchase it.

Most income producing real estate is bought and sold based on a capitalization rate, also referred to as the “cap rate.”  The cap rate is calculated as follows:

Cap rate = annual net operating income divided by the cost of the real estate.

For example, if real estate is sold at a 10% capitalization rate and the annual net operating income is $100,000, then the property would sell for $1,000,000.  In this case the investor would have a return of 10% on his investment.  A lower cap rate would indicate less risk associated with the investment and conversely, a higher rate for more risk.  Factors for assessing risk include: the term of leases; evaluation of existing leases; the credit quality of the tenants; concentration of income in too few tenants; quality of the space; the location; environmental inspection issues; and the stability of the rental market.

The annual net operating income (NOI) is the cash flow of the investment, and is calculated by adding back depreciation and interest to annual net income.  Your CPA can help you prepare a realistic and well researched projection of NOI that takes into consideration all rent income and expenses, including maintenance, capital expenditures,  loss of tenants, and vacancies.

An acquisition price range can be calculated once the cap rate and a realistic projected cash flow or NOI has been determined, resulting from your due diligence and consultation with your CPA and real estate professional.

Once you have made an informed decision on your real estate’s value, the next steps relate to financing and tax considerations.

Tax Structure

Your CPA can assist you with a favorable tax structure including issues such as entity selection, performing a cost segregation study to maximize depreciation, and the impact of the passive loss limitations as it applies to your individual tax situation.  Keep in mind that real estate investments should be driven by the underlying economics and not by tax advantages.

Financing

A good real estate investment purchase can fail if the financing is not structured properly.   With assistance from your CPA, use your previously prepared and well thought out cash flow, to evaluate whether the cash flow after debt service is adequate to cover the debt service over the long term, and to provide for an amount to survive economic uncertainties.  Also, assess the risk to your investment of the other provisions in the financing agreement including: interest rate adjustments; term; renewal dates; debt service coverage; cross collateralization; guarantees; and other covenants.

With proper research, due diligence, and an informed investment risk assessment process, an investment in income producing property (purchased at a market appropriate price, with a proper tax structure and financing agreement) can maximize the advantages of real estate ownership and help attain the financial goals of your investment.

Follow these Helpful Guidelines:

• When to Record an Exchange Transaction:  Revenue such as program service fees or sales, are referred to as exchange transactions, and are only recorded as revenue once they are earned.  This may result in a deferred liability (where payments made are recorded as revenue beyond the present date) if funds are received before the actual goods or services are provided.

• When to Record a Contribution: Contributions (often referred to as support), on the other hand, should be recorded as revenue once the funds are received.  Determine for your organization what type of restrictions, if any, are attached to your contributions, since these are presented differently based upon restriction type.  Keep in mind that contributions with no external restriction, as to use or purpose, become recorded as unrestricted net assets.

• When to Record a Temporary Net Asset: You should record a temporary net asset in the case where there is a restriction that has not been met.  For example, one of your organization’s donors may contribute funds to be used for the purchase of a specific asset on your organization’s behalf. Until this asset is purchased, the temporary net asset restriction remains in place.

• When to Record a Permanent Net Asset: Permanent net assets are recorded in situations where the principal amount of a contribution may not be spent.  In many cases, these contributions come in the form of an endowment for a specific purpose, where the principal is kept intact and any related income may be spent. For example, a scholarship endowment may be received where the principal remains, and any earnings are awarded as scholarships.

• What are Donor Restrictions vs. Internal Restrictions?  Be careful not to confuse donor restrictions with internal restrictions, in which case your board of directors may set aside necessary funds for a specific project. It is important to note that board designations are not shown as temporary restricted net assets.

• Pay Careful Attention to the Classification of Endowment Funds:  Recent developments have increased the footnote disclosures, found on your financial statements, in regards to endowment funds.  This means that you should take a close look at your net asset classifications to determine that funds being classified as endowments actually meet the criteria.

In this era of transparency in accounting, non-profit organizations have to undergo much more scrutiny than ever before.  Therefore, it’s important for your executive director or finance director to be aware of any changes made or proposed to the generally accepted accounting principles (GAAP).  If you have questions as to how to properly classify your organization’s revenue, contact Braver PC Accountants & Advisors, at (401) 421-2710.

In an ideal business world, fueled by unlimited capital, managing growth is merely academic and often based on textbooks and case studies.  After determining what you want your company to look like when you “grow up,” you would hire someone who has the experience to help you think through and identify the organization’s infrastructure— systems, processes, personnel and anything else you may need to reach your company’s targeted growth level. Then you would simply write the check to hire employees, and purchase the software, hardware, systems and processes they require. Sure, there may be some tweaking along the way, but major growing pains are virtually non-existent and under this model for growth, “the horse comes first.” Unfortunately this business model is extremely rare for most small business owners.

The Risks of Placing the Cart First

In reality, most small businesses don’t have access to the capital necessary to fund the ideal “horse comes first” growth model. Therefore, the majority of business owners take risks in placing the cart first.  Most likely, they have a vision of how big they want their company to grow and an idea as to how to market and sell in order to achieve these goals. However, most often, their access to capital is limited so they rely upon the company’s current profit level and cash flow to fund and invest in sales and marketing. The infrastructure is non-existent and invariably lags behind the growth. In this instance, “the cart comes first,” resulting in major growing pains.

The other negative issue with this model is that once the production team is expanded to service the company’s growth, and an administrative team is in place to support them and this business model begins to experience rapid growth, the systems and processes become stressed, which can often lead to employee stress and resentment.

In addition, most lenders will only finance around 70-80% of the company’s growth in current assets, such as accounts receivable and inventory. If the ownership doesn’t have the capital to finance the remaining 20-30%, the only place for the funding to come from is current profits. If the ownership has been relying on current profits to pay bonuses to the owners, then the owners need to be prepared for a serious pay cut.  Not to worry, these growing pains are typical for most organizations experiencing rapid growth.  So what is the next step?

Managing Rapid Growth

Internally, if senior management lacks past experience managing rapid growth then the team should seek advisement from an outside consultant or expert.  It is better to act late than not at all. Of course that is exponentially more expensive under this model because, at the end of the day, it cost hundreds of thousands, or in some cases, millions of dollars in lost profits to correct some of the inefficiencies (i.e., overstaffing, under staffing, failure to act on operational issues, and the stress factor). Nonetheless, this is more often than not, the reality for most small businesses that experience rapid growth.

Follow these Tips to Help Manage your Company’s Rapid Growth:

Put a Protocol in Place:  Start from the top. Make sure that the way the executive team interacts amongst themselves and with the management team changes to follow proper protocol.

Trust the New System: Both the executive team and management team must learn to let go and delegate, follow-up, and communicate. All parties have to learn to trust the new systems, or these systems will ultimately collapse and fail. Team members need to review and agree on the values by which they will live and be held accountable. This involves complete transparency.

Empower from the Top:  In order to be successful, the executive team should empower the administrative and management teams and let them run the daily activities and support the executive team, while the executive team manages sales and production.

Put a Strategic Plan in Place:  There needs to be a strategic plan in place that outlines the vision and goals that everyone on the executive team buys into. Above all else, if you don’t have cohesive executive and management teams, your plan for growth will fail. Systems which develop, maintain and monitor metrics at all levels (financial and non-financial) are essential to managing business growth.

Implement a Change Management Process:  It is extremely important to implement a change management process to support the roll-out and implementation of all new policies and procedures. In order to do this, a member of the executive team should introduce the policy as well as the point person on the management side, and explain the policy’s importance to the company.  The actual plan should include a detailed written implementation plan with key dates and benchmarks for completion.

If any of this sounds like familiar business dreams or nightmares, don’t despair! Braver Business Strategies team is available for consultation on these matters, and has experience managing growth at all levels. For a confidential and no cost discussion of your business growing pains, contact Steve Brown at (617) 559-4425, or via e-mail at sbrown@thebravergroup.com.

One major aspect of this oversight includes interaction between the board and the organization’s auditor. While many nonprofit boards have little interaction with the organization’s auditors, this appears to be shifting to facilitate a two-way dialogue.

Why Conduct the Audit?

Although there are few laws or regulations that directly state how nonprofit organizations must internally operate their finances, there are many that have a strong indirect impact, including IRS reporting requirements and the accounting standards required by funding agencies. Therefore, for many nonprofits, the annual audit is an essential component for closing the fiscal year and demonstrating that donated financial resources were properly used.

What Can your Organization Expect During the Audit Process?

• Written or Oral Communication from your CPA: The auditor is required to contact you via written or oral communication before they commence field work.  This communication allows the audit committee to review the audit plan and timing with your auditor.

• Opportunity to Express Concerns: The communication process is intended to allow and encourage audit committee members to express any concerns or issues that they feel the auditor should be aware of.  If concerns are raised, the auditor can then tailor their audit plan (if appropriate), to address these issues.

• Statement of Responsibility under U.S. Generally Accepted Auditing Standards: The auditor will state their intention to express an opinion about whether the financial statements prepared by management are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles.

• Planned Scope and Timing of the Audit:  The auditor will include a statement on what they intend to obtain from your nonprofit and its environment, including assessing the risks of material misstatement that could result from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or governmental regulations.  Your auditor will also set a date at which time you can expect them to begin the audit process and a completion date, upon which they will issue their report.

Post Audit Review

Once the annual audit is complete, your nonprofit audit committee should conduct a post-audit check, to review the following with your executive director and independent auditor:

• The auditor’s findings surrounding your financial statements and related report.

• Significant changes to the audit plan (if any), including serious disputes or difficulties that may have arisen during the audit.

• Cooperation received by the outside auditors during their audit, including access to all requested records, data, and information.

• Any disagreements between your nonprofit and the outside auditors that, if left unresolved, could cause the auditor to issue a nonstandard report on the organization’s financial statements.

• Other communications as required to be conveyed by the outside auditors by Statement of Auditing Standards 61, as amended by SAS 90, relating to the conduct of the audit.

• Written communication from the outside auditor concerning their judgment about the quality of the organization’s accounting principles as outlined in SAS 61 and amended by SAS 90, to confirm that they concur with the executive director’s representation regarding audit adjustments.

While not all nonprofit organizations are required to conduct a full audit, your board of directors is responsible for assessing the potential benefits and costs of an independent audit. Should your organization undertake an audit, it is important that your organization understands the audit process from pre-audit communication through the audit scope to the post-audit review. For more information or questions related to independent audits, contact Braver PC at (617) 969-3300.

The Advantages Are in the Details:

The importance of the HIRE Act is that it is the first legislation designed for businesses and previously unemployed workers. The goal of the Act is multi-functional: provide tax incentives for businesses while simultaneously lessening unemployment and stabilizing and increasing household incomes (and spending!).

How much of an impact can the HIRE Act have on your business?  Under the Act, a typical $30,000 per year position can generate $1,860 per year in saved payroll taxes. Consequently, the new law encourages businesses to hire across the spectrum of experience, from entry level applicants to senior executives.

Learn the details of the HIRE Act to make the most of it:

• Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2% payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010.
• This reduced tax withholding will have no effect on the employee’s future Social Security benefits.
• However, employers still must withhold the employee’s 6.2% share of Social Security taxes, as well as income taxes.
• The employer and employee’s shares of Medicare taxes would also still apply to these wages.
• In addition, for each qualified employee retained for at least 52 consecutive weeks (one year), businesses will also be eligible for a general business tax credit, referred to as the new hire retention credit, of 6.2 % of wages paid to the qualified employee over the 52 week period (up to a maximum credit of $1,000).

What types of business and non-profits qualify for the tax benefits offered under the HIRE Act?

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees.

Learn the “Caveats”

While the HIRE Act is great news for businesses and non-profits, it does come with caveats. These rules were integrated into the Act as a means of benefitting the economy as a whole and the long-term unemployed specifically. As you plan for hiring, remember the following:

• New hires filling existing positions qualify but only if the workers they are replacing left voluntarily or for cause.
• Family members and other relatives do not qualify.
• Recent college graduates are eligible as “new hires.”
• The law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked no more than 40 hours for anyone during the 60-day period.
• Household employers cannot claim this new tax benefit.

Claiming Your Benefits:

As an employer making use of the HIRE Act, you will need to claim the payroll tax benefit on your quarterly federal employment tax return.  Employers must use the new form W-11 to document their workers’ qualification for exemption from tax.

Eligible employers will be able to claim the new tax incentive on their revised employment tax forms starting in the second quarter of 2010. Revised forms and further details on these two new tax provisions have recently been posted on IRS.gov.

In the meantime, if you have questions, call us. We’re happy to help you understand how the new law can benefit your business, help you realize your tax savings – and get the economy working again.