Fiscal Responsibility and Cost Allocation Tools
Small and Medium Size Entities
DANIEL W. BRADLEY, CPA
OF YOUNG, OAKES, BROWN & CO., P.C.
IN CONJUNCTION WITH
THE COMMONWEALTH OF PENNSYLVANIA‟S
OFFICE OF CHILD DEVELOPMENT AND EARLY
WITH THE ASSISTANCE OF THE BRAIDING
PRESCHOOL FUNDING TASK FORCE
CHAPTER 1 INTRODUCTION TO BRAIDING
CHAPTER 2 TOOLS AN ORGANIZATION
NEEDS TO BE SUCCESSFUL
CHAPTER 3 PRESCHOOL PROGRAMS AND
CHAPTER 4 COST ALLOCATION
CHAPTER 5 WORKSHEETS AND
CHAPTER 6 CASE STUDY INVOLVED WITH
USING THE WORKSHEETS FOR
A SAMPLE ORGANIZATION
APPENDIX A DEFINITION OF TERMS USED IN
RESOUNCES APPLICABLE WEBSITES
The Commonwealth of Pennsylvania‟s Office of Child Development and Early Learning would like to express its sincere gratitude to the members of the Braiding Preschool
Funding Task Force
INTRODUCTION TO BRAIDING FUNDING
BACKGROUND OF „BRAIDING FUNDING‟
Under the Rendell Administration, multiple new preschool funding streams were established to promote the early education agenda and prepare the Commonwealth‘s young children for school success. As a result of the new funding streams, the Office of Child Development and Early Learning (OCDEL) convened the Braiding Funds Task Force with the goal of assisting early education and care providers to utilize the funds appropriately and efficiently. The Task Force looked to assist providers in understanding the fiscal requirements of the different programs, how these requirements worked in relationship with each other, and how to braid the funding to achieve the next level of best practice in fiscal accounting.
OCDEL in partnership with key early education and care practitioners from programs representing all OCDEL funding streams came together to consider the issues and prepare materials to assist providers in improving their practices.
The target audience for this manual and professional development opportunity is administrators and fiscal staff of small and medium size programs already using basic budgeting techniques, who wish to develop a deeper understanding of the concepts around cost allocation and management of multiple funding streams.
Ideally the program administrator and the fiscal staff member would attend the workshop together in order to best support the continued development of the fiscal practice at the site. To receive the best results, program management and fiscal operations must be inextricably linked together in overall program management.
Review of the material in this chapter will enable participants to:
; Understand and apply a number of basic accounting principles from the ‗tool kit‘
to program operations
; Define ―braiding‖ of preschool funding
; Derive the benefits associated with braiding funds
DEFINITION OF BRAIDING PRESCHOOL FUNDING
The use of multiple sources of public and private funding to support program
operations and services to individual children, with each source or thread of funding
traceable and identifiable from a management and accountability perspective.
Together the threads braid together to form a rope of coherent support for
programming for children. To properly braid funds, appropriate cost allocation
methodologies must be used and applied, assuring that there is no duplicate
funding of the costs of services or programs.
WORKING WITH ACCOUNTANTS
Programs are encouraged to use these materials in conjunction with the advice of an accountant/auditor and well trained fiscal staff.
The needs of a particular organization depend on various requirements. For example, in some cases, due to a law, regulation, contract, or agreement, an organization may be required to undergo an annual financial statement audit. If this is the case, the organization‘s auditor can be an invaluable asset for providing advice, technical assistance, and training on many topics including braiding funding. In the United States, audits can only be conducted by Certified Public Accountants (CPAs); however, much accounting and auditing work is performed by uncertified individuals, who work under the direction and supervision of a certified accountant.
A CPA is licensed by the state of his/her residence to provide auditing services to the public, although most CPA firms also offer accounting, tax, litigation support, and other financial advisory services. The requirements for receiving the CPA license vary from state to state, although the passage of the Uniform Certified Public Accountant examination is required by all states. This examination is designed and graded by the American Institute of Certified Public Accountants.
With that being said, many organizations have no legal requirement to undergo an annual audit, and, as a result, many accountants, who may not necessarily be CPAs, can provide much of the same assistance mentioned in the preceding paragraph and more. An auditor is somewhat limited in the services he/she may provide to an auditee, that is, the organization being audited; however, an accountant who is not auditing the entity is free of many of those restrictions and, as a result, can actually act as a member of management.
From an organization standpoint, the key is finding a qualified individual to act as your auditor or accountant. Ask for and follow-up on references from organizations like yours. The selected individual must be someone that the organization is comfortable with, but also must be well qualified to serve your organization. Accounting principles vary by industry and as a result, the selected organization must be familiar with the appropriate accounting principles governing your organization.
TOOLS AN ORGANIZATION NEEDS TO BE SUCCESSFUL
Many early learning programs resist operating like a business because management feels that focusing on mission fulfillment will be enough to continue in existence.
The future presents challenges to many organizations as the demand for public funds and private contributions becomes more competitive. As a result, organizations must operate both efficiently and effectively by avoiding attributes that lead to poor
performance and the inability to deliver service in a cost-effective manner. Organizations that operate both efficiently and effectively employ business tools and
techniques that result in profitability, such as:
; Strategic plans
; Accurate and appropriate interim financial statements
; Proper cost assignment and allocation
; Dashboard to highlight significant variances
; Proper resource management
; Effective internal controls
; Cash management
Unfortunately, many organizations fail to use the above mentioned tools.
Efficient and effective management of early learning programs requires an acceptance by management that a focus on financial management and the use of business tools does not taint the mission, but rather enhances the operations of the entity. The organization‘s board as well as its program and fiscal management must embrace appropriate business techniques; and both program and fiscal management must show a willingness and desire to learn about and utilize business management tools appropriate to their organization.
Every organization must operate within its means or have the ability to generate more resources. Planning and budgeting, appropriate cost allocation and cost assignment, appropriate internal controls, adaptability, the utilization of on-going performance measures, appropriate marketing strategies, and proper human resource management greatly enhance the organization‘s chance of success well into the future.
Various tools, techniques, and strategies are utilized by successful organizations. This section will introduce and explain several of these tools, techniques, and strategies.
Business plans are the long-term (five to ten years) guides that organizations follow to fulfill its mission. The business plan provides the link between the mission and the actions to attain the desired outcome based upon opportunities available to the organization due to the skills and expertise of the organization‘s staff, as well as their
commitment to the organization‘s mission. The business plan explains what an organization does and why it exists.
A key component of the business plan is an organizational budget that provides direction, control, and a start to future year‘s budgets.
Budgets should always be prepared at the program level, and then pieced together to arrive at an organizational budget. Expenditures should be classified by natural
category (i.e. salaries, benefits, rent, etc.) as well as by functional categories
(program versus management and general versus fundraising) by program to assist in outcome measurements. Program expenses are related to the mission statement. Management and general expenses are incurred to operate the organization and not directly related to the performance of the service. Fundraising expenses are those incurred principally to solicit resources.
As mentioned previously, a business plan should be for the long-term (5 to 10 years), and, as a result, a budget for each period should also be prepared. With that being said, do not become married to the budgets contained in the business plan. Things do change and, therefore, consider each year individually. As the organization begin preparing its next year‘s budget, staff should not assume that just because the
organization had a certain expense in a prior year that that expense is valid for the current year.
The organization needs to assign revenues and expenses to its projected operations. This process must be done in a realistic manner and not with an overly optimistic or pessimistic slant. If during this process, something does not make sense, investigate why immediately. Don‘t wait until you actually have a problem.
Typically, the organization should determine the amount of projected revenue before determining expenses, since an organization cannot spend what it does not have.
Certain expenses are relatively fixed or only impacted by inflation. An organization should first project these expenses. Next, project the remaining expenses based on what it will cost to achieve the organization‘s goal for next year. Determine these remaining expenses in terms of dollars based upon how much labor will be needed, what benefits will be provided, what payroll taxes are required, how much is needed in the area of supplies, etc.
Now that the organization has estimated current revenues and expenses, how did we end up, that is, do we have an excess of revenues or an excess of expenses? If we have an excess of expenses, do we have unrestricted net assets that we brought forward from the prior year in sufficient amounts to cover the excess? If not, the budget may needs to be revised; however, we also need to consider other sources of cash. For example, does the organization have an available line of credit to cover the shortfall in the current year, or are there certain fixed assets that are not currently needed that could possibly be sold.
The planning process never ends. The current year budget should be compared to actual events on a continuous basis; however, the current year budget should not be changed unless a new funding source becomes available, a new program is started, or some other unanticipated significant event occurs.
Key Financial Statement Consideration and Performance Measurements
Financial Statements communicate the measure of performance, success and
accountability of an organization. Financial ratios/analysis include budget comparisons, trends, and financial statement relationships expressed in analytical terms.
Cash is the most liquid and desired asset. One of the skills required by every successful organization is the ability to manage its cash in order to permit it to pay its current bills.
Management frequently is confused when the increase in net assets for the year does not translate into an increase in cash. The cash flow statement details how much cash
was provided or used from operating activities, as well as from investing and financing activities. A cash flow statement reconciles the net income or loss of the organization to the changes in its cash balance during the period.
After considering cash, an organization also needs to be aware of its working capital,
(the excess of current assets over current liabilities). To properly and easily determine its working capital an organization should use a classified balance sheet, separating out current assets and liabilities, fixed and other assets, and long-term liabilities.
The executive director and the Board are frequently provided with a list of the organization‘s current cash position as well as what bills are due within thirty days. In some cases, due to revenues not coming in as timely as they should, an organization should have available short-term financing to cover temporary cash shortfalls.
To stretch every available dollar as far as possible, a successful organization takes advantage of cash as well as volume discounts. A cash discount is available if bills are paid within a specified period, while volume discounts result when organizations buy in larger quantities.
A few simple “dashboard” type calculations/ratios can alert management to potential problems on a timely basis.
Many early childhood programs use an enrollment report that compares staffed capacity to enrolled capacity. Most programs develop the revenue estimates based on the numbers of children that can be served. Since most early childhood programs have staff salaries and benefits as a high percentage of the budget, insuring that enrollment is sufficient to support the staffing patterns is critical. Immediate measures must be taken when these areas are out of sync.
Other extremely useful management tools are comparative analysis. Comparing your
budget to actuals on an on-going basis highlights significant difference between actual results and expectations, with a review to determine the cause of the variance and whether the expenses are truly needed. Trend analysis compares financial statements amounts for multiple periods in a side-by-side format. Common-size statements restate all financial statement components as a percentage of a common denominator.
As mentioned earlier, working capital is the excess of current assests over current liabilities – a margin of safety, if the organization timely retires all of the current obligations using the current assets. The current ratio, i.e. current assets/current liabilities, is another measure of liquidity, where if the current ratio is less than 1:1, the organization lacks sufficient current assets to pay all current liabilities. The receivables to working capital ratio (Accounts receivables/working capital) may be indicative of collection problems.
The number of days in working capital ratio (budgeted expenses for the year/365/working capital) determines the number of days an organization could stay in existence with no other revenues being earned. Whenever the number of days in working capital drops below an established level, the organization needs to review its collection efforts, reduce budgeted expenses, or seek credit on a long-term basis.
Cost Allocation/Indirect Cost Plans assist decision makers on an on-going basis, provide cost control, and measure compliance with requirements.
Cost assignment is usually associated with a direct cost, while cost allocation is associated with indirect costs. Assigning direct costs is typically not an issue, because the classification is usually obvious. Indirect expenses are usually less obvious because they serve more than one purpose.
Costs allocation can be accomplished in a variety of ways. First, determine to what cost center/function/program indirect costs should be allocated. Next, determine an appropriate cost driver, such as direct labor hours/dollars or square footage, that will be used as the basis to allocate/drive out the costs.
Costs are allocated and assigned for several reasons. Generally accepted accounting principles require financial statements to be cost allocated by functional categories for nonprofit organizations. A grantor may specify that only certain costs are permitted to be charged against their grant, which may necessitate cost allocated to a grant and also by functional categories, if there is a limit on certain types of costs, such as administration. To determine the true cost of an activity in order to determine the amount to charge for a service, cost assignment and allocation is imperative.
Internal Control Procedures
Internal control in any organization is the responsibility of management. As part of continuous quality improvement, organizations should evaluate the need to change, update or modify procedures.
Internal control is a process, which is affected by those individuals on the Board, within management, and the organization‘s staff, designed to provide reasonable assurance
about the achievement of the entity‘s objectives with regards to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Internal control consists of five interrelated components:
; Control environment
o This component encompasses the individual attributes of its people,
including their integrity, ethical values, and competence as well as the
environment in which they operate. It includes tone at the top of an
organization. Control environment establishes the foundation for the
; Risk assessment
o Every entity must be aware of the risks that it faces. It must set activities
and objectives so that the various components of an organization are
working in conjunction with one another. An entity must establish
mechanisms to identify, analyze, and manage the related risks.