Last Updated: March 15, 2010
Production of this booklet Accountability has been made possible by a financial contribution from the Canada Revenue Agency.
Coming Together: Creating an Organization
People who come together to promote the public good are different than other organizations and groups in society. Their purpose is not to make a profit but to benefit society in some way. These groups come in many different shapes and forms. They can be anything from a group of neighbours who decide to get together to clean up their local park to large institutions such as the Canadian Red Cross. When a group of people decide that they want to make a difference there are a number of options open to them. A consideration of these various options can help groups find the most effective way to achieve their purpose.
One important thing to look at is who else may already be doing similar work. Sometimes the most effective way to advance a certain cause is to support an already established group that supports that cause. This can be done by raising money for that group, volunteering for that group and possibly getting involved in running the organization by, for example, sitting on the Board of Directors. Supporting the work of another organization can allow your group to advance their cause without the people and financial resources necessary to create and sustain an organization.
If you and your members decide that you want to create a group to provide people in society with a beneficial product or service there are a number of options concerning how to structure your group. You may decide not to have any formal or legal structure to your group. An unincorporated association is created by an agreement between individuals, and has no legal status. The members are personally liable to their creditors for the full amount of any debts. An unincorporated body cannot sue or be sued; members must sue or be sued personally. If the group owns property, title to the property has to be in all the members' names if the group is not incorporated. This can make selling the property difficult.
Many organizations that work for the public good choose to incorporate as a non-profit organization if they are looking for a more formal or legal structure. In Saskatchewan non-profits are incorporated under provincial legislation and report to the Corporate Registry. When a non-profit organization is incorporated it becomes a legal entity with virtually the same powers as an individual. An incorporated organization can enter into contracts, buy land, borrow money, have bank accounts, etc., in its own name.
The nonprofit organization is committed to its "product or service"; it focuses on obtaining and allocating resources to get the job done. The goal of the nonprofit organization is to improve society without a profit motive.
Advantages to incorporating include...
- liability of the members and directors is limited (for example, they are not personally liable for debts of the corporation)
- continuity of the organization is assured while the membership changes
- corporation can own property in its name regardless of membership change
- ability to bring a legal action in its own name (an unincorporated body cannot)
- chances of receiving government grants may increase because of the stability the organization appears to have
Non-profit corporations are run by a Board of Directors. The Board of Directors provides continuity and has the overall responsibility for managing the activities and affairs of the corporation. Depending on the organization, there will often also be volunteers and sometimes paid staff who carry out the work of the organization under the supervision of the Board. The Board's functions often include: budgeting, financing, planning, fundraising, setting policy, hiring and firing personnel, and handling public relations.
Directors are required to act honestly and in good faith with a view to the best interests of the organization. Directors are also required to exercise the care, diligence and skill that a reasonable prudent person would exercise in comparable circumstances. This does not mean that a director must do everything possible to take care; it means that a director must do what is reasonable in the circumstances.
If a director has special skills, for example the director is an architect, the director must use those skills when making decisions for the corporation where those skills could be useful, for example if the corporation was going to buy a building. If it is reasonable to do so, directors can delegate to others and rely on experts such as lawyers or auditors. A director cannot avoid being held to the standard of reasonable care simply by not taking any action. A director who does not give adequate attention to the affairs of the corporation may also be found to have not taken reasonable care.
Directors of non-profit corporations, like directors of business corporations, are largely shielded from personal liability. In most instances they have no obligation to pay any debt or liability incurred by a corporation. The corporation itself is a separate legal person and is responsible for its own debts and obligations. This is one of the advantages of incorporating. Directors can become liable for an obligation if the directors themselves agree to be responsible, for example by giving something like a personal guarantee for a loan.
Directors can also become liable for a debt or obligation that arose because they failed to properly exercise any of their duties as directors. Directors have a duty to understand the financial position of the corporation and to make prudent decisions based on this information. Things like approving expenses when there are not funds to cover them or purchasing property when there is inadequate income to cover the mortgage payments may be considered failing to properly exercise the duties of a director.
As well a number of laws make directors personally liable for obligations that the corporation fails to perform. For example, a director of a non-profit corporation may be ordered under The Labour Standards Act to pay the wages of employees. This may occur if the wages were earned by the employees but not paid to them. This liability is for a maximum of six months wages, which accrued during the director's term of office. A director may also be liable in some circumstances if income tax deductions from employees' paycheques are not forwarded to the Receiver General, and if GST was collected but not remitted by the corporation.
Because of the potential liability it is very important that the Board of Directors have good information about the financial position of the organization. The information in this booklet can be used by Boards, staff and volunteers of non-profits to help them to understand and undertake financial planning, management and record keeping.
Making the Choice to Register
Some non-profits want to go a step further and become registered as a charity under the Income Tax Act. Being a registered charity under the Income Tax Act has a very specific legal meaning that is distinct from whether an organization is considered a charity for other purposes. Registration as a charity comes with particular rights and obligations.
In addition to providing information about financial matters that any non-profit could use, this publication will also outline the additional obligations that a non-profit takes on when it becomes a registered charity. The focus will be on the financial accountability requirements. How an organization uses their money goes to the heart of whether they are eligible to register as a charity. This information on financial accountability can be used by a non-profit regardless of whether they are considering registration as charity or not. A non-profit, just like any other business, must keep track of money that comes in and goes out. There are many reasons why an organization needs to do this. At the most basic level this allows an organization to fulfill its purpose.
According to the Charities Directorate, 56% of non-profit and voluntary organizations are registered as charities. There are a number of reasons a non-profit may want to consider registration as a charity. One is the ability to issue official donation receipts. Another is that registration can provide increased credibility in the community, since registered charities must follow certain rules and guidelines to maintain their registration. As well registered charities are exempt from paying income tax.
Non-profits are exempt as well provided that the non-profit is not considered a charity under income tax rules. This means that if an organization can register as a charity, because it meets the definition of a charity under the Income Tax Act, it must register as a charity to maintain its tax exempt status.
The ability to issue official donation receipts may be key for some organizations. Many non-profit organizations depend on donations to be able to do their work. Being able to receive official receipts can make individuals and corporations more willing to support the organization. These receipts can be used by individuals and corporations to receive tax credits.
In addition only registered charities can receive donations from certain other organizations such as foundations. Even if an organization is not legally restricted from donating to a non-registered charity some individuals or corporations may not be willing to donate to an organization that is not a registered charity, even if they are not interested in the tax credit itself.
You may decide that your organization would benefit from registration but this alone does not necessarily mean that registration is right for your organization. You will want to consider whether you have the financial resources and people to carry out your purpose, as well as considering the obligations of registration and if you have the capacity to meet these obligations. A registered charity that does not meet its obligations may be subject to penalties and could also have their registration revoked.
Non-profits have certain obligations. The key requirements are filing an annual return and financial statements with the Saskatchewan Corporate Registry. If a non-profit also wants to register as a charity there are additional requirements. The non-profit will still have to meet the requirements to stay incorporated as a non-profit corporation because, generally speaking, registered charities must have some kind of legal status as an organization.
In addition to meeting the obligations of a non-profit, registered charities are required to...
- engage only in allowable activities
- issue complete and accurate donation receipts
- meet the annual spending requirement (disbursement quota)
- maintain adequate books and records and have them available for audit on request
- keep the Charities Directorate updated on changes to their organization
- file the registered charity information return annually
All of these requirements have a financial component. A registered charity must keep records that show what funds the organization received, from where, and how these funds were spent. With these records the charity can prove to Canada Revenue Agency (CRA), who monitors charities, that they are using their resources for the charitable purposes they stated when they applied to become a registered charity. They can show what funds were tax-receipted donations, the amount spent on programs, administration and fundraising activities and they will have the information necessary to fill in the financial records portion of the registered charity information return.
Getting Started - Why are we here?
Non-profits are by definition created for a purpose other than making profit. This however does not mean that non-profits cannot make money or that money is not necessary to achieve their purpose. Being a non-profit means that the organization's resources are used for a purpose other than to make more money. This purpose is the starting point of financial planning.
Your organization may already be established and have a clear purpose or you may be in the process of defining the purpose of your organization. Even organizations that have been in existence for years may want to review and refine their purpose. Especially if you are considering registering as a charity you will want to know what the law says about what purposes are considered charitable.
A business corporation is formed to make a profit and to distribute the profit to its shareholders in the form of dividends. A non-profit corporation, on the other hand, is formed to carry on activities for purposes other than personal financial gain. A non-profit corporation can earn a profit, but the profit must be used to further the goals of the group rather than to pay dividends to its membership. Most activities of a non-profit corporation are not of a commercial nature. Examples of non-profit corporations are sports groups, activity clubs, dance groups, daycares, and service groups.
In Saskatchewan there are two types of non-profit corporations: membership corporations and charitable corporations. A membership corporation carries on activities that are primarily for the benefit of its members. It is supported by its members through fees, donations, loans, or any combination of these. Examples of membership corporations are golf clubs, social clubs, special interest organizations, daycares, etc.
A charitable corporation carries on activities that are primarily for the benefit of the public. A non-profit corporation is a charitable corporation if it designated itself as one when it became a corporation. Even if it did not designate itself as charitable, a non-profit will be considered to be a charitable corporation if it does any of the following...
- solicits donations from the public
- receives government grants in excess of 10% of its yearly income
- registers as a charity under the Income Tax Act
The main differences between a membership corporation and a charitable corporation are illustrated by...
- who benefits from the activities (the members or the public)
- who supports the organization financially
- audit and financial review requirements
- how the surplus is distributed upon dissolution
Purposes and Registration as a Charity
An organization that is incorporated as a charitable non-profit may seek to become registered as a charity under the Income Tax Act but not all charitable non-profits will be eligible. As we have seen a non-profit can simply choose to be incorporated as a charitable non-profit. To become a registered charity under the Income Tax Act a charity must be established for exclusively charitable purposes. There is no legislation that defines what a charity is for this purpose so the common law definition of a charity is used.
The courts have identified four categories that are considered charitable...
- relief of poverty
- advancement of education
- advancement of religion
- other activities that benefit the community in a way the courts have said is charitable
The relief of poverty would include things like operating a food bank for the benefit of the poor, providing non-profit residential accommodation for persons of low income and providing clothing, and other basic amenities to persons of low income.
The advancement of education would include things like establishing and operating schools or similar educational institutions, providing scholarships, bursaries, and prizes for scholastic achievement and educating the public through things like seminars and workshops.
The advancement of religion would include things like establishing and maintaining buildings for religious worship and other religious use and organizing and providing religious instruction.
Other activities that benefit the community in ways that the courts consider charitable include things like providing facilities for the care and rehabilitation of the elderly, preventing and relieving sickness and disability, both physical and mental (e.g., hospitals), providing certain public amenities to benefit the community (e.g., public recreation grounds), providing counselling services for people in distress, operating an animal shelter and operating a volunteer fire department.
There are some purposes that are not considered charitable such as organizations that are created for political purposes and organizations to promote sports. To qualify for registration, an organization must show in its application that it devotes its resources (funds, personnel, and property) to charitable activities that directly further its charitable purposes.
From Purpose to Planning
The purpose of an organization is most often by its very nature quite general. It can be a daunting task to figure out how to translate that purpose into everyday activities. This can be approached in a number of different ways depending on the financial and personnel resources of the organization, as well as the preferences and expertise of those involved in the organization. Getting from a purpose to an action plan is often called strategic planning. When we hear strategic planning we may automatically think of long sessions with flip charts and maybe even a professional facilitator, but regardless of how strategic planning is approached the same basic steps are involved.
As a starting point your organization will need a concise statement of your purpose. Many non-profits call this a mission statement. A mission statement is a broad description of what you do, who you do it for and why you do it. Non-profit organizations generally put their mission statement in their bylaws. If your non-profit is planning on applying for registration as a charity under the Income Tax Act you must make it clear in your Articles of Incorporation that you are restricting your organization to activities and purposes that are exclusively charitable. This is because to be registered as a charity a non-profit must only be able to operate for charitable purposes and restrictions on activities are placed in the Articles of Incorporation. This may mean that you need to amend your Articles of Incorporation before applying for registration as a charity under the Income Tax Act.
Articles and Bylaws
The Articles of Incorporation identify the unique characteristics of each corporation. The articles state the name of the company and its objectives, the number of directors, and the classes of membership. Amendments to articles must be passed by a special resolution. A special resolution must be passed by at least two-thirds of the total votes at a general meeting. A vote to amend an article can only be held at a general meeting if there was at least 15 days notice to the members of the meeting and of the resolution to change the articles. For this reason, it is a good idea to keep the provisions in the articles to a minimum.
Once the corporation is set up it can pass bylaws, which are the rules and regulations that govern the internal workings of the organization. Bylaws are not a legal requirement but they help to clarify the conduct of the corporation. It is not necessary for the articles to include provisions that could be in the corporation's bylaws. It is easier to change a bylaw than to change the articles.
What is commonly called strategic planning is a method to break down your mission into steps that will be taken over a period of time to achieve that mission. How this is done will depend on your organization and the resources you have to devote to planning. Even if your organization has limited resources it is beneficial to consider what your organization hopes to achieve three to five years from now and how you plan on achieving those goals.
A long-term goal that you hope to achieve in five years can be broken down into yearly goals that when achieved, will allow your organization to reach the long-term goal you have identified. The specific, concrete steps that you will take in a year to achieve a goal for that year are considered your objectives for the year. This foundation will give your organization direction that will ultimately help to ensure that you are successful in fulfilling your purpose.
Planning and Registration as a Charity
Although a mission statement can be worded very broadly it should be specific enough that it is clear what your organization will need to do to fulfill your mission. This is particularly true if you are planning on registering as a charity. Purposes that are too vague will not be accepted. What you will do and who you will do it for are key elements that will help ensure that your purpose is not too vague. The "what you will do" should include something about how you will do it. For example a purpose of "relieving poverty" would be too vague without the inclusion of something about how your organization will do this, for example "to relieve poverty by operating a soup kitchen." Identifying who your clients will be and/or a geographical area you will serve also helps to ensure that your purpose is not too vague. For example it could be "to relieve poverty by operating a soup kitchen in Yorkton, Saskatchewan."
If your organization applies for registration as a charity you will need to state both your purpose (mission statement) and your planned activities in support of that purpose. Breaking your mission down into the steps that you will take to achieve it will give you the information you need to list your planned activities. The listing of your activities is a crucial part of the application to become a registered charity and most delays in processing applications are because the activities, as listed, are too broad or vague. For example, if your purpose is to relieve poverty by operating a soup kitchen in Yorkton, Saskatchewan, your objectives or activities may include things like the hours the kitchen will operate, what will be offered (meals, etc.), who will be eligible for your services and how this will be determined.
From Objectives to Action - the Budget
After going through a planning session your organization will have the information you need to list the realistic objectives or goals of your organization for the following year. The budget represents the end result of the objectives and goals of your organization expressed in monetary terms. A budget is a detailed plan of the use of your resources. Most often organizations, just like individuals, do not have enough money and energy to do everything they would like to. A budget is a deliberate decision in advance about what will have priority among the many things your organization may want to do. One of the greatest advantages of preparing a budget is that it requires organizations to "put their money where their mouth is."
Your organization may plan on doing many things but those plans that you are committed to seeing through will be reflected in the budget. It is a working document which reflects the joint planning effort of many people and is meant to form the basis for action. It is an important tool used to ensure that your financial management responsibilities are being met.
The budget contains estimates of income and expenses for the twelve month period your organization has chosen as your business year. A non-profit, incorporated in Saskatchewan, can choose any year-end that works for their organization. This is done by passing a bylaw stating what your fiscal year-end will be. You will want to consider the kind of work you do when choosing a year-end. For example, an organization that runs a school may want to have a year-end of June 30th so that each budget covers a school year.
Once you have chosen a business year, called your fiscal year, you start the budget process by looking at your organization's expected income for the year. Typically the budget process is started several months before the organization's year-end so that any approval, for example from the Board of Directors, can be obtained and any required changes made.
It can be difficult, especially in an organization's first year of operation, to estimate an amount of expected income for the next fiscal year. Estimates have to be made based on the best information available to the organization at the time. Some research into possible sources of funding and the amounts that can be expected from them can be helpful. For example, if an organization is in their first year and they are planning on raising income from a fundraiser they may want to ask other organizations if they are willing to share information about how much revenue they generated from a fundraiser of a similar type.
It is generally better to be conservative in estimating revenue. Organizations want to avoid learning during the year that the expected revenues are not near the budgeted amount. This could mean that drastic action with respect to the organization's commitments needs to be taken.
The main source of income for many organizations are contributions from the general public, grants from the government and fundraising. All sources of revenue are stated as the actual amount your organization will receive before expenses are deducted. For example, if you expect a fundraising social to bring in $4000 from ticket sales (100 tickets at $40 per ticket) and you expect that it will cost you $1500 (100 dinners for $15) for the dinner, you know that your profit will be $2500. However you do not simply record the expected profit as income in your budget. You record the whole amount of money that will come in as income. The costs of raising that money are stated in the budget under expenses.
Sometimes an organization may be supported through non-cash gifts, known as gifts-in-kind. For example, if your organization was set up to provide meals for people in need someone might donate food or cooking utensils. For a gift-in-kind the amount that is put in the revenue side of the budget is what you estimate the fair market value of the item will be at the time of the donation. A contribution of service, that is of time, skills or effort is not property and does not qualify as a non-cash gift and is not part of the budget.
Expenses are costs to the organization. Costs are based on your organization's objectives for the year. Once you have objectives, which are the concrete specific steps you need to take in a year to achieve your goals, you can estimate the cost of each objective or program.
For example an organization that is going to provide meals for people who need them would have program expenses including such things as the cost of food and other supplies for making meals. They would also need to include the cost of hiring people to run the program (buying, cooking, serving the food, scheduling volunteers) and to do administrative work (preparing financial reports for Board meetings, buying office supplies), unless the program is going to be run solely by volunteers. There would also be occupancy costs (rent), utilities and office expenses. If the organization received a non-cash gift, such as food, and recorded the fair market value as income they would record the same amount as a program expense since the food would be used for their program.
In the same way that it is important not to overestimate your income, it is important not to underestimate your costs. If costs are significantly higher than budgeted your organization will either have to raise more money or cut back on planned programs during the year. It is usually easier to decrease expenditures than to raise additional funds but cutting programs can be disappointing for stakeholders whose expectations for the organization may have been higher.
Once the budget is complete you compare the total expected revenue to the total expenses for the year. Adjustments may have to be made to ensure that you are not planning on spending more money than you are planning on bringing in. On the other hand, if you see that you will have more income than expected expenses you will want to plan on providing more programs or services. Some leeway should be built into the budget in order to meet unexpected events. Once the budget is approved by the Board, the budget is monitored on a regular basis to assess how the plans and estimates compare with the facts. Figure 1 provides an example of a budget for ABC Inc.
A cash budget is prepared after the budget is finalized. It summarizes the estimated cash inflows (income) and cash outflows (expenses) of the organization on a monthly or quarterly basis. The cash budget predicts when and by how much the organization's cash resources will either be in excess or below the requirements to cover the cash demands of the organization. The cash budget is important in terms of planning for any loans, repayment of debt and investing excess cash.
Budgeting and Registration as a Charity
To apply for registered charity status a budget for the next fiscal period is required by CRA. Some thought should be put into choosing a fiscal period that is suitable for your organization since a registered charity needs the permission of CRA to change their fiscal period. Once you are registered as a charity you do not submit your budget when you complete your registered charity information return. The budget is for the internal use of the organization and is not a record that registered charities are required to keep. Instead of a budget you provide actual financial information for the previous year.
When your organization develops a budget your expenses will be grouped according to standard categories which put all expenses of a certain kind together. For example all the employment expenses are grouped together and occupancy costs (such as rent and utilities) are also grouped together. However, CRA also requires information regarding charitable program costs, management and administrative costs and fundraising costs, if you apply to register as a charity.
Charitable program costs are costs directly associated with delivering the programs. This would include paying people to deliver the program as well as paying people to do things like schedule volunteers who deliver the program. Management and administrative costs include all expenditures related to the overall management and administration of your organization. This may include accounting and other administrative services, purchasing office supplies and paying occupancy costs for administrative offices, and salaries and benefits for administrative duties. Fundraising costs include any expenses, such as things like promoting an event, related to raising money.
Because some costs, such as salaries and benefits or occupancy costs, can be considered partly charitable and partly management and administration or fundraising it will be necessary to divide the amounts accordingly. For example, maybe the organization will rent space and most of it will be used for its programs but it will have a small administrative office in the space as well and maybe the organization will have one employee who will spend most of their time delivering the charitable services but who also will have administrative duties. In these cases the split will likely be done on a percentage basis determined by the amount of space or time that will be used for administrative activities. Figure 2 categorizes the budget expenses into charitable, management and administrative and fundraising costs based on a reasonable estimate for ABC Inc.
In the case of fundraising expenses this will be a budget line so the actual dollar amount will be used instead of a percentage. Fundraising costs will need to be further broken down to show how much, if any, would be spent on hiring an external fundraiser.
Budgeted expenses related to the sale of goods or services must also be reported separately on the application to register as a charity. These expenses may or may not be reflected in a separate budget line. For example, a budget may contain an expense line "advertising and promotion." Some of the expenses under this line could be related to the sale of goods or services. If your organization buys T-shirts to sell with the name of your program on them this would be an expense related to the sale of goods or services. However, the expense of buying ad space in the local paper, which would also be under the budget line of "advertising and promotion," would not be related to the sale of goods or services.
The Paper Trail: Financial Records
Good record keeping allows an organization to know the amount of income the organization received, including when it was received and the source it was received from as well as how and when that income was spent. Information about actual income and expenditures should be compared with the budget on a regular basis to see if they are on track with budget projections. If they are not action may have to be taken, for example to reduce spending if the expected income is not coming in.
Organizations record their financial activities using either the cash or accrual basis of accounting. For the cash basis, revenue and expenses are recorded when cash is received or expenses paid. For example payment for services would be recorded when it was received and payment of bills would be recorded when the payment was actually made.
When an accrual basis is used revenue is recorded when it is earned and expenses are recorded when they are incurred. In this case the amount owed for services would be recorded when the services were delivered, not when the organization actually got paid and money owed by the organization for services given to the organization would be recorded once the services were received, not when the bill was actually paid. This means that revenues may be received after the end of the fiscal period and expenses may be paid in the next fiscal year under the accrual method of accounting.
If the organization is relatively small and operates only one program a cheque book may be an adequate source to keep the financial records. As the organization grows the number of transactions increase and a cheque book alone is not adequate. The two basic records needed are the cash receipts and cash disbursements journals. These accounting papers can be purchased in stationery stores and the columns in the journals should be labelled to correspond with the line items in the budget. Similar spreadsheets can also be created on Microsoft Excel.
The cash receipts journal is a listing of all the cash receipts in the order they are received. Each amount is assigned a category that corresponds with the line item in the budget and categories are totalled each month. Figure 3 provides an illustration of the cash receipts journal for January.
The cash disbursements journal shown in Figure 4 is a detailed listing of the cash spent and the expense category that it applies to. The expense categories should correspond with the line items in the budget and each category is totalled at the end of each month.
All invoices or bills should be approved by the person who knows why the expense was incurred by initialling the invoice before it is paid. Once paid the cheque number and date are written on the invoice and it is filed in numerical order. This ensures the invoice is not paid twice and can be found easily when required. If the organization writes more than 30 cheques a month the invoices are usually filed alphabetically by supplier.
There must be two signatures on every cheque. Having two signatures ensures at least two individuals have the opportunity to look at the request for the expenditure and that the expenditure is in line with the budget. One of the signatures on the cheques should be the Treasurer and the other an officer of the Board or staff. In many organizations three or four persons are authorized to sign cheques so that if one person is away the organization always has at least two people to sign cheques. All blank and cancelled cheques that are returned from the bank should be kept in a secure and preferably locked location. Cheques should not be signed without the cheque being completely filled in as this puts the organization's funds at risk.
A petty cash system is usually established for disbursements where the payments are too small to write a cheque. The amount of the petty cash fund is determined by the organization. It is usually from $50.00 to $200.00. A cheque is written for the amount and cashed. The petty cash is kept in a locked box and controlled by one person who is accountable for the funds. A voucher is filled out whenever money is disbursed which includes the date, person receiving the funds, reason for the disbursement, and the amount of the transaction. The receipt is attached to the voucher. When the amount of cash runs low the receipts are added up and a new cheque is written for petty cash. The receipts are summarized and expensed to appropriate categories.
At any point in time, the amount of cash in the fund plus the petty cash vouchers (receipts) should always total the established petty cash balance. The petty cash should be checked periodically by someone other than the person in charge of petty cash to ensure the funds are properly managed.
Monthly bank reconciliations are important as it ensures that the cash balance on the books is correct. Banks sometimes make errors that need to be corrected and there may be some fees that need to be recorded. Bank statements list the deposits and withdrawals that have been made on the account for a month. Each deposit and cheque written should be checked against the bank statement. Any cheques that have not cleared the bank should be deducted from the bank statement ending balance. Likewise, any deposits that are outstanding are added to the bank statement ending balance. In summary, the bank statement ending balance less outstanding cheques plus outstanding deposits should equal the cash balance on the books. Bank reconciliations are usually filed with the bank statements and the cancelled cheques by month.
It may be helpful for the organization to review its overall cash receipts and disbursement process with an accountant to ensure that the major elements of internal control are not missing. Internal controls are procedures adopted by the organization to prevent fraud, detect errors and to make sure that money is being spent in a way that the Board wants it to be spent. One basic element of internal control is that no one person should handle all aspects of any financial transaction. This is referred to as the segregation of duties. It creates an internal system of checks and balances. For example, the person who approves a bill to be paid is not the same person who signs the cheque to pay it. In small organizations, however, it may not be practical to involve several people in the financial transactions.
Financial Records and Registration as a Charity
Registered charities must keep books and records that allow CRA to verify income tax receipts issued for donations as well as the charities' other income and expenditures. Your cash receipts and cash disbursements journals are a summary of the yearly transactions of your organization and are a record that registered charities are required to keep.
Registered charities are also required to keep the source documents that back up the transaction entries in the journals. They are proof that the recorded transactions took place as recorded. They include things like purchase receipts, bank deposit slips, cancelled cheques, contracts and sales invoices. These records must be kept for a minimum of six years after the end of the fiscal period they cover.
If your organization becomes a registered charity, records of certain individual expense and revenue items will be needed to complete the registered charity information return that all registered charities must file every year. For this reason, as well as for your organization's own purposes, it is a good idea to build into your bookkeeping system a way of categorizing different expense and income items so that all expenses or income related to certain activities can easily be extracted from your financial records.
Some of the expense or income items that CRA requires you to track separately will automatically be tracked separately because they are also budget line items and, as discussed, the cash receipts and cash disbursements journals will include information about the budget line the income or expense relates to. This would include things like employment expenses which would generally correspond to the salaries and benefits line of the budget.
Information about administrative, charitable and fundraising expenses are required on the registered charity information return. This information allows CRA to determine if the charity has met its disbursement quota. The disbursement quota is basically the minimum amount a registered charity has to spend on charitable activities to keep its registered status.
Fundraising expenses must be further broken down to show what, if any amount was spent on hiring an external fundraiser. Registered charities must also report travel expenses and professional and consulting expenses separately. If your organization has those expenses they would normally also be budget lines.
If your organization becomes a registered charity you will also have to keep track separately of a number of different sources of income. So in addition to having your cash receipts journal reflect your budget income categories you will also need to find a way to record things such as whether a donation was tax-receipted or not and whether income came from the sale of goods or services. Because you need more information than simply the budget category that the income relates to you can use notes or sub-headings for detailing income in the same way that they can be used for breaking down expenses. Other sources of income such as federal government grants also need to be tracked separately. Again this may or may not be a separate budget category so other methods of breaking down grant income may be required.
CRA also requires registered charities to keep track of non-cash gifts, sometimes called gifts-in-kind. A non-cash gift is any kind of property, such as art work, clothing, food, vehicles and computers, but does not include donated services or time. On the application to become a registered charity your organization must indicate if you plan on receiving non-cash gifts on a regular basis.
Non-cash gifts would not be recorded in your cash receipts journal because they are not cash. Once you become a registered charity you will need to record the fair market value of these gifts and whether a tax receipt was issued. This can be in a separate journal. Fair market value is usually the most that someone would pay in the open market for the property assuming that both parties to the sale are willing participants in the transaction, independent of each other and knowledgeable and informed.
If your organization is eligible for a GST rebate you will also want to track any GST you pay separately. Registered charities are eligible, as are non-profits who receive 40% or more of their revenue from government funding and non-profit health care facilities that provide certain types of services.
The End of the Road: Financial Statements
The financial statements of an organization give a clear picture of the organization's financial health. The statements are also a necessary part of the information required to make decisions about the present and future direction of the organization. Accountability is also maintained when supporting documentation justifies every transaction that takes place in the organization. After preparation of financial statements, an audit or a review by a third party is normally provided by an accounting firm. Audited statements contain an auditor's opinion that they believe that the statements are a fair representation of the financial position of the organization at year-end.
The Income Statement (also known as the statement of operations, revenue and expenditure statement or the profit and loss statement) for the fiscal period shows what an organization received as income (revenue) and what was spent over a period of time (expenditures). Revenue information comes from the cash receipts journal and the expenses come from the cash disbursements journal. The difference between what was received as revenue and what was spent is either a surplus or a deficit. A surplus means that more revenue was generated than expenditures and a deficit means there were more expenses than revenue. The surplus or deficit is reported on the bottom line.
Income Statements are prepared on a monthly or quarterly basis and compared to the budget and forecast on the statements. The forecast is the amount of income and expenses projected for the year based on what has come in and been spent already and what you expect to receive and spend for the rest of the year. Figure 5 illustrates an Income Statement for ABC. The favourable or unfavourable variance column represents the difference between the total year budget and forecast figures. Once the variances have been pinpointed the reasons for them are explored and action is taken if required.
The balance sheet or statement of financial position is a snapshot of the organization's assets and liabilities at a particular point in time. For this statement, total assets will always equal the total of liabilities and equity (Assets = Liabilities and Equity). Assets are what the organization owns or what is owed to them. When considering the total assets of an organization the liabilities are not subtracted even though liabilities are what are owed to someone else by the organization. Equity is what is left over of the assets once all the liabilities have been paid and is known as net assets in a not-for-profit organization.
Financial Statements and Registration as a Charity
The Income Statement is required by CRA. The actual charitable costs should be monitored to ensure the disbursement quota will be met for the fiscal period. The balance sheet or statement of financial position is also required by CRA.
CRA recommends that the charity's treasurer sign any financial statements that have not been professionally prepared and that charities file audited financial statements if their gross income from all sources is more than $250,000.
Charities are required by CRA to keep adequate financial records in English or French at a Canadian address that is on file with CRA. All information reported on the financial statements must be supported by source documents. This is necessary to verify the revenue and expense information on the statements. As previously discussed, source documents include sales and purchase invoices, formal contracts, deposit slips, donation receipts, cancelled cheques, bank statements, and tax returns. All financial information must be kept six years from the end of the last taxation year.
A considerable amount of financial management that organizations do involves recording financial activities as they happen as well as analyzing and summarizing past financial activities. However, organizations do not just need to know where they have been financially, they also need to know where they are and where they will be financially so appropriate adjustments can be made in a timely way.
To be able to spend money doing their work a non-profit must know how much they have to work with and what bills need to be paid with that money. This means that the organization must know not just what cash they received and what cash they disbursed, but also what cash they will be receiving and what cash they will be paying out. To be effective, organizations must know the answer to questions such as: What are expected expenses for this week or month? What funds do we expect to receive this week or month? Do we have enough money in the bank to cover these expenses or will we have it by the time they are due?
Cash flow analysis allows organizations to identify problems early. One major problem most organizations have is the timing of the cash flow. Cash inflow is the amount of money received from all sources and cash outflows are all payments made with cash during a period of time. Unfortunately, cash inflow (revenue) tend to lag behind outflows (expenses) creating a shortage of cash. It may be necessary to analyze cash flow on a daily or weekly basis to ensure there is enough cash to cover expenses.
Cash Flow Analysis for ABC Inc.
Cash flow analysis will help to keep the wolf from the door but organizations will also want to look at the bigger picture periodically to see how reality is matching up with the budget. This is called forecasting. Many organizations prepare forecasts on a regular basis during the year and use them as both planning and controlling tools.
Forecasts include actual revenue and expense information for the periods incurred and project revenue and expenses for the remaining months of the year. A file should be kept for expenses incurred that have not been invoiced or paid and also for services performed that the organization has not been paid for. If the forecast is showing a deficit a plan should be in place to manage the deficit. This may mean some programs may be cancelled or purchases scaled back. If the organization received an unexpected windfall, some new programs may be implemented based on the organization's goals.
In the Final Analysis
Organizations cannot be effective in carrying out their purposes without good financial management and this starts with having reliable financial information to work with, which in turn requires good financial record keeping. Organizations that invest time, energy and other resources into creating accurate bookkeeping and accounting systems, suitable for their use, can reap the benefits of avoiding financial instability which in turn makes the organization capable of doing its work. This kind of financial management also helps to protect directors by providing them with the means to fulfill their legal obligation of overseeing the finances of the organization. Finally having methods to record and control the organization's finances will allow an organization to have the capacity to meet the financial obligations of being a registered charity, if they choose to apply for this status.ISBN/ISSN number: 978-1-926545-22-6