What not-for-profits should be doing  early to make year-end smoother. 

For many New Zealand not-for-profits with a June balance date, financial year end arrives faster than expected. We spoke with Alex Houghton, Director at BVO Audit, about the financial habits that help charities and not-for-profits prepare for year end and avoid a last minute scramble. The single biggest difference, it turns out, is starting the process early.

The single biggest difference, it turns out, is starting the process early.

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Financial year-end tips for not-for-profits

Before the June balance date arrives, Alex recommends focusing on a few practical steps:

• • • Start planning early
    • Capture non-financial data during the year
    • Keep on top of restricted funding
    • Check your balance sheet health
    • Confirm assets and outstanding invoices
    • Make board reporting clear

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What is the single biggest mistake NFPs make as they approach year end?

Not planning ahead. The year-end just arrives and they’re not ready. The biggest culprit is often non-financial performance information; things like attendance at events, membership numbers, programmes delivered. That data can be hard to capture. Financial systems have become very good at capturing the money side of things. There’s often no equivalent system for capturing non-financial performance measures. And some of that data simply can’t be reconstructed after the fact. You need to be capturing it live, from the very start of the financial year.

What about grant funding: where do things go wrong there?

Restricted funding is consistently the trickiest area. Not-for-profits receive a grant for a specific purpose and need to correctly recognise only the revenue that matches expenditure incurred. Get that wrong and you can end up showing a healthy surplus in one period, then a significant deficit the next. That usually happens because revenue was recognised too early and the related expenses land later. Alex Houghton has seen organisations end up having to repay sizable amounts to funders because their systems weren’t tracking a project’s progress carefully enough, creating cash flow pressure at exactly the wrong time.

Is there a healthy benchmark for what a balance sheet should look like at year end?

The most useful quick measure is the current ratio: current assets divided by current liabilities. For a not-for-profit, you want to be around 2:1. Two dollars of current assets for every dollar of current liabilities. When that drops toward 1:1 you’re on a knife edge, with very little buffer if something unexpected happens. That said, your balance sheet at year end is mostly a reflection of what’s happened in the months leading up to it. If you’ve been running deficits, that shows up. The balance sheet delivers the verdict.

What practical things should organisations be doing in the lead-up to balance date?

A few things often get left too late:

• A stocktake of fixed assets, for example, checking that the laptops and equipment on your register actually still exist.
• Review your debtors and chase anything outstanding.
• Make sure creditors have submitted invoices before balance date rather than after.

Ideally if you’re doing monthly or quarterly reporting through the year, your year-end process becomes almost routine. You’re just closing out the final period rather than having to reconstruct everything from scratch. The organisations that close their books quickly and cleanly are almost always the ones that report regularly throughout the year.

How should NFPs be approaching board reporting at year end?

Finance people are notoriously bad at explaining financial information to non-finance audiences. Boards often include people who have limited financial background, and they can end up signing off on things they don’t fully understand. Use visuals. Add narrative. Show what good looks like as a benchmark and then show where you actually are.

It’s also worth making sure the board understands what an audit is and what it isn’t. There’s a persistent expectation that an audit will catch all fraud. It won’t, particularly where there’s collusion. Boards need a realistic picture of what the process provides and what its limitations are.  

What about the friction between programme staff and finance staff at year end?

There’s a fundamental mismatch. Accounting has hard cut-off dates. Operational delivery doesn’t. Programme staff are focused on the work and they shouldn’t have to stop and reconstruct a snapshot of where a project was at on the 30th of June. The finance team needs to understand that tension, and both sides need systems that can produce point-in-time data without requiring manual intervention. Asking operational people to provide information weeks after the fact produces estimates, at best.

Are there any regulatory thresholds organisations should be aware of?

Yes, and this catches people out. If you’re a charity with operating expenses over $550,000 for two consecutive years, you likely need to think about an audit if you were previously just doing reviews.

Over $1.1 million and it must be a full audit. Growing organisations sometimes find they’ve crossed that threshold without realising it. It’s worth knowing where you sit and planning accordingly – an audit has different requirements and a different timeline than a review.

What’s the one thing a finance manager should do differently after reading this?

Build a financial reporting plan for the year. Set your milestones now. For example, when the books close, when draft statements go to the board, and when the final statements are due and– then work backwards from there. Include the non-financial data you need to collect and assign someone to own it.

The organisations that handle year end well aren’t doing anything mysterious. They’ve just made the process routine enough that it stops being an event.

Following these financial year-end tips for not-for-profits can make a real difference to how smoothly organisations move through balance date.

Alex Houghton is a Director at BVO Audit, specialising in not-for-profit financial reporting and assurance. For organisations approaching their June balance date, BVO Audit recommends starting the conversation earlier in the year rather than in May.