All registered charities and many Societies coming under the 2022 Societies Act must produce a cash-based statement of income and expenditure. Slightly different rules apply for Tier 4 entities, this article covers Tier 3 only.
Principle
Cash flow is generally a very important financial indicator for not-for-profits. They are not overly concerned with their financial performance, only whether they generate enough cash to fund their activities. As such, it is important to take some care in getting this right.
A cash flow statement shows the organisation’s receipts and payments (rather than income and expenditure in an accounting sense) as it occurred during the reporting period. Unlike an accrual-based Statement of Financial Performance, a cash flow statement shows the actual capital and other non-operating expenditure as well, and gives a more accurate picture of where the organisation has put their funds in that period.
The cash flow statement has two principal sections, operating cash flow and non-operating cash flow, also often called ‘investing/financing‘ cash flow.
Selling fixed assets
Any money collected from the sale of fixed assets is considered a non-operating receipt. It does not matter if the asset was listed on the organisation's asset register.
Fixed assets bought under a finance arrangement
A fixed asset, such as a vehicle, bought under a finance arrangement, has two components.
There is a non-operating cash outflow, which includes the total cost of acquiring the asset (including any compulsory insurance or booking fee), and would be classified as 'purchase of fixed assets'.
There is a non-operating cash inflow of the part of the purchase that is financed (i.e. the difference between the total cost above and what the organisation initially paid). This would be classified as 'loans received' by the organisation.
Any future repayments under this finance arrangement will need to be split into the operating (interest) and non-operating (principal) components.
Mortgages and Loans
The principal part of any receipts and payments from mortgages and loans taken out by the organisation is considered non-operating, any interest expense is operating.
The same applies to loans given by the organisation, including salary advances to staff (not annual leave advances).
Investment Portfolios
Investment portfolios generally have cash inflows and cash outflows each year.
Investment fees are considered operating payments.
Interest, dividends, and any realised gain on the sale of any part of the investment are considered operating receipts. Realised losses are considered operating expenses.
Unrealised gains or losses are not recorded in the Statement of Cash Flows at all, as no cash is paid or received.
Re-invested realised gains (including interest and dividends) are considered non-operating cash payments (purchase of new investments).
Example:
An organisation's annual investment report gives the following information:
Value at start of year $546,398
Interest $ 1,722
Dividends $ 3,109
Fees ($ 4,860)
PIE and RWT Tax ($ 67)
Valuation Gain $32,732
Value at End of Year: $579,034
In this example, no money was paid out to, or added by, the organisation during the year.
In the Statement of Cash Flows, these items are recognised as follows:
Operating Receipts
Investment returns $4,831
Operating Payments
Investment Expenses $4,927
Non-operating Receipts
Sale of Investments $ 96
The Sale of Investments figure represents the difference between investment returns and investment costs (the portfolio manager would have sold investments to cover their costs). The net cash flow from these transactions is zero.
Term Deposits
The NZ Standard makers XRB differentiate between term deposits with maturities (running times) of less than 90 days, or 90 days or more.
Term deposits with maturities of less than 90 days are included in the cash balance together with any other bank accounts.
Term deposits of 90 days or more are treated as investments:
Any interest earned on term deposits is considered operating receipts.
If this interest is re-invested, an equal amount to the interest will appear as non-operating payments in the statement of cash flow. (Purchase of new investments).
Any further term deposits, or withdrawals on maturity, are considered non-operating receipts or payments.
Example:
An organisation puts $50,000 in an automatically renewing term deposit for 2 months, and a further $30,000 in an automatically renewing term deposit for 6 months. During the year the organisation earned $1,400 interest on the $50k deposit, and $650 on the $30k, both re-invested.
The transactions appear in the Statement of Cash Flows as follows:
Operating Cash Receipts
Investment Returns $2,050
Non-operating Cash Payments
Purchase of new investments $30,650
The $1,400 earned on the short-term deposit will appear within the closing cash balance, which continues to include the $50,000 now invested as a term deposit.
Cash Flow in Xero Reports
Accounting Software Xero offers reasonable cash flow functionality, including generating a cash flow statement for financial reports (with a partner subscription).
The equivalent of a Statement of Cash Flows is Xero's Cash Summary report. Xero's Statement of Cash Flows is not compliant with the reporting rules for not-for-profits.
For this to work properly, however, care must be taken when entering manual journals. These include a check box for whether or not the journal transaction should show on a cash-based report. This box is set to be ticked by default, although most manual journal entries should not appear on cash-based reports.
Manual journals to accrue accounts payable, receivable, income in advance or pre-payments: untick 'show on cash-based reports' checkbox.
Manual journals to accrue depreciation, accrued annual leave or any other end-of-year adjustments: untick checkbox.
Manual journals to move a transaction from one account to another (i.e. a correction of a coding error): leave checkbox ticked.
Manual journals to enter interest, dividends, realised gains and investment costs from investment portfolios: leave checkbox ticked.
Manual journals to enter valuation gain or loss on investment portfolio or any other valued assets: untick checkbox.