Financial Management Workshop for CILs…Regulations and Beyond IL-NET presentation on May 25-27, 2016 Module 17: Making Your Accounting System Consistent with Your Indirect Cost Rate JOHN HEVERON: Okay. Let's look at some of the integrating this whole process into your accounting system, because unfortunately getting your indirect cost rate approved isn't the end of the transition you're going to have to deal with. The next part is probably even more demanding, but there will be a payback, and once you have the indirect rate, once your financial accounting system is compliant and consistent with it and aligned with it, things will be easier. And easier to explain also. So the level of detail, in your indirect cost rate proposal should match the level of detail in your accounting system. The list of indirect cost we had really wasn't that substantial yesterday. You shouldn't have 400 different accounts in your accounting system. You can also simplify your accounting by putting more items into indirect. It will simplify your accounting, it will simplify your vouchering. My rule of thumb is that if you have an account in your accounting system and for the prior year you didn't have at least a thousand dollars in there, then you need to challenge whether that needs to have its own account. In other words, if you're trying to shrink things, look at any account that didn't have more than a thousand dollars. For larger organizations, that may be a bigger number. For very small organizations, maybe a smaller number. But use a thousand as a starting point, and if you have a lot of accounts that have a couple hundred dollars or less in there, then see if you can just combine them and do an office supplies and other, or some category like that. When you have a single cost objective but multiple funders, then treat that as a single program and break out your costs, just using percentages. I think we talked about this yesterday. But you will have all of your direct for these, for this one program with multiple funders, so you would build the multiple funders just based on a percentage. It's really easy in QuickBooks to export anything right to Excel, and that would make the process very easy to do your vouchering to the different funders. And we already talked about being mindful of state funder requirements. The spreadsheets that you developed to do your indirect cost rate proposal, keep those around, you will be using them again. Not all of them. But the two that I had up yesterday, you're going to be using again, so put those in a safe, easy to find place. Keep a file of your resubmissions every year, so you really, you probably want to have some section on your server that says indirect cost rate folder that has all the different files in it, so you can develop a history, so that you can look back year after year to make sure you're doing things consistently. Keep a file of your indirect cost rate approvals, so keep in mind, you're going to get an approval for your initial rate, but that's a provisional rate. After the end of your first year of using an indirect cost rate, you're going to submit your actual numbers, but your HHS will approve that at some point in time. Keep that in that folder as well. That's really proof of your compliance. It also is going to help you with other funders, so keep all of that together as well. If you do add additional income or especially expense accounts to your general ledger, think about how they fit into the big picture. Are they direct or indirect and what will the impact be? That's really all I needed to say about this, but I don't want to understate how important and critical it is. It really is going to require some attention. Now, some of you only have until July 1. Some of you have until October 1. But that's really right around the corner. So the time to plan the restructuring of your general ledger is right now. Look at your accounts. See what you can do to make them more aligned with what you did with your indirect cost rate, see what you can do to consolidate and simplify things. It will be a change. You won't implement it until the beginning of your new year, but get it into order right now. PAULA MCELWEE: You don't want to change your chart of accounts mid-year. You want all the same this fiscal year and all the same next fiscal year but the changes will be in next fiscal year. For some of you, your fiscal year starts July 1. You don't have a lot of time for that to happen. For those of you who have October 1 fiscal year, you've got a little more time to make this. Did this part make sense? Any questions about implementing it into your system AUDIENCE MEMBER: Sorry to take a brief step back. But you said something in one of your examples, we were discussing it over here, it sounds like you're saying paid time off for vacation is indirect, but that's not, we generally charge it as wages across our grants, just like regular wages. JOHN HEVERON: Yeah, if I said that, I didn't intend to. It's not indirect. It's part of payroll overhead, so it's part of that first percentage, so we're, you would add it on to your direct, but along with payroll taxes and the like. AUDIENCE MEMBER: Also, you consider it payroll overhead. JOHN HEVERON: Yes AUDIENCE MEMBER: Most of ours asks for payroll and then fringe, we count is as wages. PAULA MCELWEE: Payroll included AUDIENCE MEMBER: Is that okay? JOHN HEVERON: I'm sorry, say that again. AUDIENCE MEMBER: We wouldn't count paid time off as fringe. We would count as wages. That's usually how it's divided up on our invoices. Either has to go in payroll or fringe. PAULA MCELWEE: John, the example you used, was that the rates might be different in the summer months. So that's where the question came. AUDIENCE MEMBER: That's where the question came up. And I thought, wait a minute. We wouldn't put that in indirect. But you didn't mean that, that it was indirect. But you are saying, overhead. JOHN HEVERON: It's not indirect. It's part of payroll overhead so it really follows the person's chargeable time. AUDIENCE MEMBER: Okay, great. AUDIENCE MEMBER: On the same note we were wondering about how the accrual of the paid time off affects, does that go into payroll overhead or does that go into direct? I mean indirect. JOHN HEVERON: Well, for the most part, we're talking about your draws, your vouchering, and those need to be based on when you're going to be making payments, not when you're accruing. So you wouldn't be able to say we made an accounting adjustment for this, so we need to draw that down. Even though it's a legitimate expense, the draw would be based on the disbursements. AUDIENCE MEMBER: Okay. From my reading of UGG, accrual of paid time off is allowable just so long as you adjust it up and down the same way you adjust it in your books. JOHN HEVERON: Well I agree that it's an allowable expense, but in terms of the mechanics of how you get the money, there are federal cash management rules that are part of Uniform Guidance, and they would not allow you to draw that down in advance of when you were paying it. So you're supposed to pay things and then request reimbursement or request advances for things that will be paid in the, as soon as administratively possible is the exact wording. PAULA MCELWEE: And the expectation is usually just a couple of days. AUDIENCE MEMBER: Is it actually when we pay them or when we're legally obligated for them. That's where the accrual comes in. PAULA MCELWEE: Pay them. I think there's a question back here and I think you've got a question here. There you go. AUDIENCE MEMBER: Okay. Maybe I'm not doing this right, or understanding it, but I'm confused by the term, voucher. Maybe we're just using a different term. But what I'm really confused about is, you're talking about making a draw for the checks that we need to pay, like to our, for our rent or whatever, and also, making a request for the indirect costs? I don't understand where that goes or in the accounting. JOHN HEVERON: Okay. So the term voucher may not be what you use when you're drawing down money or when you're requesting a payment. Whatever term you use to request a reimbursement of your cost, that's what we're talking about when I use the term voucher. Apologies if that's incorrect. But that's the process we're talking about. You are going to request a payment from a funder for direct costs that you itemize, and your indirect cost rate add on. PAULA MCELWEE: So before we give it back to you, let me see if I can make it make more sense. So there was a time when we didn't do it this way, in independent living there may still be some pockets where this isn't the way it's done. It used to be we'd draw down 1/12 every month because we thought we could. That's not allowed under these Uniform Guidance nor was it allowed under the prior regulations. The requirement was you have to draw it down as you need it. We see lots of little pockets of places where this word has never gotten to them, so if that's part of what's happening, I don't know. But the other thing is, sometimes the state will grant you the money in that 1/12 per month or a quarter at a time and you'll get that money from them regardless of how you don't have to draw it, they send it to you, or whatever automatically. So sometimes that's happening. But regardless of what happens, you're still supposed to keep track of your actual costs for that period. And you have to know your actual cost so you have all your direct actual costs and then you just get to add in the indirect, which you've paid. You kept track of it separately. You know what that indirect cost is. But it is all direct cost plus indirect is what your actual expenses were against that draw, or against that payment that you got. Does that make sense? Yeah. All right. One here and one. AUDIENCE MEMBER: Following along the lines of the gentleman that was talking about the liability and I think more than one person has talked about that. It's a good example of an expense as a bulk dollar expense, so in a situation where you have, and for years, you have like a 3,000 or $4,000 general liability policy. You were primarily just federally funded. Then you've billed programs, and let's say you have a $300,000 ACL amount. And then you have, let's say, including part timers, eight to ten different people on that. And then you have another grant opportunity that is about 90 to 100 thousand and only two people, one and a half, one FTE, one part time, so the exposure from a liability perspective would be far less on that, so that's what I'm trying to understand. So it would be expected that that particular grant pay the same percentage for another grant that has far more exposure from a liability perspective. And especially like you get a grant where people are going into homes, that's another thing we have coming up, in the state of Texas, where we're going to be inheriting the independent living services from the state, that's requiring us to pay that much more general liability because of the exposure, so the dollars amount for the cost of the entire CIL is going up, but we wanted to attribute some of that cost variance related to that program because that's where the exposure is going to increase. That's where the indirect cost rate confuses me. PAULA MCELWEE: If you have a place where one program bears most of the cost then you probably want to charge it directly and not indirectly. JOHN HEVERON: Absolutely. Absolutely. As said before, I mean, there are even programs where you have a bookkeeper dedicated to this one program, because it's very active. And that's a classic administrative cost. But indirect and administrative aren't exactly the same. We make them almost the same for convenience. But you are absolutely allowed to charge an administrative-type cost that really is a direct cost, directly to the program. AUDIENCE MEMBER: Using again the example, the insurance. Because that seems it would be comparable to the scenario that gentleman gave, you have a higher exposure for where you have more staff involved. You see. So can you come up with a formulary where you can make it direct and then only have the indirect apply to part of it. Am I, that's where I keep going back to that sort of a hybrid if you will. PAULA MCELWEE: Absolutely, that's what you're doing with some of your salaries, right? They are partially direct and partially indirect. Your insurance can be the same. So you need to do what works for you and often there will be a cost like that, that makes a lot more sense to be indirect because of the peculiar circumstances. It might not be traditional or usual, but it might be what works best for you, and that's, I know that's the hardest part about all of this, there isn't only one set of ways to do it. You have to examine your own situation and say, well, what makes most sense? Well, you know, it doesn't seem fair to charge all of that liability to this little program over here. Oh, we have got to do that as direct because it's the only thing that makes sense for our circumstances, even though we've listed insurance as one of the things you would typically put into indirect you don't have to do that. Did that help? I bet that helped a lot of you, didn't it? Sometimes there's a unique cost. AUDIENCE MEMBER: Back to the splitting of expenses. If you have 80% of an expense that you can put into direct costs and 20 is going into indirect cost, when that goes back to the indirect for reimbursement, is that double dipping, if the JOHN HEVERON: No. No. It's not double dipping, so the question is, if you've got an expense, 80% of which is direct and 20% is indirect, so now you're going to take that 20% and along with other programs, you're going to charge some of that back to the program that got the 80% of that same cost. But it's not a double dipping. It's a proper allocation method. And the best example of that is payroll. That's the classic example of where 80% of your payroll might be direct and 20% might be administrative indirect. So the direct payroll gets charged to each program, the indirect gets pooled with the other indirect cost, and – PAULA MCELWEE: If you've done your accounting system properly, your indirect is not in that pool of direct cost. And so it's over here and those are dollars that have not been applied yet until you apply your indirect rate. So they're an add on, they are not. Even though it might be part of the same bill, so it's 80% plus two and a half percent or whatever their allocation is for that program out of the indirect, you know, but it's just added on. It's hard to make sure you're, you know, clear. Other questions? AUDIENCE MEMBER: I just have a clarifying question, making sure I'm understanding this correctly, because I've heard it a couple of different ways but my understanding, as you said, it used to be you could draw down 1/12 of the funds you had available. You could ask for reimbursement of 1/12. In a way, that's almost what the indirect expense rate is doing, is that you're asking for the same rate every single month, regardless of what your total expenses are because you've done your best guess at the beginning of the year at what those indirect expenses will be at the end of the year, and taking that as a percentage of your overall budget, and so you're asking for that little amount. So if you have that insurance expense as an indirect expense, you're not charging just 1/12 to that one funder, you're charging that as an indirect expense and asking for the same portion of funds back every month for which to use to pay all your indirect expenses. Correct? PAULA MCELWEE: Yes, but of course, if you have a larger program, that percentage is a larger dollar amount. Same percentage but it's, that's the advantage of having a percent. But well said. Thank you. AUDIENCE MEMBER: On the budget, do you, like I am doing the 10%, do you take 10% of what to put in your budget line? 10% I mean, how do you figure what your budget and indirect PAULA MCELWEE: When you took the deminimis, how do you know what your actual indirect costs are? Because you have to take something out, right? JOHN HEVERON: I'm sorry, say that again. PAULA MCELWEE: They took the deminimis, how do you know what your indirect costs are that you don't charge directly? JOHN HEVERON: Well, because you need to classify every single item of cost as either direct or indirect. Keep in mind that some bills may be split, but you know, you do have indirect costs in separate accounts, and you should have a way of grouping them. As I said in QuickBooks, you would do it with classes or sub accounts. But you would have some way of grouping them. And I strongly recommend you do that as soon as possible to make sure that you can live on 10%. AUDIENCE MEMBER: That's what I was wondering. On the actual budget for HHS coming up, where, how much do you know to put in the budget line for the indirect? PAULA MCELWEE: Well, you figure all your total costs, subtract 10% from something, so you're going to have to decide what are your indirect costs, and figure that 10% and put your 10% up here. I don't know any other way to do it. You figure it out in your budget the same way you figure it out in your statement month to month, you split those costs. JOHN HEVERON: I don't know whether the budget submission forms are going to change at all to make this a little more – PAULA MCELWEE: Well, the federal form has always had that little block where you can put indirect rate, you just could never use it before. Now you have to use it, so when you're doing your budget form, what you're doing is, you're putting your actual costs and indirect rate and you're separating out direct from indirect as you do that. So you can't double bill for the 10%. AUDIENCE MEMBER: I have a couple comments and a question, John. I think most of the people have understood the percentage and how apply it, but some questions make me think that maybe still not very clear. If I can, I would like to clarify that the indirect cost rate is not applied to the indirect expense, so the insurance, if it is 15,000, and your indirect cost rate is 12%, you do not apply, and please correct me if I'm wrong, you do not apply 12% to that 15,000 insurance cost. You apply the 12% to your direct expenses in the grant. So the grant that is one million, the expenses might be 800,000, the direct expenses, and you would apply the 12% indirect cost rate to the 800,000 direct expenses. And that will be higher amount than the indirect expenses for a lower grant, for a smaller grant, and the question is that in this cases, if I applied for one month for example, the direct expenses for the grant were 50,000, and indirect was 12% of the 50,000, and that amount actually was larger than my insurance, so I can, if I understand correctly, I can include the whole amount of the insurance expense just to that grant. I don't have to divide and allocate the insurance expense to all grants. Is that correct? I can apply the full amount of the insurance, if I treat the insurance fully as indirect expense, can I charge the full insurance to one grant and still be in amount of my indirect, and apply other indirect expenses to other grants? JOHN HEVERON: We're talking about insurance, and I think we've already acknowledged that this one is a little unusual. You can charge it to one program only if it is directly benefiting that program. Then it's a direct cost. And then also gets its share of indirect. But if an insurance is part of your indirect, if it's a general insurance that benefits all programs, I think we've said that we're going to have to see whether we can bill for that now, and what kind of an adjustment we would make in billing in indirect. Paula's suggestion of paying that in payments makes a lot of sense to me, because that way we don't have to worry about whether there might be an exception for this. You would manage your cash flow by billing indirect at the time you bill direct each and every time. That would manage your cash flow. That really would be the best. PAULA MCELWEE: Is that what you're talking about, is using it for cash flow management? AUDIENCE MEMBER: Not quite. Maybe the insurance is not a good example. What I'm asking is that should every single indirect expense be allocated to every single grant, or can I allocate, because it's a pool of indirect expenses. So in that pool, I have different items, right? The grant, insurance, workers' compensation, whatever that are fully indirect. I didn't think I should allocate each of those items to each of the grants. I can take one of this item and allocate to the JOHN HEVERON: No, you take the total. You take the total based on the percentage. You don't do individual items. At least not with federal grants. They're just, that's the whole. PAULA MCELWEE: So for cash flow, when you pay the bill, you have an indirect pool where you've combined the indirect from each of these grants, and you pay the indirect cost from that pool. And it may be practically speaking true that this bigger grant contributed that money, but you don't charge it back to the grant as that expense. You charge it as your indirect rate and you take the cost out of that pool. Is that. AUDIENCE MEMBER: Yes. Maybe I am getting into the documentation part too, so some states require to bring the documentation for your indirect expenses. Right? And federal doesn't require that, if I understood correctly, but some states might require, and if the state requires to provide documentation for the indirect expenses, my documentation might be a full amount of the indirect expense item. PAULA MCELWEE: You should have set up your funds so that it is paid from the indirect costs that were transferred from each grant into this pool. JOHN HEVERON: You know, you made me think about something that a client who has been using an indirect cost rate for many years does. I mentioned you should group all of your indirect costs, so you'll have, let's say a sub account for indirect costs in all these 20 categories. He adds a 21st category, called indirect costs recovered. Indirect costs recovered. So every time you voucher for a, for indirect cost, he puts it in, it's sort of like an income account. You've got a receivable, and then he credits indirect costs recovered, and what that does is to continuously let you know what you've spent versus what you've billed. I'm really glad you asked that, because this is a nice practical thing that you can all do to see how well you're coming throughout the year to recovering your indirect costs.