Financial Management Workshop for CILs…Regulations and Beyond
IL-NET presentation on May 25-27, 2016
Module 5.3: 

JOHN HEVERON: After the conference yesterday I was thinking about the fact that there were still so many questions, and wondered what we hadn't done.

And I thought about a book that is one of the best books that I have come across called the Art of Explanation, by Lee LeFever.

It's phenomenal.

It helps you connect with an audience, and one of the things he talks about in that book is called the curse of intelligence.

That means you know so much about a particular thing, you're unable to understand what other people, their level of understanding.

And so I found myself guilty of that, as much as I've admired the book and actually got to meet the author and think it's a wonderful resource.

I said, what did I miss yesterday?

And I missed the key part of your world, which is how you voucher for these things.

That's what we didn't do.

So this is exactly what we had up yesterday, to calculate the indirect costs.

It's a list of all the indirect costs.

It's the list of all the costs.

This is the total for the agency, for the year.

And we calculated that the indirect, in this case was 21.9%.

We also calculated that the payroll overhead rate as a percentage of payroll was 15.6%.

We did that on another sheet, but we calculated that.

So now let me move into your world, and this is how you're going to do a voucher.

Whether this is for a draw down or paper voucher to a state agency, you're going to have your different employees who worked on this program during this month.

You certainly know how to prepare a PAR or track their time, so that part I trust is no problem.

So you've got your employees.

You get a subtotal there.

We all know that payroll overhead is 15.6, so we add 15.6.

Then we list all of the other direct costs.

I know you know how to do that because you do it every time you prepare a voucher, or a draw down.

And that gives us a total for direct cost, and now we know that our indirect, in this case, is 21.9%.

We add that documentation for the voucher, done.

That's how we do it.

So don't worry about tracking this person's time or that person's time.

The direct, of course, yes, but the indirect just goes into this pool and that's all we have to do.

Now several people came up to me yesterday and said, well, the state won't accept that.

They want more detail.

So if the state wants more detail, we can break that indirect down for them, like this, showing payroll, payroll overhead again using the percentage, and all of these other cost categories.

And if that's not good enough, and if they want office supplies broken down into paper clips versus pencils, we can do that, because the way you're going to accomplish this, most of you use QuickBooks, I would say that's probably majority and certainly not everybody, so if you put your indirect into either a sub account, in other words, have a sub account called indirect with all of these categories, or into a class, either one, QuickBooks will do either, you can still drill down into what is included in office supplies for this 60 days, and take the portion that applies to this particular project, just like you would with your direct cost.

So you can get it that detailed if somebody requires it.

But for your federal grants, once you've gotten an approved rate, that's your voucher.

Your employees with your overhead rate, your other direct costs, and then your 21.9% indirect.

That's your voucher documentation, and that should be sufficient.

Does that help?

Are there questions?

Can we go any further?

Okay.

So we have one right here.

AUDIENCE MEMBER: So my question is, I follow that.

So you have the total vouchered amount.

But that's not necessarily going to match in QuickBooks what you have for expenses for that period of time.

Because you just used a percentage.

You know, you're not necessarily in every period going to have 21.9% indirect.

JOHN HEVERON: No, you won't.

But this is really how you should charge your indirect.

Certainly on your federal programs.

There might possibly be some funders that want it differently.

You haven't lost any of that information in the general ledger.

You've just consolidated all in one place.

AUDIENCE MEMBER: You haven't really consolidated it because that's not my actual indirect.

You just applied a percentage.

If I took every expense and allocated it either to a grant or to indirect during a month, let's say we are doing a month, it wouldn't necessarily come out to 21.9% every month.

JOHN HEVERON: You're right.

It won't.

In fact, you may have months, summer months, when there is a lot more time off, so things don't happen uniformly throughout the year.

For the federal funding, for the federal draw downs, this is going to work because we look at the big picture, we look at the whole year.

AUDIENCE MEMBER: Okay.

JOHN HEVERON: For the state, for certain state funding, you may need to go back to the way you've done this in the past.

But again, we haven't gotten rid of accounts.

We've just consolidated them to simplify the federal process.

AUDIENCE MEMBER: And the states may accept that, but you answered my question, the federal, they won't care that you can't track that 23 or 29 to the actual month's expenses.

JOHN HEVERON: I wouldn't say they don't care, because they're going to get a final accounting at the end of the year.

AUDIENCE MEMBER: At the end of the year they care, yeah.

JOHN HEVERON: They have a process to do it.

I'm going to hold out a little bit of hope that this process might gain some wider acceptance, because it's so logical and so simple but it really is almost flawless.

AUDIENCE MEMBER: John, would it be safe to say that if we kind of allocate our expenses the way we always do, kind of like with our Cost Allocation Plan.

I know we don't want to say that.

And then reconcile it to this at the end of the year, because it should kind of sort of come out the same.

Would that be okay?

JOHN HEVERON: Are you talking about direct expenses or indirect?

AUDIENCE MEMBER: Indirect.

JOHN HEVERON: For indirect this should simplify the process so much, and it is acceptable for your federal draws, and as I said, the reconciliation of this is done just once at the end of the year, when everything is said and done, so you're not precluded from doing that, but this is really the method that federal wants you to go in, and of course, if you've submitted an indirect cost rate proposal and it's been accepted, you're saying this is how I'm doing it.

AUDIENCE MEMBER: I know, but the state is not going to accept that.

So instead of doing it two different ways, can I do it the way I always do it and then reconcile it at the end?

JOHN HEVERON: Can you do it the way you always do it for federal?

AUDIENCE MEMBER: Right.

JOHN HEVERON: No, I don't think so.

I mean, if you have a federal indirect cost rate, I think, you've made a commitment to do it this way, and so I think you need to do that for federal.

And I think you need to have enough of a mastery of this that when your state funder comes in you can explain it.

Maybe we will be part of the educational process that brings this along.

Now, if you know, let's say you've added a couple of significant programs, and you know that your indirect is going to be lower, I have had clients say, I'm not going to wait until the end of the year and have a problem.

I know I'm lower than that.

I'm going to reduce it now.

That's the rare exception.

Normally you would do this until the end of the year.

You submit your final report of your indirect rate.

They said, ha ha, you charged too much, we're going to reduce the rate next year, and then it will even out.

Okay.

AUDIENCE MEMBER: I kind of wanted to say the same thing, just to comment.

I had the same questions that once was answered to me that was helpful, so I thought to share.

That 4,143 that we are doing the months is based on the rate, which comes from the indirect cost rate proposal.

So it comes out from all the work that's done and determined what that rate is.

To apply every month without tracking.

So at the end of the year, like John said, the reconciliation will be done not only through the grant budget and your actual total year expenses, but also through the renewal process of the indirect cost rate.

So I don't think we would need to make sure that we spent that 4,000 that month before we draw down because we were given that percentage to be used.

We use that based on the percentage that was approved in indirect cost rate.

I hope that helps.

AUDIENCE MEMBER: Probably everybody else perfectly understands, but employees one, two, three, and four, they're on the grant, right, they're not in the indirect.

Totally -- JOHN HEVERON: Direct services.

Thanks for clarifying that.

Yeah.

PAULA MCELWEE: Kind of what I'm hearing, people don't know how to make sure their indirect isn't billed twice.

They don't know how to pull out indirect from QuickBooks program in order to show a total that makes sense, and I don't know how to advise on that one.

JOHN HEVERON: That is a complicated question.

The best way to do it is to build that into your general ledger.

Build it into your QuickBooks or whatever you use.

QuickBooks, as I said, uses sub accounts and uses classes, so if you use classes, you could have a class for indirect.

You're breaking down your payroll every time.

So there shouldn't be any problem with payroll and that's your biggest cost.

Office supplies are always going to go into that indirect office supplies category.

General insurance is always going to go into that category in QuickBooks.

So really, the key here is to make sure that you align your accounting system with your indirect cost rate.

AUDIENCE MEMBER: So I'm a QuickBooks pro adviser and I want to clarify.

You're saying that you can either use a class or build it into your chart of accounts as indirect costs and then sub accounts for each subject of indirect costs, like payroll, office supplies, rent, et cetera?

JOHN HEVERON: Yes.

So one option, and again, I'm talking about QuickBooks, but this could be any general ledger doing it this way.

You could have an account for indirect payroll and you could have an account for office supplies and you could have an account for general insurance.

And without any sub accounts, without any classes, and so whenever you've got office supplies, they would go into that office supplies category, which you know is indirect.

The advantage of combining all of those indirect things is it makes this federal voucher really easy to do.

So that's why I would recommend using sub accounts or classes for the indirect.

But you don't have to.

You can still get the job done.

You might want to export to Excel and say, these ten accounts or 15 accounts are all the indirect, and then do your calculations that way.

AUDIENCE MEMBER: Okeydokey, thanks.

AUDIENCE MEMBER: I'm just curious, when you're listing those items up there, rent, utilities, is that just a portion of the total cost that's direct and then the additional is indirect?

JOHN HEVERON: Just the direct for that particular program.

AUDIENCE MEMBER: The rent might be 6,000 but you're directly billing 5138 of it.

JOHN HEVERON: For that program, right.

PAULA MCELWEE: Another practical question I heard over the lunch hour was this, when do I begin to apply my new indirect cost rate?

Do I have to do it right away or do I have to wait until the next grant because my current grant was budgeted under a Cost Allocation Plan?

JOHN HEVERON: So for most of you, you've just recently done or shortly will be applying for and hopefully getting approval for your indirect cost rate.

Your budget year generally starts October 1 of 2016.

That's when you would start applying it on the first day of that new fiscal year.

PAULA MCELWEE: Time pressure that we had, on wanting you to get it done soon, is that ACL or the Independent Living Administration wants to see that indirect cost rate on your next grant application.

They do not want all of your costs to be in like they have been.

They want direct and indirect split out on your next grant application, which is, Bob said today, they'll probably be issuing in June or July.

And of course, you have to have it in in time to apply it on October 1.

AUDIENCE MEMBER: I just want to comment.

For those who already got theirs back it may be different.

But for ours, it starts, the beginning of our next fiscal year, which is July First.

So we submitted ours in December.

We got it back and we have to put it in place July First.

PAULA MCELWEE: So you may or may not need a budget revision with your federal grant, which does not start until October.