BASIC FINANCIAL MANAGEMENT

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• BASIC FINANCIAL MANAGEMENT
• FOR
• NON-PROFIT ORGANISATIONS

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• The Promise
• This training is an introduction to financial
  control and accountability for non-financial
  organisational or project
• leadership.
• Many of us in leadership positions in civil
  society organisations and projects find ourselves
  dealing with large sums of money when we have
  little or no knowledge or experience about how to
  manage money.

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• The Promise contd.
• Some other organisations are unable to attract
  funding because they have failed to play by the
  rules.
• This training is intended to give us a basic
  understanding of some of the issues and how
  tos. It will not turn us into bookkeepers or
  accountants. But it will provide us with a
  reference tool to help us understand some of the
  concepts and approaches.

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Training Outline

• Session 1 Introduction
• Session 2 Setting up a bookkeeping system
  for our organisations
• Session 3 Producing financial reports

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• Introduction
• This Session
• Explains why financial management is important
  for NPOs.
• Clarifies what financial management and
  financial control involves.
• Describes the underlying principles of financial
  management.

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• Introduction contd.
• This session
• Explains roles and responsibilities for financial
  management.
• Outlines the building blocks and tools of
  financial management.
• It looks at the basics of a good bookkeeping
• system, at the importance of having financial
• policies and how to develop them.

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Why financial management training for non-profit
organisations?

• Many leaders and managers in civil society
  organisations are overwhelmed by the jargon of
  financial management.
• Sometimes they avoid their responsibilities in
  this regard because the jargon makes them feel
  incompetent.

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• Good practice in financial management will
• help managers to make effective and efficient
  use of resources to achieve objectives and
  fulfill commitments to stakeholders
• help NPOs to be more accountable to donors and
  other stakeholders

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Good practice in financial management will

• help NPOs gain the respect and confidence of
  funding agencies, partners and beneficiaries
• give the NGO the advantage in competition for
  increasingly scarce resources
• help NGOs prepare themselves for long-term
  financial sustainability.

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• What is Financial Management?
• Financial management entails planning,
  organising, controlling and monitoring the
  financial resources of an organisation to achieve
  objectives.
• Financial management is about taking action to
  look after the financial health of an
  organisation, and not leaving things to chance.

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• In summary, financial management is all
• about
• Managing scarce resources
• Managing risk
• Managing strategically
• Managing by objectives

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• What is Financial Control?
• At the heart of financial management is the
• concept of financial control.
• This describes a situation where the financial
  resources of an organisation are being correctly
  and effectively used.
• And when this happens, managers will sleep
  soundly at night, beneficiaries will be well
  served and donors will be happy with the results.

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• Financial control occurs when systems and
  procedures are established to make sure that the
  financial resources of an organisation are being
  properly handled.

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• The 7 Principles of Financial Management
• It is useful to identify a series of good
  practice principles,
• which can be used as a standard in developing
  proper
• financial management systems in an NPO.
• Consistency
• Accountability
• Transparency
• Viability
• Integrity
• Stewardship
• Accounting Standards

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The 4 Building Blocks of Financial Management

• Accounting Records
• Every organisation must keep an accurate record
  of financial transactions that take place to show
  how funds have been used. Accounting records also
  provide valuable information about how the
  organisation is being managed and whether it is
  achieving its objectives.
• -
• Financial Planning
• Linked to the organisations strategic and
  operational plans, the budget is the cornerstone
  of any financial management system and plays an
  important role in monitoring the use of funds.

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• Financial Monitoring
• Financial reports allow the managers to assess
  the progress of the organisation.
• Internal Controls
• Checks and balances collectively referred to
  as internal controls are put in place to
  safeguard an organisations assets and manage
  internal risk.

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• Effective management of NGOs demands
• Planning
• Tools Strategic plan, business plan,
  activity plan, budgets, work plans, cashflow
  forecast, feasibility studyetc.
• Organising
• Tools Constitution, organisation charts, flow
  diagrams, job descriptions, Chart of Accounts,
  Finance Manual, budgetsetc.

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• Controlling
• Tools Budgets, delegated authority,
  procurement procedure, reconciliation,
  internal and external audit, fixed assets
  register, vehicle policy, insurance...etc.
• Monitoring
• Tools Evaluation reports, budget monitoring
  reports, cashflow reports, financial
  statements, project reports, donor reports,
  audit reports, evaluation reportsetc..

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Session 2

• Setting up a bookkeeping system for
• our organisations
• What is the Right System?
• Steps to setting up a bookkeeping system

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What is the Right System?

• Every NGO is different there is no such thing
  as a model finance system. But there are a
  number of considerations to take into account to
  find the right approach for your NGO
• Structure line management number of staff,
  their functions and where they are based
  operational structure (e.g. department, branch,
  function). Organograms are useful here.

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Considerations for identifying the right system
contd.

• Activities of the organisation number and type
  of projects.
• Volume and type of financial transactions do
  you pay for your goods and services with cash or
  with suppliers accounts or both?

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Considerations for identifying the right system
contd.

• Resources of the organisation what financial,
  equipment and human resources are available to
  help manage the finances?
• Reporting requirements how often and in what
  format do financial reports have to be produced
  for the different stakeholders in your
  organisation?

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Considerations for identifying the right system
contd.

• All of these considerations will help one to
  decide the most appropriate
• method for keeping accounting records
• coding structure for transactions
• financial policies and
• financial reporting routines.

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Steps to Developing a Bookkeeping System

• Develop an organisation chart and job
  descriptions of staff.
• Produce a budget based on activity plans.
• Develop a financial accounts structure
  including a Chart of Accounts and Project Cost
  Centres.
• Develop a Finance Manual or a file of
  established policies and procedures.

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Steps to Developing a Bookkeeping System contd.

• Keep financial records
• Produce financial reports or statements.

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Steps to Developing a Bookkeeping System contd.

• 1. Developing an organisation chart
• The way that an NGO is structured and registered
  has an impact on its legal status, accountability
  and transparency.
• Every NGO should have a founding document such
  as a Constitution or Memorandum and Articles of
  Association.

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Organisation Chart Contd.

• The constitution describes, amongst other
  things
• the name and registered address of the NGO
• the objects of the organisation and target
  group
• the system of accountability i.e. who is the
  governing body, its powers and responsibilities
  and
• how it raises its funds.

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Steps to Developing a Bookkeeping System contd.

• 2. Developing a budget
• A budget is derived from an organisations
• Vision
• Mission
• Goals
• Objectives
• Strategies
• Activities

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Steps to Developing a Bookkeeping System contd.

• Developing a financial accounts structure based
  on
• Chart of Accounts
• Cost Centres
• Chart of Accounts
• The Chart of Accounts is probably the
• most important organising tool for the
• accounting and reporting processes.

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Chart of Accounts contd.

• The chart of accounts is a list of codes
• representing different categories or groups
• of transactions carried on by an NGO.
• NGOs buy a wide variety of goods and services to
  help achieve their objectives
• They also receive different kinds of income
  grants, donations and membership fees

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Chart of Accounts contd.

• To make sense of all of this financial activity,
  it helps to sort the different types of income
  and expense into a series of pre-determined
  categories.
• Then, when a transaction takes place, it is
  recorded in the books of account and categorised
  according to the guidance held in the Chart of
  Accounts (see fig 1)

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Cost Centres

• Restricted funds must be accounted for
• seperately to demonstrate to the donor
• how the funds have been utilised. This is
• known as fund accounting and requires that
• such fund will have a separate code.
• Thus every cost item concerning the funds
• activities is listed under that code.

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Steps to Developing a Bookkeeping System contd.

• Developing a finance manual
• A finance manual is a document containing
• the financial policies of an NGO.
• A financial policy is a rule governing the
• handling of an NGOs finances. It includes a
• Statement of Delegated Authority which
• describes everyones financial roles

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Developing a finance manual contd.

• WHAT FINANCIAL POLICIES DO WE NEED?
• An overall Financial Policy will contain policies
• that relate to a number of areas such as
• Donor or income policies (e.g. receipts,
  deposits)
• Budgeting policies
• Expenditure policies (e.g. amounts, payments,
  requisitions, non-budgeted expenditure)

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What financial policies do we need contd.

• Travel policies (e.g. car hire, class of airfare
  or hotel, per diems)
• Auditing policies
• Assets policies (e.g. purchasing, utilisation,
  maintenance and disposal vehicle policies go
  here).
• Petty cash policy
• Salary policy
• Staff loans
• Opening and operating a bank account.

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While developing the policy

• Make sure you have enough information to develop
  the policy.
• Clarify why the policy is needed. Write a short
  paragraph or sentence to explain the need. (e.g.
  We need a per diem policy because staff are doing
  regular work out of town, and they need to know
  in advance what money will be available for
  them).

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While developing the policy contd

• Define any terms that need defining. (e.g. Per
  diem means daily allowance.)
• Clarify the purpose of the policy. What do you
  want the situation to be as a result of having
  the policy? (e.g. This policy is intended to
  ensure consistency.
• Clarify organisational principles that underpin
  the policy (e.g. transparency, consistency).
  Note these in writing.

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While developing the policy

• Clarify who the policy will apply to. Write this
  down. (e.g. All staff traveling out of town
  overnight on project business).
• Clarify the existing situation. Write a short
  paragraph/sentence that does this. (e.g. This was
  always decided on an ad hoc basis before.)
• Put it all together and then circulate the draft
  policy for feedback.

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• See Appendices for samples of a financial
• policy and schedule of delegated authority.

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Steps to Developing a Bookkeeping System contd.

• Keeping Financial Records
• Our financial records will be most beneficial
• when we keep accurate books of accounts.
• To keep accurate books, we need to have the
  following
• A bank account with a cheque book.
• A daily record system with receipts and petty
  cash vouchers.
• A monthly record system with a petty cash book
  and a cash book for recording and analysing
  income and expenditure.

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• Every financial transaction must go through the
  following
• steps
• The transaction (money is spent or received)
  takes place.
• The transaction is recorded in writing as proof
  that it has taken place. This could be in the
  form of a receipt issued by you for money
  received, or a receipt issued to you by the
  supplier when you pay for something. If the
  payment is electronic, then you will receive
  confirmation in a print-out. If you pay by
  cheque, or are paid by cheque, you may not
  receive a receipt or issue one. Instead, the
  transaction will be recorded in your bank
  statement.

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• The transaction is then recorded in an accounting
  book. For all money received and spent, this
  record will be in the cash book (either manually
  or on computer).
• A summary is made of all transactions and written
  in a monthly statement.
• A summary of all transactions for the year is
  written in an annual statement.

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• Keeping the books
• Here we will go through the checklists for the
• bookkeeping activities that need to be done
• on a
• Daily
• Monthly, and
• Annual
• basis.

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• DAILY
• The bookkeeping tasks that need to be done daily
  are
• Receipting incoming money.
• Maintaining a petty cash system with petty cash
  vouchers.
• Banking (depositing the money that has come in).
• Writing cheques based on approved cheque
  requisition forms.

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• Standard forms to use for daily record keeping
• Receipt Voucher (for receiving every incoming
  money)
• Payment Voucher (for ALL expenses made)
• Travel and Subsistence Expenses claim
• Bank Reconciliation
• Journal Voucher
• (see samples in the handout)

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Standard forms to use for Monthly record keeping

• Cashbook
• Bank statements
• Bank reconciliation forms.
• (see samples in handout)

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Accounting Procedures

• Issue receipt vouchers for money received
• Issue payment vouchers for money paid out
• Enter details of the above transactions in a
  journal
• At the end of the month, enter details in the
  journal into the cashbook
• Use the analysed cashbook to produce an income
  and expenditure statement.

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Why should we keep books?

• Organisations and projects keep books to
• Provide an accurate account of financial
  management practices to stakeholders
• Prevent misuse of money
• Provide a management tool for organisational and
  project leadership and management.
• Part of keeping the books is to provide monthly
  and annual reports to management and leadership
  on the finances of the organisation. This should
  be done in a way that is user-friendly for
  non-financial managers and leaders. The
  information provided should enable the management
  and leadership of the organisation to make
  decisions about the running of the organisation.
• Financial reports generated by your bookkeeping
  system should enable you to answer questions such
  as
• Are there variances (differences) between the
  budget and actual income and expenditure? If so,
  why? Do we need to take action?
• Are donor grants being spent as intended? If
  not, why not?
• Is most of our money being spent on programmes as
  opposed to core costs?
• Are there any items for which we are not
  allocating enough money (e.g. replacement of
  major equipment)?
• What do we owe and own at the moment? (from the
  balance sheet).
• Why are our assets worth so little/so much?
• Are we spending too much on any item relative to
  the work being accomplished?
• Is our financial position healthy? (Can we
  continue to operate and do the work we are
  supposed to do?)
• Do we have a good distribution of sources of
  income? (Are we too dependent on one source?)
• Are any cash flow problems likely to occur? If
  so, what can we do about them?

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Roles in financial control and accountability

• Financial accountability in a civil society
  organisation means that
• Regular financial reports are given to all those
  who have a right to know what the organisation is
  doing with its funds.
• The organisation can account for funds by
  producing documentary proof of receipts and
  payments.
• The organisation can show that the money is being
  spent on its aims and for the particular work it
  was intended to cover.

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• Roles in financial control and accountability
  contd.
• Financial accountability in a civil society
  organisation means
• that
• The organisation does not take on financial
  obligations it cannot meet.
• The organisation has taken all necessary
  precautions to prevent misuse of funds, and to
  keep funds and records relating to them safe.

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Principles of financial control

• Control over finances should be divided up so
  that one person does not have too much control or
  power over the money.
• It should be clear who is responsible for each
  task or area of activity. You must be able to
  trace mismanagement or abuse to a particular
  person or people.
• There should be no grey areas in terms of who is
  responsible for what, and no overlaps that make
  it possible for one person to blame another and
  avoid responsibility.

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• Decisions about finances should be made at the
  right level. So, for example, a bookkeeper
  should not make decisions about non-budgeted
  expenses. Who makes what decisions should be
  included as written financial policy, approved by
  your highest governing body.
• People should have the necessary skills to carry
  out their roles and responsibilities.
• Everyone from at least the level of middle
  management up, and including members of the
  governing structures, should understand financial
  statements and be able to monitor them. Anyone
  working directly on a project or programme should
  understand its financial statements. Train
  people if necessary. Financial statements should
  be discussed at governing body and staff
  meetings.