basic financial management for non-profit orgs

BASIC FINANCIAL MANAGEMENTBASIC FINANCIAL MANAGEMENT

FORFOR

NON-PROFIT organizationsNON-PROFIT organizations

The PromiseThe PromiseThis training is an introduction to financial This training is an introduction to financial control and accountability for non-financial control and accountability for non-financial organizational or projectorganizational or projectleadership. leadership.

Many of us in leadership positions in civil Many of us in leadership positions in civil society organizations and projects find society organizations and projects find ourselves dealing with large sums of money ourselves dealing with large sums of money when we have little or no knowledge or when we have little or no knowledge or experience about how to manage money.experience about how to manage money.

The Promise contd.The Promise contd.

Some other organizations are unable to Some other organizations are unable to attract funding because they have failed attract funding because they have failed to play by the rules. to play by the rules.

This training is intended to give us a This training is intended to give us a basic understanding of some of the basic understanding of some of the issues and “how to’s.” It will not turn us issues and “how to’s.” It will not turn us into bookkeepers or accountants. But it into bookkeepers or accountants. But it will provide us with a reference tool to will provide us with a reference tool to help us understand some of the concepts help us understand some of the concepts and approaches. and approaches.

Training OutlineTraining Outline

Session 1:Session 1: IntroductionIntroduction

Session 2:Session 2: Setting up a bookkeeping Setting up a bookkeeping system for our organizationssystem for our organizations

Session 3:Session 3: Producing financial reports Producing financial reports

IntroductionIntroductionThis Session:This Session:

Explains why financial management is important for Explains why financial management is important for NGOs.NGOs.

Clarifies what financial management and financial Clarifies what financial management and financial control involves.control involves.

Describes the underlying principles of financial Describes the underlying principles of financial management.management.

Introduction contd.Introduction contd.

This session:This session:

Explains roles and responsibilities for financial Explains roles and responsibilities for financial management.management.

Outlines the building blocks and tools of financial Outlines the building blocks and tools of financial management.management.

It looks at the basics of a good bookkeepingIt looks at the basics of a good bookkeepingsystem, at the importance of having financialsystem, at the importance of having financialpolicies and how to develop them.policies and how to develop them.

Why financial management training for Why financial management training for non-profit organizations?non-profit organizations?

Many leaders and managers in civil Many leaders and managers in civil society organizations are overwhelmed society organizations are overwhelmed by the jargon of financial management. by the jargon of financial management.

Sometimes they avoid their Sometimes they avoid their responsibilities in this regard because responsibilities in this regard because the jargon makes them feel the jargon makes them feel incompetent.incompetent.

Good practice in financial management Good practice in financial management will:will:

help managers to make effective and help managers to make effective and efficient use of resources to achieve efficient use of resources to achieve objectives and fulfill commitments to objectives and fulfill commitments to stakeholdersstakeholders

help NPOs to be more accountable to help NPOs to be more accountable to donors and other stakeholdersdonors and other stakeholders

Good practice in financial management will:Good practice in financial management will:

help NGOs gain the respect and help NGOs gain the respect and confidence of funding agencies, partners confidence of funding agencies, partners and beneficiariesand beneficiaries

give the NGO the advantage in give the NGO the advantage in competition for increasingly scarce competition for increasingly scarce resourcesresources

help NGOs prepare themselves for long-help NGOs prepare themselves for long-term financial sustainability.term financial sustainability.

What is Financial Management?What is Financial Management?

Financial management entails planning, Financial management entails planning, organizing, controlling and monitoring organizing, controlling and monitoring the financial resources of an organization the financial resources of an organization to achieve objectives.to achieve objectives.

Financial management is about taking Financial management is about taking action to look after the financial health of action to look after the financial health of an organization, and not leaving things an organization, and not leaving things to chance. to chance.

In summary, financial management is allIn summary, financial management is all

about:about:

Managing scarce resourcesManaging scarce resources Managing riskManaging risk Managing strategically Managing strategically Managing by objectivesManaging by objectives

What is Financial Control?What is Financial Control?At the heart of financial management is theAt the heart of financial management is the

concept of financial control. concept of financial control.

This describes a situation where the financial This describes a situation where the financial resources of an organization are being correctly and resources of an organization are being correctly and effectively used. effectively used.

And when this happens, managers will sleep And when this happens, managers will sleep soundly at night, beneficiaries will be well served soundly at night, beneficiaries will be well served and donors will be happy with the results.and donors will be happy with the results.

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

The 7 Principles of Financial ManagementThe 7 Principles of Financial ManagementIt is useful to identify a series of good practice principles,It is useful to identify a series of good practice principles,

which can be used as a standard in developing properwhich can be used as a standard in developing properfinancial management systems in an NPO.financial management systems in an NPO.

ConsistencyConsistency AccountabilityAccountability TransparencyTransparency ViabilityViability IntegrityIntegrity StewardshipStewardship Accounting StandardsAccounting Standards

The 4 Building Blocks of Financial ManagementThe 4 Building Blocks of Financial Management

Accounting RecordsAccounting RecordsEvery organization must keep an accurate record of Every organization must keep an accurate record of financial transactions that take place to show how funds financial transactions that take place to show how funds have been used. Accounting records also provide valuable have been used. Accounting records also provide valuable information about how the organization is being managed information about how the organization is being managed and whether it is achieving its objectives.and whether it is achieving its objectives.

-- Financial PlanningFinancial Planning

Linked to the organization’s strategic and operational plans, Linked to the organization’s strategic and operational plans, the budget is the cornerstone of any financial management the budget is the cornerstone of any financial management system and plays an important role in monitoring the use of system and plays an important role in monitoring the use of funds.funds.

Financial MonitoringFinancial Monitoring

Financial reports allow the managers to assess Financial reports allow the managers to assess the progress of the organization.the progress of the organization.

Internal ControlsInternal Controls

Checks and balances – collectively referred to Checks and balances – collectively referred to as internal controls – are put in place to as internal controls – are put in place to safeguard an organization’s assets and manage safeguard an organization’s assets and manage internal risk.internal risk.

Effective management of NGOs demands:Effective management of NGOs demands: PlanningPlanning

ToolsTools: Strategic plan, business plan, : Strategic plan, business plan, activity plan, budgets, work activity plan, budgets, work

plans, plans, cashflow forecast, cashflow forecast, feasibility feasibility study…etc.study…etc.

OrganisingOrganisingToolsTools: Constitution, organization charts, : Constitution, organization charts, flow diagrams, job descriptions, Chart of flow diagrams, job descriptions, Chart of Accounts, Finance Manual, budgets…Accounts, Finance Manual, budgets…etc.etc.

ControllingControlling

ToolsTools: Budgets, delegated authority, : Budgets, delegated authority, procurement procedure, reconciliation, procurement procedure, reconciliation,

internal and external audit, fixed assets internal and external audit, fixed assets register, vehicle policy, insurance...etc.register, vehicle policy, insurance...etc.

MonitoringMonitoring

ToolsTools: Evaluation reports, budget : Evaluation reports, budget monitoring monitoring reports, cash flow reports, reports, cash flow reports, financial financial statements, project reports, statements, project reports, donor reports, donor reports, audit reports, evaluation audit reports, evaluation reports…etc..reports…etc..

Session 2Session 2

Setting up a bookkeeping system forSetting up a bookkeeping system forour organizationsour organizations

What is the Right System?What is the Right System? Steps to setting up a bookkeeping systemSteps to setting up a bookkeeping system

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.

Considerations for identifying the right system contd.

Activities of the organization – 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?


Resources of the organization – 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 organization?


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.

Steps to Developing a Bookkeeping SystemSteps to Developing a Bookkeeping System

1. Develop an organization chart and job descriptions of staff.

2. Produce a budget based on activity plans.

3. Develop a financial accounts structure – including a Chart of Accounts and Project Cost Centres.

4. Develop a ‘Finance Manual’ – or a file of established policies and procedures.

Steps to Developing a Bookkeeping System contd.Steps to Developing a Bookkeeping System contd.

5.5. Keep financial recordsKeep financial records

6.6. Produce financial reports or Produce financial reports or statements.statements.


1. Developing an organization 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.

organization Chart Contd.organization Chart Contd.

The constitution describes, amongst other things:

the name and registered address of the NGO;

the objects of the organization and target group;

the system of accountability – i.e. who is the governing body, its powers and responsibilities; and

how it raises its funds.


2.2. Developing a budgetDeveloping a budget

A budget is derived from an A budget is derived from an organization’s:organization’s:

VisionVision MissionMission Goals Goals Objectives Objectives StrategiesStrategies ActivitiesActivities


3.3. Developing a financial accounts Developing a financial accounts structure based on:structure based on:

Chart of AccountsChart of Accounts Cost CentresCost Centres

Chart of AccountsChart of AccountsThe Chart of Accounts is probably the most important organising tool for the accounting and reporting processes.

Chart of Accounts contd.Chart of Accounts contd.

The chart of accounts is a list of codesThe chart of accounts is a list of codes

representing different categories or groups representing different categories or groups

of transactions carried on by an NGO.of transactions carried on by an NGO.

NGOs buyNGOs 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

Chart of Accounts contd.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)

Cost CentersCost Centers

Restricted funds must be accounted forseparately to demonstrate to the donorhow the funds have been utilized. This isknown as fund accounting and requires

thatsuch fund will have a separate code.

Thus every cost item concerning the fund’sactivities is listed under that code.


4.4. Developing a finance manualDeveloping a finance manual

A finance manual is a document containingA finance manual is a document containing

the financial policies of an NGO.the financial policies of an NGO.

A financial policy is a rule governing theA financial policy is a rule governing the

handling of an NGO’s finances. It includes ahandling of an NGO’s finances. It includes a

Statement of Delegated Authority whichStatement of Delegated Authority which

describes everyone’s financial rolesdescribes everyone’s financial roles

Developing a finance manual contd.Developing a finance manual contd.

WHAT FINANCIAL POLICIES DO WE NEED?WHAT FINANCIAL POLICIES DO WE NEED?

An overall Financial Policy will contain policiesAn overall Financial Policy will contain policies

that relate to a number of areas such as:that relate to a number of areas such as:

Donor or income policies (e.g. receipts, deposits)Donor or income policies (e.g. receipts, deposits) Budgeting policiesBudgeting policies Expenditure policies (e.g. amounts, payments, Expenditure policies (e.g. amounts, payments,

requisitions, non-budgeted expenditure)requisitions, non-budgeted expenditure)

What financial policies do we need contd.What financial policies do we need contd.

Travel policies (e.g. car hire, class of airfare or hotel, Travel policies (e.g. car hire, class of airfare or hotel, per diems)per diems)

Auditing policiesAuditing policies Assets policies (e.g. purchasing, utilisation, Assets policies (e.g. purchasing, utilisation,

maintenance and disposal – vehicle policies go here).maintenance and disposal – vehicle policies go here). Petty cash policyPetty cash policy Salary policySalary policy Staff loansStaff loans Opening and operating a bank account.Opening and operating a bank account.

While developing the policy:While developing the policy: Make sure you have enough information to Make sure you have enough information to

develop the policy.develop the policy.

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

While developing the policy contd:While developing the policy contd: Define any terms that need defining. (e.g. “Per Define any terms that need defining. (e.g. “Per

diem” means daily allowance.)diem” means daily allowance.)

Clarify the purpose of the policy. What do you want Clarify the purpose of the policy. What do you want the situation to be as a result of having the policy? the situation to be as a result of having the policy? (e.g. This policy is intended to ensure consistency.(e.g. This policy is intended to ensure consistency.

Clarify organizational principles that underpin the Clarify organizational principles that underpin the policy (e.g. transparency, consistency). Note these policy (e.g. transparency, consistency). Note these in writing.in writing.

While developing the policy:While developing the policy: Clarify who the policy will apply to. Write this down. Clarify who the policy will apply to. Write this down.

(e.g. All staff traveling out of town overnight on (e.g. All staff traveling out of town overnight on project business).project business).

Clarify the existing situation. Write a short Clarify the existing situation. Write a short paragraph/sentence that does this. (e.g. This was paragraph/sentence that does this. (e.g. This was always decided on an always decided on an ad hocad hoc basis before.) basis before.)

Put it all together and then circulate the draft policy Put it all together and then circulate the draft policy for feedback.for feedback.

See Appendices for samples of a financial See Appendices for samples of a financial

policy and schedule of delegated authority.policy and schedule of delegated authority.


5.5. Keeping Financial RecordsKeeping Financial Records

Our financial records will be most beneficial Our financial records will be most beneficial when we keep accurate books of accounts.when we keep accurate books of accounts.

To keep accurate books, we need to have the To keep accurate books, we need to have the following:following:

A bank account with a cheque book.A bank account with a cheque book. A daily record system with receipts and petty cash A daily record system with receipts and petty cash

vouchers.vouchers. A monthly record system with a petty cash book A monthly record system with a petty cash book

and a cash book for recording and analysing and a cash book for recording and analysing income and expenditure.income and expenditure.

Every financial transaction must go through the following Every financial transaction must go through the following steps:steps: The transaction (money is spent or received) takes The transaction (money is spent or received) takes

place.place. The transaction is recorded in writing as proof that The transaction is recorded in writing as proof that

it has taken place. This could be in the form of a it has taken place. This could be in the form of a receipt issued by you for money received, or a receipt issued by you for money received, or a receipt issued to you by the supplier when you pay receipt issued to you by the supplier when you pay for something. If the payment is electronic, then for something. If the payment is electronic, then you will receive confirmation in a print-out. If you you will receive confirmation in a print-out. If you pay by cheque, or are paid by cheque, you may not pay by cheque, or are paid by cheque, you may not receive a receipt or issue one. Instead, the receive a receipt or issue one. Instead, the transaction will be recorded in your bank statement.transaction will be recorded in your bank statement.

The transaction is then recorded in an The transaction is then recorded in an accounting book. For all money accounting book. For all money received and spent, this record will be in received and spent, this record will be in the cash book (either manually or on the cash book (either manually or on computer).computer).

A summary is made of all transactions A summary is made of all transactions and written in a monthly statement.and written in a monthly statement.

A summary of all transactions for the A summary of all transactions for the year is written in an annual statement.year is written in an annual statement.

Keeping the booksKeeping the books

Here we will go through the checklists for the Here we will go through the checklists for the

bookkeeping activities that need to be done bookkeeping activities that need to be done

on a:on a: DailyDaily Monthly, andMonthly, and AnnualAnnual

basis.basis.

DAILYDAILY The bookkeeping tasks that need to be The bookkeeping tasks that need to be

done daily are:done daily are:

Receipting incoming money.Receipting incoming money. Maintaining a petty cash system with Maintaining a petty cash system with

petty cash vouchers.petty cash vouchers. Banking (depositing the money that has Banking (depositing the money that has

come in).come in). Writing cheques based on approved Writing cheques based on approved

cheque requisition forms. cheque requisition forms.

Standard forms to use for daily record Standard forms to use for daily record keeping:keeping:

Receipt Voucher (for receiving every Receipt Voucher (for receiving every incoming money)incoming money)

Payment Voucher (for ALL expenses made)Payment Voucher (for ALL expenses made) Travel and Subsistence Expenses claim Bank Reconciliation Journal Voucher

(see samples in the handout)(see samples in the handout)

Standard forms to use for Monthly record Standard forms to use for Monthly record keeping:keeping:

Cashbook Cashbook Bank statementsBank statements Bank reconciliation forms.Bank reconciliation forms.

(see samples in handout)(see samples in handout)

Accounting Procedures:Accounting Procedures:1.1. Issue receipt vouchers for money receivedIssue receipt vouchers for money received

2.2. Issue payment vouchers for money paid outIssue payment vouchers for money paid out

3.3. Enter details of the above transactions in a journalEnter details of the above transactions in a journal

4.4. At the end of the month, enter details in the At the end of the month, enter details in the journal into the cashbookjournal into the cashbook

5.5. Use the analysed cashbook to produce an income Use the analysed cashbook to produce an income and expenditure statement.and expenditure statement.

Why should we keep books?Why should we keep books?organizations and projects keep books to:organizations and projects keep books to: Provide an accurate account of financial management practices to stakeholders;Provide an accurate account of financial management practices to stakeholders; Prevent misuse of money;Prevent misuse of money; Provide a management tool for organizational and project leadership and management.Provide a management tool for organizational and project leadership and management. Part of keeping the books is to provide monthly and annual reports to management and Part of keeping the books is to provide monthly and annual reports to management and

leadership on the finances of the organization. This should be done in a way that is user-leadership on the finances of the organization. This should be done in a way that is user-friendly for non-financial managers and leaders. The information provided should enable the friendly for non-financial managers and leaders. The information provided should enable the management and leadership of the organization to make decisions about the running of the management and leadership of the organization to make decisions about the running of the organization.organization.

Financial reports generated by your bookkeeping system should enable you to answer Financial reports generated by your bookkeeping system should enable you to answer questions such as:questions such as:

Are there variances (differences) between the budget and actual income and expenditure? If Are there variances (differences) between the budget and actual income and expenditure? If so, why? Do we need to take action?so, why? Do we need to take action?

Are donor grants being spent as intended? If not, why not?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?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 Are there any items for which we are not allocating enough money (e.g. replacement of

major equipment)?major equipment)? What do we owe and own at the moment? (from the balance sheet). What do we owe and own at the moment? (from the balance sheet). Why are our assets worth so little/so much?Why are our assets worth so little/so much? Are we spending too much on any item relative to the work being accomplished?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 Is our financial position healthy? (Can we continue to operate and do the work we are

supposed to do?)supposed to do?) Do we have a good distribution of sources of income? (Are we too dependent on one Do we have a good distribution of sources of income? (Are we too dependent on one

source?)source?) Are any cash flow problems likely to occur? If so, what can we do about them? Are any cash flow problems likely to occur? If so, what can we do about them?

Roles in financial control and accountabilityRoles in financial control and accountability

Financial accountability in a civil society Financial accountability in a civil society organization means that:organization means that:

Regular financial reports are given to all those who Regular financial reports are given to all those who have a right to know what the organization is have a right to know what the organization is doing with its funds.doing with its funds.

The organization can account for funds by The organization can account for funds by producing documentary proof of receipts and producing documentary proof of receipts and payments.payments.

The organization can show that the money is being The organization can show that the money is being spent on its aims and for the particular work it was spent on its aims and for the particular work it was intended to cover.intended to cover.

Roles in financial control and accountability contd.Roles in financial control and accountability contd.

Financial accountability in a civil society organization meansFinancial accountability in a civil society organization meansthat:that:

The organization does not take on The organization does not take on financial obligations it cannot meet.financial obligations it cannot meet.

The organization has taken all necessary The organization has taken all necessary precautions to prevent misuse of funds, precautions to prevent misuse of funds, and to keep funds and records relating to and to keep funds and records relating to them safe.them safe.

Principles of financial controlPrinciples of financial control

Control over finances should be divided up so that Control over finances should be divided up so that one person does not have too much control or one person does not have too much control or power over the money.power over the money.

It should be clear who is responsible for each task It should be clear who is responsible for each task or area of activity. You must be able to trace or area of activity. You must be able to trace mismanagement or abuse to a particular person or mismanagement or abuse to a particular person or people.people.

There should be no grey areas in terms of who is There should be no grey areas in terms of who is responsible for what, and no overlaps that make it responsible for what, and no overlaps that make it possible for one person to blame another and avoid possible for one person to blame another and avoid responsibility.responsibility.

Decisions about finances should be made at the right level. Decisions about finances should be made at the right level. So, for example, a bookkeeper should not make decisions So, for example, a bookkeeper should not make decisions about non-budgeted expenses. Who makes what decisions about non-budgeted expenses. Who makes what decisions should be included as written financial policy, approved by should be included as written financial policy, approved by your highest governing body.your highest governing body.

People should have the necessary skills to carry out their People should have the necessary skills to carry out their roles and responsibilities.roles and responsibilities.

Everyone from at least the level of middle management up, Everyone from at least the level of middle management up, and including members of the governing structures, should and including members of the governing structures, should understand financial statements and be able to monitor understand financial statements and be able to monitor them. Anyone working directly on a project or programme them. Anyone working directly on a project or programme should understand its financial statements. Train people if should understand its financial statements. Train people if necessary. Financial statements should be discussed at necessary. Financial statements should be discussed at governing body and staff meetings.governing body and staff meetings.

basic financial management for non-profit orgs

Documents

financial resources

tools of financial management

financial planning

financial management

jargon of financial

basic financial management

financial statements

heart of financial management