Building capacity through financial management is a vital way of achieving a stronger charity that is more able to proactively control its own affairs. Financial management is the use of financial information, skills and methods to make the best use of an organisation’s resources, and to achieve its social objectives. It can be thought of as the ‘foundation’ of the organisation: if it is strong, the charity can flourish and grow, but if not, the charity may struggle or even collapse.
There are three key principles to strong financial management:
Planning and budgeting
Strong budgeting is key for developing financial management capacity. Preparing a budget for the forthcoming year(s) will assist management in deciding their objectives and estimate the cost of achieving them. It is vital that the charity’s progress is compared with the original budget as the year progresses, and action taken as required –for example, to decrease spending or increase fundraising efforts.
Accounting, record keeping and financial reporting
There are over 6,000 charities now registered with the Charity Commission for Northern Ireland (CCNI). Once registered, charities should make themselves aware of the legal requirements now applicable whilst preparing their financial statements and annual report, which may include having these documents audited or independently examined. Charities that have not yet registered should contact the CCNI regarding registration requirements.
However, the statutory information required by regulatory bodies does not always provide the level of information that is required for managing an organisation and making informed decisions. As the charity grows, more ‘management accounting’ may be required to help it manage its activities more effectively.
Financial management is not only about understanding the financial information and using this accordingly, it is also about ensuring that the right policies and procedures are in place. Without adequate financial controls, the information produced may not be accurate, and may pose a risk to the security of the assets within the organisation. The charity may also be exposed to the possibility of errors or theft. Professional accountants can advise on what systems are needed and suggest ways of implementing them.
Good financial management is not limited to the charity’s accountant or finance team. The board and trustees also have a key role to play. However, since many board members of charities are non-executives, it is essential that strong governance measures are in place. The board has ultimate responsibility for the organisation and its activities, but cannot run it on a day-to-day basis, and delegation is therefore crucial. For this to be successful, it must involve a clear structure and Terms of Reference to ensure everyone involved understands their role and individual responsibilities, and the process should be regularly reviewed. This will allow the board to make informed strategic decisions, building the capacity of the organisation and allowing it to achieve its full potential. Charities do good work for others, but they also need to take care of themselves by embracing good financial practices to ensure their future.