Strong financial management is at the heart of every successful organisation. For some straight forward companies it is a simple process; for others, particularly those with long term business, project cycles or complex activities, it can be difficult and challenging.
For charities and not for profit organisations the financial management process is often just different.
Ultimately financial management is about making the sound financial decisions that enable an organisation to make the best use of its resources and to achieve its objectives. For trading businesses the key measure of success will often be long term profitability and value.
For charities and not for profit organisations, the financial management must facilitate the achievement of long term outcomes for its beneficiaries, which is inherently harder to predict and to measure.
Responsibility for good financial management is not limited to the charity’s finance team. The board and trustees are ultimately responsible for transparency, accountability and stewardship of all financial matters and they must understand and review the financial information prepared and presented. Not for profit boards ought to therefore consider applying an adapted approach to key financial management tools of planning, reporting and controls.
Planning and budgeting: Strong budgeting is key for developing financial management capacity. Preparing a budget for the forthcoming year(s) will assist management in understanding how they will achieve the outcomes, determining their priorities and estimating 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:, The Charities (Accounts and Reports) Regulations, which came into effect on 1 January 2016, require registered charities in Northern Ireland to complete compulsory annual reporting. At this stage charity boards ought to be aware of the legal requirements now in place whilst preparing their financial statements and annual report, which may include having these documents audited or independently examined.
However, maintaining even the increased level of statutory information is unlikely to be adequate for managing an organisation and making informed decisions. As the charity grows, more qualitative and quantitative management information will be required to help it manage its activities more effectively. Charities will need to consider how to develop key performance indicators that connect the financial data with the achievement of outcomes, which will often not have a financial measure.
Financial controls: 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.
Charity trustees would be well-served to remember a warning by Benjamin Franklin: “Beware of little expenses; a small leak will sink a great ship”.