BASIC FINANCIAL MANAGEMENT

FOR

NON-PROFIT organizations
The Promise
This training is an introduction to financial
control and accountability for non-financial
organizational or project
leadership.

Many of us in leadership positions in civil

society organizations and projects find
ourselves dealing with large sums of money
when we have little or no knowledge or
experience about how to manage money.
The Promise contd.

Some other organizations 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 to’s.” 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.
 Training Outline
Session 1: Introduction

Session 2: Setting up a bookkeeping

system for our organizations

Session 3: Producing financial reports

 Introduction
This Session:

 Explains why financial management is important for

NGOs.

 Clarifies what financial management and financial

control involves.

 Describes the underlying principles of financial

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

 Many leaders and managers in civil

society organizations are overwhelmed
by the jargon of financial management.

 Sometimes they avoid their

responsibilities in this regard because
the jargon makes them feel
incompetent.
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
 Good practice in financial management will:
 help NGOs 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.
What is Financial Management?

 Financial management entails planning,

organizing, controlling and monitoring
the financial resources of an organization
to achieve objectives.

 Financial management is about taking

action to look after the financial health of
an organization, and not leaving things
to chance.
In summary, financial management is all
about:

 Managing scarce resources

 Managing risk

 Managing strategically

 Managing by objectives
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 organization 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.
 Financial control occurs when systems and
procedures are established to make sure that
the financial resources of an organization
are being properly handled.
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
The 4 Building Blocks of Financial Management
 Accounting Records
Every organization 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 organization is being managed
and whether it is achieving its objectives.
-
 Financial Planning
Linked to the organization’s 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.
 Financial Monitoring
Financial reports allow the managers to assess
the progress of the organization.

 Internal Controls
Checks and balances – collectively referred to
as internal controls – are put in place to
safeguard an organization’s assets and manage
internal risk.
Effective management of NGOs demands:
 Planning

Tools: Strategic plan, business plan, activity plan,

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

 Organising
Tools: Constitution, organization charts, flow
diagrams, job descriptions, Chart of Accounts,
Finance Manual, budgets…etc.
 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, cash flow reports, financial statements,
project reports, donor reports, audit reports,
evaluation reports…etc..
 Session 2

Setting up a bookkeeping system for

our organizations

 What is the Right System?

 Steps 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?
 Considerations for identifying the right system contd.

 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?
 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.
Steps 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.

5. Keep financial records

6. Produce financial reports or
statements.
Steps to Developing a Bookkeeping System contd.

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.
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.
 Steps to Developing a Bookkeeping System contd.

2. Developing a budget

A budget is derived from an organization’s:

 Vision
 Mission

 Goals

 Objectives

 Strategies

 Activities
 Steps to Developing a Bookkeeping System contd.

3. 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.
 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
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 Centers
Restricted funds must be accounted for
separately to demonstrate to the donor
how the funds have been utilized. This is
known as fund accounting and requires that
such fund will have a separate code.

Thus every cost item concerning the fund’s

activities is listed under that code.
 Steps to Developing a Bookkeeping System contd.

4. 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 NGO’s finances. It includes a
Statement of Delegated Authority which
describes everyone’s financial roles
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)
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.
 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).
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 organizational principles that underpin the policy

(e.g. transparency, consistency). Note these in writing.
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.
See Appendices for samples of a financial
policy and schedule of delegated authority.
 Steps to Developing a Bookkeeping System contd.
5. 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.
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.
 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.
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.
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.
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)

 Standard forms to use for Monthly record
keeping:
 Cashbook
 Bank statements

 Bank reconciliation forms.

(see samples in handout)

 Accounting Procedures:
1. Issue receipt vouchers for money received
2. Issue payment vouchers for money paid out
3. Enter details of the above transactions in a journal
4. At the end of the month, enter details in the
journal into the cashbook
5. Use the analysed cashbook to produce an income
and expenditure statement.
 Why should we keep books?
organizations and projects keep books to:
 Provide an accurate account of financial management practices to stakeholders;
 Prevent misuse of money;
 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
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
management and leadership of the organization to make decisions about the running of the
organization.
 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?
Roles in financial control and accountability

Financial accountability in a civil society

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

Financial accountability in a civil society organization means

that:
 The organization does not take on financial
obligations it cannot meet.
 The organization has taken all necessary
precautions to prevent misuse of funds, and to
keep funds and records relating to them safe.
 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.
 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.