FM1: Practical Financial Management for NGOs: Getting the
Basics Right
Advance Preparation
Please take a few minutes to read the attached short handout on the Building Blocks
of Financial Management. This will help you to be familiar with some of the concepts
and terminology that we are covering on the workshop.
As you go through the handout, note down any challenges that you or your NGO face
in terms of achieving good practice in financial management. These can be
expressed in general terms or as specific issues around each of the building blocks
described. We will discuss these together on Day 1 of the programme.
Thank you.
Notes on financial management challenges
Issue Which building block(s)?
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The Building Blocks of
Financial Management
There is no such thing as a model finance system that suits every NGO. But there are
some basic building blocks, which must be set up to achieve good practice in financial
management.
Figure 1: The Building Blocks of Financial Management – Getting the Basics
Right
Accounting Financial
records planning 1 2
Systems
Design 3 4
Financial Internal Financial
monitoring controls
Control
1. Accounting Records
Every organisation must keep an accurate record of all 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.
Accounting records fall into two categories:
Supporting documents – these are the paper-work, such as receipts and
invoices, which provide evidence, or proof, that a transaction took place. There
should be at least one supporting document for every transaction taking place.
Books of Accounts – these are the books or ‘ledgers’ where information of
financial transactions are recorded and summarised. They can either be kept
as special books with lots of columns or on a computer accounts program
designed for that purpose.
There are two main approaches to keeping accounts:
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Cash accounting – a simple bookkeeping system which is relatively easy to
use. This uses a Cashbook to record the date that payments are made and
cash is received. It also gives a summary of cash available in the bank.
Accruals accounting – a more advanced system requiring knowledge of
‘double entry’ bookkeeping techniques. This uses a General Ledger (in addition
to the Cashbook) to capture financial transactions when they are actually
committed or due. This system provides a more comprehensive view of the
financial status of the organisation, including information on assets (things we
own) and liabilities (things we owe to others).
There is also a ‘hybrid’ approach used by many NGOs. This is where the cash
accounting system is used during the year and summary figures are adjusted at the year-
end on an accruals basis.
2. Financial Planning
Financial planning includes both a longer-term strategic look at how the organisation’s
mission will be financed, as well as short-term operational budgets. The budget is the
cornerstone of any financial management system and fulfils several functions including
fundraising, and controlling and monitoring the use of funds.
There are several different types of budget, used for different purposes:
Income and expenditure – the most common type of budget highlighting
spending and resources needs for a specified period and purpose.
Capital budget – covering one-off purchases of equipment, vehicles, buildings,
construction work, etc.
Cashflow forecast – this breaks down the budget into shorter periods to show
when the cash will come in and go out of the organisation, to help plan activities.
3. Financial Monitoring
Providing the has kept and reconciled its accounting records in a clear and timely manner,
it is possible to produce a variety of financial reports for those with an interest in the work
of the organisation. There are several kinds of reports, used by different stakeholders –
both inside and external to the NGO. The main types are:
Financial statements – produced at least once a year to give a summary of
operations and the financial status of the organisation. These are usually
comprised of an Income & Expenditure Statement and a Balance Sheet. The
annual financial statements form part of the audited annual accounts and mainly
for use by those external to the organisation.
Budget monitoring report – this report compares the budget with actual
income and expenditure for a specified period. Managers need this report to
monitor progress of projects and programmes, and to help make decisions
about future action. It should be produced at least once every quarter.
Donor reports – it is usual to provide an account to donors on how their funds
are being used. Often accompanied by a narrative report, this financial report
will usually be in the form of a budget monitoring report, the required frequency
and format specified by each donor.
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4. Internal control systems
A system of controls, checks and balances – collectively referred to as internal controls –
are put in place to safeguard an organisation’s assets and manage internal risk. Their
purpose is to deter opportunistic theft or fraud and to detect errors and omissions in the
accounting records. An effective internal control system also protects staff involved in
financial tasks.
There is a wide range of cross-cutting internal control procedures, but they fall generally
into one of the following categories:
Delegation of authority and separation of duties – these procedures define
who is responsible for what and within what limits – e.g. authorising expenditure,
signing cheques and contracts; completing and reconciling accounting records.
It is good practice to share these financial administration tasks around so that
one person alone is not responsible for everything. This is to help prevent the
opportunity for fraud or abuse.
Reconciliation – including bank and cash reconciliation, and stock counts to
verify records.
Cash control – cash is slippery! So special procedures to protect those
handling it are required, including arrangements for receiving, receipting and
banking.
Physical controls – these are common-sense measures for safeguarding
equipment and valuables. For example, taking out insurance against losses
due to theft or fraud; having a safe – or a safe place – to keep cash, cheque
books and keys; and keeping a Fixed Assets register so that it is clear what
property is owned and where it is kept.
Budgetary control – this involves checking that expenditure is within the
agreed budget and has been properly authorised. The budget monitoring report
is a useful tool in budgetary control.
Note that all of the building blocks must be in place continuously and that there is an
overlap in their respective systems. Effective financial control will not be achieved by a
partial implementation.
For example, there is very little point in keeping detailed accounting records if they are not
checked for errors and omissions with regular bank reconciliation. Inaccurate records
could result in inaccurate financial reports and management information, which in turn
could wrongly influence a financial management decision.
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