Financial monitoring and management is an important governance and management function in all organisations with separation of ownership and management.
The Board has three main roles in relation to financial monitoring and management:
- Plan through the approval of budgets.
- Monitor the financial performance of the organisation to ensure that targets are being met.
- Respond to financial results and indicators by making informed decisions to maintain the organisation’s financial wellbeing.
Understanding Financial Reports
All board members should possess an understanding of how to read and interpret financial reports and statements. Board members who are financially astute are more likely to guide their not-for-profit organisation toward achieving effective outcomes. This means that board members know what to look for in financial reports. Their understanding of the reports enables them to ask appropriate questions and make informed decisions about the use of the organisation’s funds.
Not-for-profit managers make decisions on a daily basis that are vital to the success of their programs. For this reason all managers in the organisation need to understand that there are financial ramifications to all of their program decisions.
Appropriate Financial Reports
The Board needs to make informed decisions. To do so, the financial reports presented to the Board need to be tailored to provide the relevant information given the organisation’s circumstances.
Financial Reporting Structure
The financial reporting structure should have regard to the needs of various users of the financial reports.
The needs of stakeholders vary, for example:
A. The Board needs to be provided with reports to monitor the financial operations of the organisation to respond to financial indicators and to ensure targets are met.
B. Managers need to be provided with reports to manage and monitor the results of operational programs within their control.
C. Funding providers require reports to demonstrate that funds have been expended in accordance with funding agreements.
The financial reporting structure (e.g. chart of accounts, cost centres, budget structures etc) needs to be established to enable the financial reporting requirements of all stakeholders to be met. The financial reporting structure should also be reviewed periodically as the circumstances of the organisation change.
Financial Management Policies and Procedures
Delegating responsibility to individuals for the maintenance of the financial systems requires control and oversight by the Board. Financial management policies outline the minimum standard for dealing with financial practices, and guides staff in their conduct and decision making processes.
Policies provide a framework and are a part of the internal control environment. Management is responsible for making sure that the organisation implements and maintains systems, but the Board should ensure that management follows appropriate policies. A procedures manual contains the guidelines for processing transactions and maintaining good internal controls.
Management and the Board are responsible for establishing and implementing an internal control structure for accomplishing the following objectives:
- The reliability and integrity of information
- The safeguarding of assets
- Compliance with policies, plans, procedures, laws and regulations
- The economical and efficient use of resources
- The accomplishment of established objectives and goals for operations.The first two objectives pertain to financial audit considerations of the internal control structure.
Generally, control procedures fall into one of five categories:
1. Proper authorisation of transactions and activities
2. Segregation of duties
3. Design and use of adequate documents and records
4. Adequate safeguards over access to and use of assets and records
5. Independent checks on performance.
An increasing number of organisations are performing reviews in the area of financial policies and procedures. A review of policies and internal control procedures examines and evaluates the adequacy and effectiveness of current policies and controls, providing recommendations for improvements.
All systems have inherent limitations and the risk of override, however having practical internal controls in place protect the assets of an organisation and promote its efficient operation.