idasa

Financial
Management
2004

This publication was made possible through the support by the U.S. Agency for International Development,
under the terms of Award No. GEG-A-00-01-00005-00. The opinions expressed herein are those of the author(s)
and do not necessarily reflect the views of the U.S. Agency for International Development
Financial Management Course Notes

Course Content:
• General Financial Management
• Financial Accountability
• Asset Control

Definitions:
What is Financial Management?
• The management and recording of the flow of money.
• Planning the future use of money
• Ensuring that the money is well spent and not misused
• Is essential to building financial sustainability

What is Financial Accountability?

• Producing regular financial reports for those with an interest and a right to know
• Proving that the leadership has control over the financial decisions of the organisation
• Accounting for funds by producing documentary proof of receipts and payments

FINANCIAL MANAGEMENT

MANAGEMENT AND RECORDING OF THE FLOW OF MONEY

• The development sector is becoming increasing competitive – there is constant change
within and outside the sector.
• Like in the corporate world, management of organisations in the development sector
must therefore respond to the needs/requirements of the donor community.
• It is expected of organisations to demonstrate that they have implemented sound
financial policies and disciplines.
• By implication we mean “the management of financial systems” within an organisation.

PROCESS
INPUTS OUTPUTS

(Income) (Planning/Budgeting) (Expenditure)

PRINCIPLES:
Control Monitoring Recording

1. Definition: FINANCE IS THE APPLICATION OF A SERIES OF ECONOMIC PRINCIPLES

TO MAXIMISE THE WEALTH OR OVERALL VALUE OF AN ORGANISATION.
2. Process indicates that activities need to be co-ordinated to achieve a desired result.
3. Process also refers to systems – in this instance, financial systems – with its inputs, processes
and outputs.
4. All financial processes/systems should be clear and accessible
5. For control to be implemented it is necessary:
• To realise that there is a difference between what is required and what is happening
• To have the means to act on that information so that the input to the system is altered in
the right way.
6. Accounting systems are systems with control – outputs are monitored and used to change input
so that the system will achieve its goals.
7. Financial transactions need to be recorded somewhere – either on paper, electronically or both.
8. Both income and expenditure should go through the process of controlling, monitoring and
recording.
9. This is a continuous process and should be applied to every transaction.
10. Being in the development sector we do not wish to think of organisations making “profits”
(maximising profits) but rather substitute ”profit” with “surplus”.

BASIC ACCOUNTING SYSTEM REQUIREMENTS

• Records all income of the organisation
• Records all expenditure of organisation
• Provides a detailed analysis of transactions
• Provides history of transactions
• Allows for production of accurate reports (information)

1. Different types of information systems exist in organisations:

• Executive system (EIS) (support senior management)
• Management information systems (MIS) (information to support all levels of
management)
• Expert systems (ES) (designed to solve narrow range of problems – need expertise in
particular area, e.g. credit scoring systems)
• Transaction Processing systems
2. In organisations a wide range of systems are operative – both formally (as above) and
informally.
3. The aim of systems is to ensure that there is order in their activity and that the activities of the
organisation are not chaotic.
4. Systems also help to ensure steady progress towards defined goals.
5. Organisations need to measure their performance – we therefore need to understand the
relationship between the resources (money in this instance) and the demand for our work
(services).
6. We are looking specifically at the transactions processing systems (TPS)

DECIDING ON A SYSTEM
• Know the organisation’s needs?
• Know donor requirements?
• Know purchasing costs?
• Know maintenance / support costs?
• Finance personnel skills?
• System requirements?
• Upgrade current hardware & software?
FINANCIAL POLICY AND PROCEDURES (minimum standards)

1. Procurement
a. Authorisation limits
b. Purchase Orders
c. Documentation requirements (quotes, etc)
2. Receipts
a. Maintain Receipt Books
b. Deposits reconciled regularly
3. Disbursements
a. Check expenses are properly authorised
b. Apply matching principle to documents
c. Ensure original documentation
d. Expenses are properly allocated and captured
e. Documents are cancelled once paid (using paid stamp)
4. Bank Accounts
a. Safekeeping of cheques
b. Reconciled monthly
c. Reconciliation items are followed up promptly
5. Petty cash
a. Cash counts performed regularly
b. Ensure adequate supporting documentation
c. Limited access to cash box
6. Property Management (see notes below)
7. Travel
a. Policy well defined and applied
b. Properly authorised
c. Mechanism for reporting expenses
8. Filing
a. System allows for easy access and retrieval of documents
b. Sequential

DAILY FINANCIAL RECORD KEEPING

• Recording income
 • Recording expenses
ƒ Salaries
ƒ Petty cash
ƒ Project expenses
ƒ Other (journal)
• Reconciliations
ƒ Bank
ƒ Creditor/debtor
• Reports (income & expenditure)

PLANNING FOR FUTURE USE OF MONEY

The important tool to use here is the budget process

Financ ial Management

Planning / Budgeting Process Budgeting Process Financ ial Management

Understand the Organisational Setup / Structure BUDGET ACTUAL VARIANCE

THE ORGANISATION

INCOME INCOME INCOME INCOME INCOME

Core Programme or Project Activities -

Direct Costs
Or (less) (less) (less)

Admin EXPENSES EXPENSES EXPENSES

Activities
Project
Project
INDIRECT = = =
Project
SURPLUS / SURPLUS / SURPLUS /
COSTS
SHORTFALL SHORTFALL SHORTFALL

Budgeting Process Financ ial Management

Budgeting Process Financ ial Management

Interest Income
INCOME Generating EXPENSES ADMIN PROJECT
BUDGET Income BUDGET /CORE EXPENSE
Activities
BUDGET BUDGET

Donor
Donor Funding
Funding 1. Utilities 1. Staff
2. Rent 2. Consultants
Fund- 3. Telephone 3. Workshop
Subscriptions raising 4. Stationery 4. Travel
5. Insurance 5. Training Mat
6. Staff 6. Etc. ..
Fees for 7. Etc. ..
services
Donations

PREVENTING FRAUD
• Ensure that all financial transactions are recorded and documented
• Have two signatories for every cheque including EFT’s (electronic funds transfer)Deface
cancelled cheques and cancel paid invoicesKnow the financial workings of your
organisation
 • Segregate duties – do not rely on one individualCash received should be reconciled daily
with deposits or receipts book
• Bank reconciliations should be prepared at least monthly and be approved
• Unused cheques should be held in a secure placeRestrict access to petty cash and
reconcile periodically (monthly)

BUILDING FINANCIAL SUSTAINABILITY

• Ability to manage and account for funds received – key to donor funding
• Drawing funds from more than one or two sources – diversify
• Learn how to recover costs and earn income
• Develop partnerships with government, other NGO’s and business
• Develop framework that shows where the organisation is going – strategic planning
• Managers to think strategically everyday – know the changes in the development sector
and country
• Organisational proposals for funding must happen well in advance
• Develop good financial management capacity as part of overall organisational strategy
• Ensure that unnecessary and wasteful costs are removed
• Build financial reserves to maximise interest income

FINANCIAL ACCOUNTABILITY

Financ ial Management

What is Financ ial

Ac c ount abil it y?
Producing regular financial reports for those
with an interest and a right to know

Proving that the leadership has control over

financial decisions

Accounting for funds by producing

documentary proof of receipts and payments

1. Who are the stakeholders: Donors; - Certain Government Departments; -Board of the
organisation; - Banks; - Management; - Staff; etc.
2. Donors would want to see a sample report to assess the organisation’s ability to produce proper
project reports.
3. Copies of the Annual Financial Statements are requested by donors to assess the history and
financial stability of the organisation
4. Financial Management means having regular board meetings and senior management meetings
to report on the financial activities and financial status of the
F inanc ial Management

Donor
Reports

Project
Project
Income & Expenditure
Statement Narrative

Income & Expenditure

Statement
Balance Sheet Project Reports

Management Audited Financial

Cash Flow Report
Reports Statements
organisation.

1. Ensuring that a good policy and procedure manual is drafted for the finance department. Spot
checking that policy and procedures are implemented and adhered to.
2. Minutes of board meetings are filed – especially those relating to finances
3. Regular management meetings where various financial reports are discussed and decisions
taken by management are documented and recorded.
ASSET CONTROL
Are usually expensive and require board approval. Special procedures regarding use, right of use,
disposal and movement of assets need to be included in the policy and procedures manual of the
organisation.

Assets should be recorded in an asset register. This come in useful especially when organisations,
such as NGO’s & CBO’s are wound-up and the disposal of its assets are governed by law.

Types of assets:
♦ Furniture
♦ Office Equipment
♦ Computer Equipment
♦ Land & Buildings
♦ Motor Vehicles

Information required for an assets register

♦ Detailed description of items purchased
♦ Supplier Name
♦ Date of Purchase
♦ Purchase price
♦ Location of asset
♦ Person responsible for asset

Types of asset register:

♦ Could be a file with different sheets
♦ Could be a book with a sheet for each asset
♦ Could be a spreadsheet kept on a computer
♦ Could be a special software programme

The important point to remember is that we have and keep an asset register.

Asset Control
♦ All assets to be tagged with a unique number
♦ System to allow for asset movement between locations
♦ Responsible person assigned to locations
♦ Asset counts to be performed at least once a year – normally a requirement for annual
audits.
♦ Physical counts to be reconciled to accounting records.
♦ Ensure that assets are depreciated at the correct rates as per the organisation’s
accounting policy