Finacial Management Basic
Course Code: FM1
Finacial Management Basic
In this course you will get an overview on the main financial subjects in the non profit sector and learn useful tips for the financial management of the organisation you volunteer in. You will learn how to keep a simple and proper bookkeeping for your organisation, and how to report in financial terms your volunteering. Finally you will also learn some basic principles of fundraising together with some practical tools to start or improve this kind of activity with your organisation.
Duration: 45 m.
Author/Source: Sandra De Thomasis, Piero Stanchi, CSV
Tags: financial management, courses, training, volunteering
Starting: 21/11/2012 Ending: 01/01/2014
What is a budget? Definition
The role of budgeting within an organisation´s planning
A budget is an action plan expressed in quantitative and monetary terms, referring to a certain period of time, which sets out the objectives to be pursued and the resources needed to achieve them. There are anumber reasons why organisations spend time planning and monitoring their budget:
- To check in advance the financial sustainability of future management
- To guide and align the various parties involved in the strategies pursued
- To verify the results of their activities through comparison with the estimated ones
- To develop a management approach that is efficient and effective..
A budget is a time-bounded plan. Programming must be done taking into account the specific time of the year and the related variables - both economic and financial and quantitative and qualitative .
In drawing up the budget you should start by referring to long term strategies and objectives, and then proceed to define the short-term objectives.
The budget is the main document for operational planning and control; it is a planning tool as it sets up the objectives to be achieved and plays a leading role in the management decisions of the responsible bodies.
The implementation of a well conceived budget requires the identification of goals, which in turn implies a number of organizational assumptions:
- Active participation in the budgeting process (sharing the justifications, benefits and operating methodologies to achieve the objectives);
- Ongoing evaluation of the performance and overall budget effectiveness;
- Continue reprogramming;
- Planning on a multiannual basis.
The annual budget must be:
- Closely linked to the values of the multiannual strategic plan with which there must be total consistency;
- Structured in a way that enables a useful comparison with the final balance and allows the analysis of the deviations;
- Constructed by considering performance indicators;
- Designed in a way that takes into consideration the coordinating role that it plays between the different components of the organisation.
Below there is a chart with the main stages of the economic and financial planning and control process.:
Accounting and record keeping
What is accountancy? Definition
The dos and don´ts in bookkeeping applied to volunteering
Accountancy, or accounting, is the process of communicating financial information about any operating entity, both public and private, to internal or external users such as shareholders, managers and control authorities. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable. The principles of accountancy are applied to all entities in three main divisions: accounting, bookkeeping, and auditing.
Accountancy is indeed the art of recording, classifying and summarizing in in monetary terms, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.
Reliable accounting is vital for sound financial management and reporting.
Accounting has two basic purposes:
- Show the revenue, expenses, assets and liabilities of the project for financial management purposes;
- Provide the data needed to draw up accurate financial reports.
To meet these basic objectives, accounting records must be:
- Accurate and reliable
- Drawn up according to proper accounting standards, methods, policies and rules.
Reliable and up-to-date accounting records are essential to demonstrate how an organisation uses its financial resources.
Therefore, for any organisation, keeping clear and relevant documentation is vital. Proper documentation is necessary to show that costs claimed meet the conditions set up by law and between the organization and the donor(s).
Below there is a list of the most common bookkeeping mistakes that may undermine the efficiency of organisations:
- The accounting system is inadequate as it does not allow reconciliation with relevant costs, e.g., it is not a double-entry system (see below);
- All costs have not been registered in the accounting system;
- Accounting records do not comply with generally accepted accounting standards;
- Accounting records are not kept according to the organisation’s usual accounting practices;
- Certain documents are not drafted or kept;
- Documents kept do not provide sufficient evidence showing that contractual conditions agreed with donors or funders have been met;
- Project documents kept are not retrievable;
- Projects documents are prematurely discarded;
- False documents are provided. In this case the organization responsible of producing faked documents can be prosecuted by law.
Below are some basic tips for a correct accountancy and record keeping.
1. Make sure to use proper bookkeeping techniques.
Some basic bookkeeping principles include:
- Accounting records must be double-entry (debit/credit);
- Accounting records must be based on a properly defined chart of accounts;
- Methods used must ensure that once an accounting entry is recorded, it can no longer be altered.
- The accountant person should be competent, trained and experienced in accounting.
- It is preferable to make use of accounting software. Spreadsheet applications are not designed for double-entry accounting records; spreadsheets can easily be changed and therefore don’t meet the requirement that accounting entries be unalterable.
- Beneficiaries may opt to keep a separate set of accounts specifically for some projects, or to include the projects’ accounts in their own accounting system. In the latter case, they should have a method of ensuring that the projects’ accounts are still easily identifiable.
2. If your organization is a beneficiary of a grant from an external public or private body, before starting the project pay attention to all the contractual conditions. Beneficiaries of grants financed by external bodies are advised to keep extensive records over and above the minimum requirements set out in the grant agreement. There are number of procedures that organisations usually attempt to adhere to:
- To be eligible, the costs must be identifiable and verifiable. They should be recorded in the accounting records of a beneficiary and determined in accordance with applicable accounting standards of the country where the beneficiary is established and the usual cost-accounting practices of the beneficiary.
- The beneficiary’s accounting procedures must permit direct reconciliation of costs and revenue declared for the project with the corresponding accounting statements and supporting documents .
- The beneficiary is usually required to allow the financing authority and/or external auditors to carry out checks and audits, examining supporting documents, accounting and tax records and any other documents relevant to the financing of the project.
- Supporting documents and records must remain at the beneficiary premises and available for inspection by the financing authority and/or external auditors for a period of at least five years after the final balance of the grant has been paid.
- Keeping originals is compulsory. An original document is more reliable than a copy, as it is difficult to alter and offers better protection against recording the same expense twice.
- An official, formal document is more reliable than an unofficial one. For example, an official bank statement for a bank transfer provides more reliable evidence of payment than a cash payment voucher drawn up by the beneficiary’s accounting department.
- Cash payments should be limited to small transactions (e.g. petty cash).
- Project documentation should prove that the costs were incurred. For example, a supplier’s invoice may prove that the supplier was owed money by the project, but it does not prove that the beneficiary accepted the goods and paid for the goods or services. It may be necessary to keep the supplier’s invoice, the delivery note and the bank statement (or receipt) showing that the payment was made.
- Use a simple referencing and numbering system that everybody, including people unfamiliar with the project, can follow easily. Make sure the system allows documents to be found easily and quickly.
- Collect documents during the implementation of the action and not at the end of the project or once it has been completed.
- File physical documents in an orderly way.
- Make sure documents are physically protected and cannot deteriorate while in storage or transit.
Accountancy rules may vary widely from country to country. Nevertheless, as a general rule the use of a double-entry accountancy is recommended to all organisations wherever they are based and whether they are big or small.
Double-entry bookkeeping system
A double-entry bookkeeping system is a set of rules for recording financial information in which every transaction or event changes at least two different nominal ledger accounts.
A double-entry bookkeeping system was first codified in the 15th century. The name derives from the fact that financial information used to be recorded using pen and ink in paper books (whereas now it is recorded mainly in computer systems) and that these books were called journals and ledgers and that each transaction was entered twice (hence "double-entry"), with one side of the transaction being called a debit and the other a credit.
In deciding which account has to be debited and which account has to be credited, the golden rules of accounting are used.
Golden rules of accounting
|Debit what comes in |
Credit what goes out
|Debit the receiver |
Credit the giver
|Debit all expenses and losses |
Credit all incomes and revenues
This is also accomplished using the accounting equation: Equity = Assets − Liabilities.
The accounting equation serves as an error detection tool. If at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred. It follows that the sum of debits and the sum of the credits must be equal in value.
However double-entry bookkeeping is not a guarantee that no errors have been made – for example, the wrong ledger account may have been debited or credited, or the entries completely reversed.
What is a financial report?
Basic notions on financial statements
A financial report is simply a comparison of income and expenditure, showing how, through the management, the available resources have been used by an organisation.
The financial report allows the analysis of income and expenses in the different categories that make it up and are detailed in the bookkeeping. It aims to demonstrate, through a comparison between the inputs and outputs, how the organisation has come to generate a surplus or a deficit.
A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. In UK English a financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants.
For a business enterprise, all the relevant financial information presented in a structured manner and in a form easy to understand is called a financial statement. Despite the existing differences from country to country, financial statements typically include four components , which are accompanied by a management discussion and analysis:
- A balance sheet (also referred to as a Statement of Financial Position), which reports on a company´s assets, liabilities and ownership equity at a given point in time.
- A profit and loss statement (also referred to as Statement of Comprehensive Income), which reports on a company´s income, expenses and profits over a period of time. It also provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state.
- A statement of changes in equity which explains the changes of the company´s equity throughout the reporting period.
- A statement of cash flows which reports on a company´s cash flow activities, particularly its operating, investing and financing activities.
For large corporations, these statements are often complex and may include an extensive set of notes relating to the financial statements and an explanation of financial policies and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes relating to financial statements are considered an integral part of the financial statements.
The financial statements of non-profit organisations tend to be simpler than those of for-profit corporations. Often they consist of just a balance sheet and a ‘statement of activities’ (listing income and expenses) similar to the ‘Profit and Loss statement’ of a for-profit.
The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an organisation that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization´s financial position.
Financial statements are intended to be comprehended by readers who have a reasonable knowledge of business and economic activities and accounting, and who are willing to study the information diligently.
As in almost all aspects related to accounting issues there are differences from country to country, according to the variety of national legislations in force.
Usually across Europe the minimum requirement for small-sized non-profit organisations is a simple Profit & Loss Statement supported by a report on activities.
Medium-sized and bigger organisations, especially if involved in projects financed by external bodies/authorities, are usually required to have an extensive set of financial statements. This can include the following:
- A balance sheet, reporting on organisation’s assets, liabilities and equity;
- A profit and loss statement;
- A set of notes to the financial statements that typically describe each item in further details;
- And an activity report.
What is fundraising? Definition
Fundraising principles and basic tools
‘When God asked Cain where Abel was, Cain replied, angrily, with another question: ‘Am I my brother’s keeper?’ […] Whether I admit it or not, I am my brother’s keeper because my brother’s wellbeing depends on what I do or refrain from doing. The moment I question that dependence and demand – like Cain did – to be given reasons why I should care, I renounce my responsibility’. (Zygmunt Bauman)
Fundraising is about generating long-lasting relationships with people in order to reach a valuable goal. Fundraising is fundamentally an exchange between people seeking economic resources and material, and people that are potentially available to give. Fundraising is not an exchange of equivalent goods that exists in for-profit enterprises, where each product or service is assigned a monetary value.
Fundraising is not a redistributive exchange (like in public welfare), where the tax revenue is redistributed according to the needs of citizens.
Fundraising is an exchange that is based on the reciprocity principle: it reflects the importance of the relationship between people. It does not count the value of the action but its symbolic meaning (family, friends, interpersonal relationships...). It produces the so called ‘relational goods’.
The well-being of people has a tangible component (material goods) and a symbolic one composed of the networks of relationships that are established with the surrounding environment (relational goods).
The relational goods produce well-being thanks to the relationship that is established between those who give and those who receive them. The relational goods are essential to address the need for happiness that every human being has inside.
In fundraising the donor allocates resources (money, time, goods and services, knowledge) to an organisation and this organisation returns only a relational good (thanks, counselling, ethical administration), sometimes together with a symbolic material good (a card, a thanks letter, etc). Therefore fundraising exists only when there is a ‘non equivalent’ economic exchange.
In the non-profit sector fundraising is a comprehensive set of activities that organisations put in place to find the necessary resources to carry out their statutory objectives, creating relational goods with people.
Communication when fundraising
‘No fund raising action ever failed because too many people have said no. Fund raising actions fail because you have not asked to a sufficient number of people’. (Harold J. Seymour).
Based on the definition given by Henry Rosso ‘Fundraising is the gentle art of teaching the joy of giving’, it’s clear how relevant it is for non-profit organisations to build relationships with the people, following a simple logic path that can be summarised as follows:
1. Mission: it tells the identity of your organisation. It’s the declaration which explains the nature, purpose, main activities and principles that inspire the organisation.
2. Good cause document (GCD): the reason why it is worth giving your organisation.
The GCD is a written document to list all the reasons why a donor should be motivated to donate to your organization. This is the base of all communication in fundraising.
The GCD answers the following questions:
- What is the history of the organization? (Who founded it, what results have been achieved, etc.)
- Who is it serving? (Anecdotes and testimonials ...)
- What kind of programmes does it implement? What services? How?
- What is its reputation?
- What are its future goals?
- How will the organisation use the money that will be donated?
- How is the donor involved?
3. From GCD to the ‘case’: it’s the story to tell to your potential donor.
It is the project which we ask the donation for.
CASE ---------------VEHICLE ---------------POTENTIAL DONOR
(cause) (how) (who)
Face to face individuals (50-60%)
Letter foundations (20-30%)
Telephone enterprises (10%)
Door to door
4. Relationships with people (donor research) – C.A.I.
People give in relation to their means and in relation to what others give.
Each potential donor is identified and qualified according to the CAI matrix:
C = Connections with your organisation
A = Ability to donate (nobody gives because he/she is rich!)
I = Interest to your cause.
You and the member of your organisations, board, other volunteers and employees, can easily draft ‘homemade’ lists to identify potential donors. Everyone can build his own list individually, following the example reported here below:
Volunteer name: Sandra
Once the lists are drawn up and the characteristics of people to be contacted are set out, you can start developing the program to make them become donors!
5. Ask: how do you engage your potential donors? What interactions can we have with them?
The Gift Pyramid displayed here below can help you understand what kinds of relationships you can establish with potential donors depending on the amount of the donation that we expect from them.
The list below shows the possible ways of interacting between an organisation and potential donors:
- Individual/confidential: Face to Face
- Personal letter - with telephone solicitation or without telephone solicitation
- Personal phone call - with solicitation letter or without solicitation by letter
- Personalised letter: ‘Dear Mr. Name ....
- Telephone marathon
- Impersonal letter
- Special events
- Media / advertising
If your organisation is looking for a large donation it would be sensible that you decide not to make an announcement through the local radio or door to door, but rather your chair person asks the potential donor during a personal one-to-one meeting. The person who is in charge of fundraising within the organization can accompany the chair person but will never replace him/her. The chair person has to be the one to tell the ‘good cause’ of your organisation.
Once you will have drawn the lists of potential donors and taking into account the gift pyramid, you can try to choose the most appropriate type of relationship with your potential donors.
Example: Jon, who has a confidential relationship with Sandra (as they know each other since they were classmates in high school) but knows very little about your organisation, may be invited (by Sandra) to participate to your organisation’s annual dinner.
And so on.
But how many potential donors should we contact?
As an example we can say that:
That means to get one donation of high amount you have to contact five potential donors and to get a donation of average amount you have to contact 3
And so on.
6. Thank: it is compulsory to thank your donors.
When thanking the donors of your organisation, bear in mind that in fund raising anything your organisation gives in return can be a relational good, which may also sometimes combined with a small prize with a symbolic value (a card, a mention on a certificate, etc…). The choice of the right reward also varies depending on the amount of the donation.
For instance, you will not give a plaque to the person who gives you £1 during a fund raising dinner. Neither it is appropriate to give a membership card of your organisation to the chair of the Foundation that is supporting your project to build a well for drinkable water in Africa.
In any case, remember the following two points:
- You must always thank donors, and it must be done within 24/48 hours.
- Making donations to an organisation is never an obligation; you should always bear in mind that pontential donors may say no.
Good communication is essential for good fundraising.
The strategic objective of communication in fundraising is to help potential donors develop a clear understanding of the organisation and its goals, and indoing so, create a desire among potential donors to contribute to the accomplishment of the mission.
When thinking about communication strategies when fundraising, you must always bear in mind the so called ‘3 P rule’: People give to People who help other People.
People give …
It’s people who donate, not institutions. People that work within institutions may want to donate, and it’s them you must address.
… to People …
People do not donate to restore a budget deficit. They give to a non profit organisation because this organisation is committed towards a “good cause”, and because the organisation is able to keep the promises.
People donate because of the mutual trust that exists between people.
… to help People
It’s the needs of people that make other people donate.
Keep in mind the following figures:
- People involved in volunteer give (67%)
- Religious people give (61%)
- Women give more than men
- 1 out of 4 people give to 3-4 different causes
- 1 out of 8 people give to 5-6 different causes
Important: in some countries donors benefit from tax reduction. In those cases the tax benefits represent an added motivation.
Communication should therefore go beyond the mere provision of information. It must stimulate feelings and thoughts in potential donors.
If you are collecting money to build a well for drinkable water in Africa, your communication has to address people and highlight the importance of their act (although small) as contributing to the objective.
Drinkable water for Tosamaganga hospital in Tanzania (CASE)
For many people in Africa water is still a dream (GOOD CAUSE)
With your help thousands people will have access to drinkable water for ever (CREATION OF A RELATIONSHIP WITH THE POTENTIAL DONOR)
By buying an aerator you will contribute to the creation of a well for drinkable water in Tosamaganga hospital. (POINT OUT HOW TO DONATE)
Even when choosing images to support your campaign, always consider the ‘3 P rule’. It is always preferable to use images of people.
Finally remember everything is not understandable to a fourteen year old does not work!
Gazzoni Emilia, Programmazione e controllo nel non profit, Carocci Faber, Roma, 2004
AA.VV. , Come si tiene la contabilità, Il Sole 24 Ore, Milano, 2010
Buscema Angelo, Enti non commerciali - Gestione contabile e trattamento fiscale, Maggioli editore, 2010
Flanagan Joan, Successful Fundraising: A complete handbook for volunteers and professionals, Contemporary Books inc, Chicago Illinois USA 1991
Rosso H., Tempel E. R. , Melandri V., Il libro del Fundraising: Etica, Strategie e Strumenti della Raccolta Fondi, RCS Libri SPA, 2004
Worth Michael J., The George Washington University, Nonprofit Management – Principles and Practice, SAGE Publications Ltd, 2009
Zamagni S., Gratuità e agire economico: il senso del volontariato, Working Paper n.9, Università di Bologna
Melandri Valerio, Materiali per un corso di fund raising, Edizioni Filantropy, 2007
Garbellini Mara, Eventi di raccolta fondi: teoria e tecnica, Università di Bologna – Master in fundraising e responsabilità sociale, 2006
Internet Center for Management and Business Administration http://www.netmba.com/