Financial Management Intermediate
Course Code: FM2
Financial Management Intermediate
Non profit organisations do not measure their success exclusively or primarily by their financial result but rather by outcomes related to their missions or by a double bottom line that considers both financial and programs results. That being the case, however, it is the reality that many boards and CEOs pay particular attention to their organizations’ financial condition. Without adequate and well-managed resources, achievement of the mission is jeopardized, and the very survival of the organization may be threatened.
Many non profit board members are drown from the business community and may be more familiar, or more comfortable, with financial concepts than with the professional fields of the organization’s staff, so they often focus their attention on the budget and financial statements. In addition conservation of the non profit’s assets is an essential part of the board’s fiduciary responsibility, and any signs of trouble are likely to be addressed urgently. Few events can so quickly place a non profit officer’s tenure in jeopardy as an operation deficit, financial mismanagement, or a bad audit report. In sum, financial skills are necessary, even if not sufficient, to effective non profit management.
Through this course you will improve your skills in accountancy, budgeting, financial reporting and fundraising.
Duration: 1 h.
Author/Source: Sandra De Thomasis, Piero Stanchi, CSV
Tags: financial management, courses, training, volunteering
Starting: 21/11/2012 Ending: 01/01/2014
Accounting and record keeping
Bookkeeping, accounting and financial management: definitions
Financial cash accounting
It may be useful to firstly clarify a few terms, especially the differences among bookkeeping, accounting and financial management.
Bookkeeping refers to the methods and systems by which financial transactions are recorded, either by hand or on a computer.
Accounting encompasses the rules by which financial transactions are classified and reported. There are two types of accounting:
- “Financial accounting” deals with the financial information published for the use of parties outside the organization.
- “Managerial accounting” deals with information that is useful to an organization’s managers but it is not required to be made available to others.
For example, a banker considering giving a loan to a non-profit would need to see financial accounting statements but might not be concerned about how much it costs per client to run each of the organization’s programs. The latter however might be important information for a CEO to have when planning budget allocations.
Financial management relies on accounting statements for data, but it focuses on the meaning of those figures. Financial management usually involves the analysis of various financial ratios that may provide indicators of trends and the organization’s financial health.
Thus, the key in bookkeeping is accuracy; in accounting, consistency, and following the rules; and in financial management, making judgments and establishing policies to guide the organization’s financial life.
Financial management goes to the heart of the board’s fiduciary responsibility, and any problems involving budgets or assets are likely to demand immediate attention from the board and the CEO. Bookkeeping involves the entry of financial transactions in the organization’s records.
Accounting encompasses the rules by which transactions are allocated and reported.
Financial management requires making judgments based on data financial statements, relationships among that data and financial management policies of the organization.
Economic-patrimonial accounting (or accrual accounting)
Organisations must keep registers – even informal ones – that will allow them not to lose track of their financial – and consequently economic – movements.
There are different accounting systems for organisations in different countries, but usually the most common approach is based on financial cash accounting (only recording revenues/expenses).
Financial cash accounting is the simplest way to describe economic events and transactions of an organisation. It is simply based on ordering and classifying all revenue and expense items.
For financial cash accounting it is proper to keep record of modest economic transactions. In this sense the financial dimension (membership fee, liberality, contributions, and donations) acquires great relevance and often, in the absence of complex transactions, the management surplus tends to coincide with the economic results.
Financial cash accounting only takes into account the financial dimension - namely revenues and expenses - and makes use of the so called ‘petty cash book’ (a cash book that only records cash receipts and payments).
The credit balance or debit balance deriving from the management financial statement must correspond to the actual monetary consistency of the organisation.
Managing financial cash accounting requires a smaller operating structure.
It is sufficient to make use of a two-column accounting book (or journal) in which the first column will conventionally highlight all the association incomes, while the second one will pinpoint all its expenses.
Financial cash accounting has unfortunately a big fault: it does not account for economic and patrimonial facts – even relevant ones - with no financial manifestation.
For instance, financial or cash accounting does not highlight:
- Any credits and debts still not collected or paid off during the financial year but still concern the association management (on the one side, entries related to services delivered to public and private corporations, on the other side invoices for energy and telephone consumption during a period of time bridging two years, purchase of products, counselling activities, etc…)
- All management activities concerning fixed assets, namely the association property destined to be used for an extended period of time (for example ambulances and emergency vehicles, furniture and equipment, office electronic machines) in addition to single shares put aside as an amortization
- Consistency of what remains once the accounting period ends (for instance, consumables)
In some countries bigger organisations may choose more complex accounting systems that better meet transparency and clarity needs and also help to draw up a truthful and correct financial statement.
In the so-called economic-patrimonial accounting (or accrual accounting) - which takes into account both the economic and financial dimension - each management transaction leads to a ‘couple’ of values of the same amount but opposite sign. These are the expression of economic variations (revenues/expenditures) and financial variations (credits/debts). This leads to the drawing up of the financial statement (assets and liabilities statement and profit and loss account).
The principle of accrual accounting builds upon the irrelevance of financial dynamics with regard to the representation of the economic value. Therefore income and expenses must be recorded in the accounting system in the financial statement in which they have found economic justification and produced economic effects, and not when their respective monetary movements (payments and receipts) occur.
To better understand this, read through the following example:
The payment for a six-month rental (if brought forward to November) in financial accounting would entirely weigh down on the payment period (even though 4 months out of 6 make reference to the following accounting period) and in doing so alter the operating results . In accrual concept accounting only 2 months out of 6 would be included in the current accounting period, while 4 months out of 6 would be taken into account during the future accounting period.
Accrual concept accounting makes use of a general ledger or a computer-assisted accounting system. It is a more complete accountancy system and facilitates the drawing up of the financial statement.
For non-profit organisations (especially the smallest ones) it is sufficient to make use of a ‘petty cash book’ or a general journal (paper or spreadsheet version), keeping record of all revenue and expense items shared out among all the identified entries.
Accounting books must respect some principles, in particular:
- Chronological sequences
- Analyticity and accuracy of entries.
An accounting book is a document in which (and through which) accounts are kept. Among accounting records, we can include:
- The general journal;
- The inventory book (also named list of items).
Depending on the accounting entries reported in such records, once each corporate period ends, a balance sheet or financial statement is drawn up.
The general journal is an accounting tool that must report chronologically all the transactions concerning the accounting period. It is a document recording all accounting movements.
Inventory book (List of items)
By the term inventory we usually mean the physical/material recognition of significant elements within the organisation. It generally takes place once the accounting period ends, but it might be also carried out during the above-mentioned period, on a need basis.
The inventory, therefore, may make reference to:
- Credits and debits;
- Capital assets.
Developing and managing a budget
On a month-to-month or day-to-day basis, for most people working in the organisation, activities are guided by the budget and reports that relate to the budget. A full discussion of budgeting is beyond the scope of this text, but this section will summarize some of the key principles and concepts.
A budget is a political document that reflects not only plans but the competition for resources within the organization. How budgets are constructed creates important incentives and disincentives that affect managers’ behaviour.
One important consideration is whether budgets are maintained on an organisational or centre basis, and whether departments and programs are treated as cost centres or profit centres.
Some say that the budget reveals an organization’s “real strategy”, despite what may be written in the strategic plan or other documents, because the budget is a tangible expression of what the organization’s real priorities are.
Budgets invariably create incentives and disincentives that will affect the behaviour of managers and staff. For example, some organisations have a use-it-or-lose it approach to annual budgets.
If a department has not expended its budgeted funds by the end of the fiscal year, the remaining funds do not carry over the available to the department the following year.
One important consideration is whether budgets are maintained on an organizational or centre basis and whether departments and programs are treated as cost centres or profit centres.
Most non-profit organisations have three separated budgets: 1) an operating budget; 2) a capital budget, and 3) a cash budget. As their names suggest, the first tracks all revenues and expenditures; the second concerns the purchase or disposal of long-term physical assets, such as building and equipment; and the third tracks the flow of cash during the year, whether related to operating or capital activities.
The budgeting process starts by translating strategic plans into annual plans.
Organizations should make:
1. A Operating Budget, which tracks all revenues and expenditures;
2. A Capital Budget, which concerns the purchase or disposal of long-term physical assets, such as buildings and equipment;
3. A Cash Budget, which tracks the flow of cash during the year, whether related to operating or capital activities.
|PLANNING OF SUPPORT AND REVENUE FOR THE YEAR … |
Government and agencies
Contracts and other revenue
Total support and revenue
PLANNING OF EXPENSES FOR THE YEAR …
Management and general
Changes in net Assets
Example: detailed planning of functional expenses
PLANNING OF ASSETS
Total Assets for the next year
PLANNING OF LIABILITIES AND NET ASSETS
Total liability and net assets for the next year
PLANNING OF CASH FLOWS FROM OPERATING ACTIVITIES
PLANNING OF CASH FLOWS FROM INVESTING ACTIVITIES
PLANNING OF CASH FLOW FROM FINANCING ACTIVITIES
PLANNING OF Net cash flow
Cash and cash equivalents – End of this year
Cash and cash equivalents – End of the next year
Social performance indicators
A financial statement is a record that aims to provide relevant stakeholders with the necessary information regarding the financial activities of an organisation. In this sense, they are a communication tool. Furthermore, they become an essential tool in an organisation’s governance and in assessing an organisation’s performance. In this sense, financial statements are a management tool for an organisation.
Financial Statements of non-profit organisations include:
1) Statement of Financial Position or Balance sheet;
2) Statement of Activities or Income Statement;
3) Statement of Cash Flows;
4) Statement of Functional Expenses.
Statement of Financial Position or Balance sheet
The Statement of Financial Position (balance sheet) provides a snapshot of an organization at a point in time, usually the end of a fiscal year. It summarizes:
- Assets: “ the items that an organization possesses, with which it carries out its programs and service”;
- Liabilities: “the amounts of borrowed money, or debt, that an organization has used to finance some of those assets”;
- Net Assets: “the difference between assets and liabilities”.
Assets always equal the sum of liabilities and net assets.
Liabilities and Net Assets
Total liability and net assets
Statement of Activities or Income Statement
The Statement of Activities shows the flow of revenues and expenses of an organization, and the resulting changes in net assets over a period of time- generally a fiscal year (Statement of revenues, expenses, and changes in net assets).
Support and Revenue
Government and agencies
Contracts and other revenue
Total support and revenue
Management and general
Changes in net Assets
Statement of Cash Flows
The Statement of Cash Flows shows cash inflows and outflows over the year, enabling us to see how the cash amount changed from one year to the next.
CASH FLOWS FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
Net cash flow
Cash and cash equivalents – Beginning of year
Cash and cash equivalents – End of year
Statement of Functional Expenses
The Statement of Functional Expenses shows how every category of expenses has been allocated among the uses of each program or project of an organization, as well as fund-raising and management in general.
Example: detailed statement of functional expenses
Indicators are forms of data that measure the performance of an organisation or project. Indicators, apart from being clear and essential, must be:
- formulated in a significant way
- commonly understood among those involved
In defining selection criteria for social performance indicators, it would be wise to follow some principles:
1. An imperfect indicator is always better than nothing
2. If possible, compare your indicators with those ones made available by external sources
3. Use different indicators for different aims
4. Develop a range of indicators
It is recommended creating a list of indicators through group classification activities (by making use of brainstorming techniques, consulting key stakeholders, thinking over the data concerning the previous (accounting) period). Then consult the stakeholders that will be presented the results to make sure that the indicators to be used are significant and comprehensible.
You will also need to identify what is relevant to measure according to each stakeholder’s group or area of interest (social indicators list).
Just as an example, here below you find a table outlining some social indicators related to different stakeholders.
- Participation in the decision making process
- Moments of discussion
- Satisfaction deriving from their tasks and role
- Constant engagement
- Involvement in the decisions related to the services provided
- Willingness to spend some more time beyond the working one for volunteering activities
- Detection of needs
- Sense of welcoming
- Level of satisfaction
- Communication of the activities
- More citizens’ willingness to participate in the activities carried out by the organisation
- Contacts increase
- Participation in common initiatives
- Participation in coordination activities and meetings
- Communication of messages, values and social exposures through local media
- Good authority information sources and no self-referential communication
- Fundraising campaigns to finance projects
- Documents testifying the amount of money raised, the aims it has been destined to and the results achieved
- Participation in roundtables or commissions
- Presentation of innovative projects
- Possibility to orient and influence public decisions
A Mission Statement is a document containing all the extra-accounting information available, in order to complete – together with the accounting one – the basic informative framework provided by the financial statement.
A Mission Statement could be structured as follows:
1. Institutional framework
- Stakeholders identification
- Illustration of the plans and programmes aiming to ensure the pursuit of the mission
- Description of each one of the institutional activities through analytical activity and/or project (file) cards and of the resulting management choices concerning the institutional activities (main services delivered, quality level of services, investments made, etc…)
2. Support work aiming to consolidate institutional activities
- Description of support actions
3. Relationship with the environmental context
- Nature and characteristics of the relationship
- Description of any environmental bound that might have affected the general management
4. Organizational shape
Analysis of the organizational shape that highlights its strong and weak points, with regard to the pursuit of an efficient and effective general management.
How to organise small fundraising events
The programmes (annual campaign, capital raising)
A well-planned event is an opportunity to raise funds – both during and after its implementation.
Events represent a unique chance for an organisation to communicate with external organisations and raise money: they draw the media, donors’ and enterprises attention, increase an organisation’s prestige, as well as motivate staff members and engage volunteers. But before organizing an event, it is wise to take into account that this kind of activity only leads to short-term incomes. Furthermore, it requires good organizational and leadership skills, many resources and a massive dose of energy. There is also a high risk of failure.
The main steps to follow are:
1. CLEARLY FOCUS ON THE OBJECTIVES
The aim of an event must be CLEAR AND UNIQUE:
Fundraising? Gaining new volunteers?
Promoting the attention towards the organisation through the media?
Creating relationships with external enterprises/organisations?
In case of more than one aim to be pursued, you will need to determine the priority.
2. CHOOSE THE “RIGHT” EVENT
In order to choose the right event, it could be useful to arrange a brainstorming activity within the organisation, taking into account that often the best ideas are the simplest ones and that the event must meet specific market needs (a heavy metal concert addressed to an old audience?) and lead to concrete results.
3. DEFINING A BUDGET
Events are arranged in order to raise funds, therefore you will need to draw up a financial budget, to obtain a reliable estimate of expenditures and the most accurate possible cost control.
4. IDENTIFY THE PROJECT MANAGER RESPONSIBLE FOR THE EVENT ORGANIZATION
This is the the association member who directs the organization of the event and coordinates all the activities.
5. DEFINING A TIMETABLE
A timetable is a simple graphic description of the activities to be carried out and the related period of time (what to do and when) and is an extremely useful tool that will help you to arrange the event in the best possible way.
6. ENGAGE PARTICIPANTS
During the event, involve all participants in order to support your “cause”. How?
By presenting your own organisation, distributing leaflets and related material indicating how to donate.
7. THANK EVERYBODY
And in doing that keep asking your audience to support your ‘cause’.
Bearing in mind that fundraising is an ongoing process of interaction between the organisation and the surrounding world, its effectiveness depends on good planning and rigorous execution. The better the planning, the better the results.
Once your good cause and objectives (strategic and operational) have been defined you can draft your General Development Start planning from the definition of the economic needs.
The QUANTITY and QUALITY must be clear, as well as the necessary resources. The organisation may request resources for projects of general interest. It is more difficult to ask for money to cover the general functioning costs of an organisation. In this phase it is important to analyse the problem properly and check the financial viability of the various activities.
The quantitative target of your fundraising, meaning the amount of money you need for next year, should be brokendown into a set of objectives linked to individual ‘external cases’- cases that ask donations.
Through the operational planning of activities you will evaluate the priority of individual cases and place them in a timetable.
Non-profit organisations’ needs refer to 4 types, corresponding to 4 fundraising programs:
Now the question you should ask yourself is: ‘Where does your potential donor draw the money that they might give you?’ It’s an important question because the relationship that you have to establish with your donor depends on his source of income. This will be clearer later, looking at the pyramid of the donation.
Let´s start with the so called ‘donor stool’ that explains the relations between donor, source and program.
A) The annual campaign is the core element of a successful fundraising program. The aim is to get donations from the annual income of the donor to meet an organization’s needs in terms of cash. The basic concepts of the annual collection are: get a donation, make it replicable and increase its size.
B) Capital raising is an intensive fundraising program to collect in terms of capital. For example, the construction of a building or the purchase of equipment. Therefore capital raising requires big donations that affect the assets of the donor. Often these donations are made through the "pledges" along several years.
C) Major donations are the ones that everyone wants! Seriously, it is not always necessary to start raising capital to solicit an extraordinary donation. Large donations are transversal to all programs and are usually bestowed in the framework of the annual harvest linking a donor further to the organisation.
D) Planned gifts represent a sophisticated tool for fundraising: these donations are planned when the donor is alive, but the organisation reaps the rewards later, usually the death of the donor.
Important: a properly organised annual campaign is the solid basement to receive planned gifts because it tends to bind the interests of the donor to those of your organisation.
Before exploring the annual campaign in more depth, it might be helpful to display the gift pyramid that shows the various degrees of donor involvement and interdependence of all the components of fundraising.
Formula (how it works): receive the donation, repeat the donation, make the donation increase.
Annual fundraising plays a key role within a successful fundraising programme. It aims to obtain donations from the donor’s annual income in order to face an organisation’s requirements regarding liquid assets.
Annual fundraising programme builds upon three different levels:
1- POTENTIAL DONORS FOR INITIAL DONATIONS.
RECEIVE THE FIRST DONATION:
• Inform the potential donor about the activities carried out within your non-profit organisation, the reason why donations are important and the possibility to affiliate to your organisation;
• Ask for a donation;
• Thank the potential donor that now has become a donor.
2- DONORS WHO REPEAT DONATIONS.
REPEAT THE DONATION:
• Write to the donor to tell him what your organisation has been able to do thanks to his contribution;
• Invite him to take part in programmes/activities carried out within your organisation;
• Thank him for his faithful attitude in constantly donating;
• Advise that he should go on donating every year.
3- ANNUAL DONORS WHO INCREASE THEIR DONATIONS.
MAKE THE DONATION INCREASE:
• Arrange events or activities that motivate donors to contribute more and more through constant donations;
• Thank them even for small donations;
• Show them the opportunities for those who donate more. For instance, donors club.
Annual fundraising aims to create a base group of donors able to act as an effective tool in involving, informing and building solid relationship with those making up an organisation as well as raising the accountability to the good cause.
In the absence of an annual fundraising programme, an organisation is likely to end up being forced to organise “emergency” campaigns such as “Help us or we will have the spend the money destined to our aid programmes!”
In order to properly plan a fundraising campaign you must know that:
1. According to the fundraising profile – shown in the Pareto chart in the graph below – 60% of the donations amount will derive from 10% of the donors, 20% of the money will derive from 70% of donors and the remaining 20% of donations from 20% of donors. Among fundraisers it is believed that, in general, 3-5% of actual donors is able to give great donations.
2. To determine the number of donations needed to ensure the achievement of the estimated goals, the ‘table of range’ is a helpful tool to use. The table of range of donations is a tool for annual fundraising that reaches its maximum effectiveness for major needs, from € 25.000,00 upwards.
You can build your table range (where range = range of donation) by following these simple guidelines:
- The first 2 donations must represent 10% of the goal, or 5% each;
- The next 4 must cover an additional 10%;
- The ratio potential donor / donor vary from 2:1 to 5:1 (that is to say that only one on five contacted potential donors becomes really a donor).
The annual needs of your organisation are € 60.000.
Keep in mind that the first two donations account for 10% (or 5% each).
10% € 60.000,00 = € 6.000
5% € 60.000,00 = € 3.000 (range donations)
Ratio potential donor / donor 5:1.
You will need to contact 10 potential donors.
And so on....
As you can see from the table below, there are different ranges of donation.
This is a useful tool as it reduces the need to collect small donations. The Range Table shapes the plan of fundraising activities. For instance it’s reasonable that to contact 10 potential donors from whom you want to receive, the first 2 donations you won’t organise a special event. It would much more effective to meet them face-to-face.
Depending on the range, you should choose the most suitable fundraising program including, mailing, face to face, special events, funding proposals to foundations, personal solicitations, etc...
The table is a flexible tool: you can vary the number of potential donors within each range. But be careful: do not forget that fundraising is sequential. Do not go to the next range if you still haven’t gathered the previous one.
If you cannot identify potential donors belonging to the first range you’d better ask yourself whether the goal you have set up is a realistic one.
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