<p> Extract from Y Care Partnership Manual Financial Management</p><p>XI. Financial Management</p><p>What is Financial Management?</p><p>Financial management involves Planning, Organising, Controlling and Reporting on the financial resources of an organisation to achieve organisational goals.</p><p>Financial management is not just about keeping accounting records. It is an important part of the programme management and not be seen as a separate activity left to finance staff. It is the responsibility of the whole organisation. In practice financial management is about taking action to look after the financial health of an organisation, and not leaving things to chance and protect staff in vulnerable positions. Finance managers and programme staff should work together to ensure that they are both involved in the planning and organising of activities and expenditure and in the subsequent reporting. </p><p>Financial management involves: </p><p>Managing scarce resources Managing risk Managing strategically NGO’s operate in a All organisations face competitive environment internal risks (fraud, office Financial management where donor funds are fire) and external risks is part of management scarce. These funds must (withdrawal of funds), as a whole. be used for best effect to which can threaten the Organisations need to achieve organisational operations and even their plan for short term, objectives. medium term and long survival. term.</p><p>At the heart of financial management is concept of financial control. </p><p>Financial Control is a state of affairs, which ensures that the finances of an organisation are being properly handled. It is achieved by designing systems and procedures to suit the particular needs of an organisation. Without effective financial control: o Assets are put at risk; o Funds not spent in accordance with the organisation’s objectives or donors’ objectives; and o The competence of managers and integrity of the organisation may be compromised. Extract from Y Care Partnership Manual Financial Management</p><p>Financial Management Financial management involves close attention to project and organisation objectives. The financial management process – Plan, Do, Review, takes place on a continual basis.</p><p>Plan When an organisation or project starts up, it sets its objectives and planned activities. The next step is to prepare a financial plan for the costs involved in undertaking the activities and where to obtain funds</p><p>Do Having obtained the funds, the programme of activities is implemented to achieve the goals set out in the planning stage.</p><p>Review The actual situation is compared to the original plans. Managers can then decide if the budget is on target to achieve its objectives within agreed time scales and budget. The learning from the review stage is then taken forward to the next planning phase and so on. </p><p>Principles of financial management</p><p>Below is a list of key good practice principles, which can be used as a standard in developing proper financial management systems in your organisation. These principles can be used as a checklist to identify strengths and weaknesses in an organisations finance system. </p><p>Consistency: The financial policies and systems of an NGO must consistent over time. This promotes efficient and transparency, especially in financial reporting. This promotes efficient operations and transparency, especially in financial reporting. </p><p>Accountability: The organisation must explain how it has used all its resources and what it has achieved as a result to all stakeholders, including beneficiaries. All stakeholders have the right to know how their funds and authority have been used. NGOs have an operational, moral and legal duty to explain their final decision and actions, and submit their financial reports to scrutiny.</p><p>Transparency: The organisation must be open about its work, making information about its activities and plans available to all relevant stakeholders. This includes preparing accurate, complete and timely financial reports and making them accessible to stakeholders, including beneficiaries. </p><p>Viability: To be financially viable, an organisation’s expenditure must be kept in balance with incoming funds, both at the operational and strategic levels. Viability is a measure of the NGO’s financial continuity and security. </p><p>Integrity: On a personal level, individuals in the NGO must operate with honesty and propriety. For example, managers and Board members will lead by example in following policy and procedures and declare any personal interests that might conflict with their official duties. </p><p>Stewardship: An organisation must take good care of the financial resources it is entrusted with and make sure that they are used for the purpose intended. – this is known Extract from Y Care Partnership Manual Financial Management as financial stewardship. The governing body (e.g. the board of trustees) has overall responsibility for this. </p><p>Accounting standards: The system for keeping financial records and documentation must observe internationally accepted accounting standards and principles. </p><p>Financial Management Building Blocks</p><p>These are the basic building blocks which must be in place to achieve good practice in financial management. </p><p>Accounting Systems Records Financial Planning Financial Design Control</p><p>Financial Internal Controls Monitoring</p><p>1. Accounting Records – Every organisation must keep an accurate record of financial transactions that 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.</p><p>2. Financial Planning – Linked to the organisation’s strategic and operational plans, the budget is the cornerstone of any financial management system and plays an important role in monitoring and prioritising the use of funds.</p><p>3. Financial Monitoring - Providing the organisations has a set budget and has kept and reconciled its accounting records in a clear and timely manner, it is then very simple matter to produce financial reports which allow the managers to assess the progress of the organisation. (Add in relevant appendices)</p><p>4. Internal Controls – A system of controls, checks and balances are put in place to safeguard organisations 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. Note that all of the building blocks are of equal importance and must take place at the same time. Extract from Y Care Partnership Manual Financial Management</p><p>The importance of an accounting system</p><p>The proper management of any organisation depends largely on having in place an efficient accounting system to manage its finances. Such a system should help to:</p><p>- Record </p><p>- Clarify the organisation’s financial activities</p><p>- Sum-up </p><p>Its purpose is to provide accurate information regarding the organisations finances in a regular and timely manner.</p><p>Key requirements of an efficient accounting system include:</p><p>(i) All financial transactions are recorded according to accounting procedure and with supporting referenced documentation (ii) Supporting original documentation to all transactions stored in a dry and safe place. (iii) All supporting documentation properly referenced to the Cashbook or Bank book. (iv) All transactions supported by Vouchers, giving details of the transaction in question. (v) Like supporting documentation, all Vouchers, Cash and Bank books are kept in a secure place.</p><p>Key Accounting records An efficient accounting system should have procedures for each of the following:- 1) Cash a) Withdrawal voucher / receipts b) Deposit vouchers 2) Bank a) Cheque book b) Signature authorisation schedule c) Bank statements 3) Other accounting documents a) Invoices b) Petty cash vouchers</p><p>Book keeping</p><p>Accounts should be maintained in accounts books, which record the financial operations (accounts entries), and these should always be supported by accounting documentation.</p><p>Deposits Payments Extract from Y Care Partnership Manual Financial Management</p><p>Operations Credits (Account entries) Transfers Withdrawals</p><p>Bills Accounting Vouchers Petty cash vouchers Statements</p><p> o The Cashbook This is the main book of account for recording ‘cash’ transactions – i.e. receipts and payments effected through the bank account. The Cash Book is used to record:</p><p>. Details of each transaction – date, payee, cheque number, amount and description – usually listed in date order; and . Opening and closing cash balances.</p><p>It is normal to maintain a separate Cash Book for each bank account held.</p><p>At the end of each accounting period, Receipts and Payments are totalled up and the cash balance to be carried forward to the next period is calculated. This is then checked with the bank statement balance during the bank reconciliation to identify any errors or omissions.</p><p>Bank Reconciliations Bank reconciliations should be prepared every month end for each bank account.</p><p>To be an effective control tool the reconciliation should be reviewed by the financial controller, finance manager or other responsible official</p><p>Financial Planning/Budgeting</p><p>Financial planning is both a strategic and operational process linked to the achievement of objectives. Financial planning does not start with budgets and numbers. Effective budgets can only be produced as a result of good underlying plans. It is impossible to start a financial forecast without a clear idea about what it is you want to do and how you intend to do it. Organisations must identify their objectives and these are usually described in a strategic plan and details how these objectives are going to be met. Different parts of the plan are relevant to different people depending on their role, but all staff need to be familiar with the strategic plan and be part of implementing it.</p><p>Once the strategic plan is drawn up a budget can be drawn up. A budget can be defined as ‘a budget describes an amount of money that an organisation plans to raise and spend for a set purpose over a given period of time’. The financial budget is a way of quantifying the resources needed to achieve organisational objectives. (Please refer to World Alliance Harmonised Project Management Templates for further information on budgeting and templates.) Extract from Y Care Partnership Manual Financial Management</p><p>Financial Monitoring/Reporting</p><p>All reports should be based on information contained within the organisations accounting system. The frequency can vary depending on the organisation / donor in question i.e. this could be monthly, quarterly (every three months) or annually. Irrespective of the frequency of reporting, all accounting books should be kept up to date with detailed reconciliation taking place at the end of each month. This will also make reporting easier and quicker to produce.</p><p>If reports are produced on a timely basis, any problems can be addressed early on and action taken to put things right. Programme staff at YCI can also offer support where needed. </p><p>How to review/compile a financial report.</p><p>There are four key indicators to look for when reviewing or compiling a report that will help detect problems. </p><p>1. What does the bottom line tell you? Overall is the budget over-spending or under-spending and is it significant at this period? Plus/minus 10% is reasonable. 2. What are the significant variances in the individual line items? Are the reasons for the differences explained? 3. Do linked budget line items (e.g. activity related costs) tell the same story? Or contradict each other? For example, the project materials budget is under-spent suggesting delayed activities, but the projects’ vehicle running costs are high? 4. Do the budget report figures tell the same story as the narrative report figures e.g. The narrative report says that everything is complete but the financial report illustrates very low expenditure. </p><p>When grants are given for a specific purpose they must be accounted for separately so that the organisation can demonstrate to the donor how the funds have been utilised. This is known as fund accounting and requires care when setting up accounting systems to identify and separate the necessary information. It is good practice to set up separate bank accounts for each project.</p><p>Exchange Rates for reports</p><p>Please note that most funders have particular guidelines regarding which exchange rate to use, please make sure you are familiar with the funders guidelines before compiling financial reports. Please also refer back to your PFA drawn up by YCI at the start of the project which will include exchange rate guidelines.</p><p>For the required YCI reporting format, please see the attached templates Appendix 12 & 13, which include explanatory “Notes” on Appendix 11. (Appendices need to be checked) Extract from Y Care Partnership Manual Financial Management</p><p>The Audit An audit is an independent assessment of the finances of the organisation by a qualified person(s). Audits are important for NGOs as they demonstrate a commitment to transparency and accountability and bring credibility to the NGO. It is also a legal requirement in most countries to have the financial statements reviewed by an independent auditor once a year.</p><p>The purpose of an independent audit is as follows:  To find out how much money the organisation received and spent in the financial year and what it was used for  Whether the money has been spent in accordance with the constitution of the organisation and donor requirements  Whether the accounts (the bookkeeping system) have been properly and honestly kept  The value of the organisation’s assets  Are the internal controls in place and used</p><p>Please check generic term of reference for use when hiring auditors: (please refer to Appendix 17 in the World Alliance Harmonised Project Management Templates) </p><p>Some donors have very specific guidelines on the audit and require the auditor to sign an audit certificate e.g. The European Commission. Please refer to your PFA and guidelines from specific funders for particular project. </p><p>Sometimes donor agencies may request an independent external audit of records and activities and will appoint a qualified person to undertake a review. The primary purpose of such a review is to check that grants are being used as intended and in accordance with the budget in the original funding agreement.</p><p>The person conducting the audit must not be actively involved in the organisation and should not be a relative or close associate of anyone actively involved in it. </p><p>It is good practice to rotate auditors every five years </p>