Education and Early Childhood

Financial Management

In this section:

The Budget
Financial Controls and Procedures
Financial Record Keeping
Financial Reporting
The Audit
Finance Committee
Worksheets
Tool Kit for Boards - Wage Grid Implementation - 2023/2024

Please don't bypass this section of the guide. As discussed in the "Legal Accountability" section, it is the board which is legally accountable for the sound management of the agency. This section presents a basic overview of the financial governance responsibility of the governing board.

Board members have a wide range of skills, and varying degrees of knowledge and comfort with financial management. However, each board member should know enough about financial management to make informed and responsible decisions on the budget and financial policies and to understand the financial reports.

The benefits for agencies which practice effective financial management include the following:

the spending of the agency is linked directly to its goals and program objectives
there are timely, accurate reports on the financial status of the agency for members and funders
there is more informed decision-making within the agency by linking planning, budgeting and reporting
the agency has a financial method for evaluating past performance, reviewing current conditions and predicting future potential
the agency maintains a competent, professional image that will build confidence within the membership and credibility with funders and clients

Under the financial management function, the board is responsible for:

establishing the budget process and the financial reporting system
planning and reviewing the budget
establishing contracting procedures and policies
monitoring the revenues and approving the expenditures of the agency
participating in, and overseeing fund-raising activities
managing the physical and financial assets of the agency

The key components of the financial management system include:

The Budget - the organization's financial plan for one year.
Financial Controls and Procedures - the accounting and management practices to manage and protect all resources of the agency.
Financial Record Keeping - the method of organizing financial information.
Financial Reporting - the information that allows the agency and others to assess its financial health.

The following section discusses each of these key components in further detail.

The Budget

When a board approves a budget, it approves the expenditures and commits to obtaining the required funds. A non-profit organization may obtain public funds from government, or other granting agencies and still need to do fund-raising or fee-for-service work in the community. A board should not approve a budget if it is not willing, or able to be responsible for obtaining the required funds.

A finance committee may be responsible for coordinating and reviewing the budget which has been prepared by staff, but it is the board that is ultimately responsible for establishing and approving the budget.

A budget is a detailed plan for projected expenses and anticipated income over a period of usually one year. For agencies regardless of the size of their budget, budgeting is the key to their continued existence. A budget is necessary for obtaining money and functions as the tool to monitor and control expenditures.

Budgeting is done year-round. The budget reflects how much money the agency will receive as revenue and from where, and how much money it will spend (expenses) and on what. Senior staff and the board are responsible for monitoring the results achieved by the agency, adapting to changing needs and allocating resources appropriately.

When developing a budget it is important that it relates to the mission and strategic plan of the agency. Effective budgets cannot be developed without a strong sense of where the agency is headed.

Before beginning the budget process it is important that a budget calender be established. It should include the planned actions, who is responsible for their completion and time frames.

There are eight steps in the budgeting process,* which include:

*The Non-Profit Organization, An Operating Manual, Thomas Wolf, Prentice Hall, 1984

1. Compile a List of Activities

Compile a comprehensive list of what the agency wishes to do in the year ahead. At the beginning of the budget process the agency should consider the activities it must undertake to meet its goals. It is important in this and the following step, to consult the individuals and groups who are affected by the budget, or who have special knowledge about the operations of the agency.

2. Determine Costs

Decide how much it will cost to carry out the list that you compiled in step 1. Include all possible expense items. To this costing of the step 1 list, add the basic operating costs that keep the agency going (i.e. office rent, staff salaries, meeting expenses, etc.). The previous year's actual costs will be helpful during this exercise.

3. Determine Revenue

Using the information gathered in steps 1 and 2, determine the revenue that can be expected from all sources. It is helpful at this time to review past budgets as a source of information.

It is important to understand the difference between restricted and unrestricted revenue. Restricted revenue is usually received from a funding agency. It is income with special limitations attached. These funds can only be used for the purpose specified by the funding agency (i.e. a lottery grant to purchase specialized equipment). Unrestricted revenue is received without limitations attached. This revenue usually includes membership fees, general donations or special event revenue.

It is common practice to:

i) allocate restricted revenue to the proper expense category
ii) allocate unrestricted revenue to the basic administrative expenses
iii) allocate the balance of the unrestricted revenue to other expense items as needed

4. Compare Revenue and Costs

Compare the revenue and expenses from the earlier steps to ensure a balanced budget. Items may have to be added or deleted from the list. While an agency should be stretching itself, it should not undertake more than it can pay for.

5. Set Priorities

The comparison in step 4 will, in all likelihood, result in changes to the list of what the agency can accomplish in the year. If it is necessary to reduce the proposed programs or activities of the organization, choices must be made. If the agency is to fulfill its mission, it is essential that this procedure focus on the agency's "real" priorities. These are based on vision, mission and goals, rather than the special interests of individuals or groups.

6. Balance the Budget

Once program choices have been made and the activities for the year have been redefined, the budget must be adjusted and balanced.

7. Approve the Budget

The budget is now ready for the consideration of the agency's board of directors. The board is accountable for the budgeting process and must take great care in reviewing, discussing, revising and finally approving the budget. The board must ensure that the budget they approve is a responsible one, and not based on unrealistic revenue expectations. Both projected revenue and expenses must be realistic.

8. Monitor the Budget

The final step in the budget process - monitoring - is often neglected. The approved budget is not a final document. Throughout its one year life the budget must be monitored and, where necessary, modified. This is an ongoing process for which senior management is accountable.

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Financial Controls and Procedures

To effectively monitor the agency's financial activities, the board must ensure there are clear policies and procedures in place. Funds must be received, recorded, deposited and spent in an acceptable manner. An example of two common control practices include the following.

The person who opens the mail or receives monies, should record all cheques and cash received. The cheques and cash are then forwarded to the staff bookkeeper who prepares the bank deposit, makes the deposit, records the transaction and completes the monthly bank reconciliation. The executive director or treasurer reviews and approves the reconciliation.
More than one person should be involved in the control procedure for all expenditures. The executive director, who has the authority to commit sufficient funds within the board approved budget, should approve all expenditures. The accountant should then prepare the cheques according to the agency's cheque signing policy. This policy should ensure that all supporting documentation accompany the cheques when they are forwarded to the signing officers for signature.

Signing Officers

The board must appoint the signing officers, usually the treasurer and executive director. The president or vice-president is also appointed in the event that one of the two primary signing officers is absent. It is important that the board implements a signing procedure that includes enough checks and balances so as to prevent self-interest. Signature stamps should not be used nor should a signing officer sign blank cheques.

Petty Cash

Petty cash funds are set up to handle small expenses.

Rules governing petty cash funds are as follows.

Establish a limit on the size of the expense to be paid from this fund. Common limits range from $5.00 to $20.00, with all expenses above this amount to be paid by cheque.
Establish the type of expense that is eligible from the petty cash fund (i.e. office supplies, postage, bus and taxi fares).
Appoint one member to be custodian of the fund. This person should not be the treasurer of the agency as it is the treasurer's responsibility to provide the cash for this fund. Thus, when a request for additional funds is made, someone other than the individual in charge of the fund will scrutinize the request.

Bonding

Bonding provides insurance against dishonesty by individuals in the agency. Bonding insurance can be purchased from many commercial companies and will protect the agency in the event an employee or volunteer commits a dishonest or fraudulent act.

A number of controls and procedures have been discussed as part of the financial controls and procedures component of financial management. In addition there should be policies on the purchase of supplies and equipment, the payment of expense accounts and per diem allowances, car allowances, audit procedures and cheque signing. It is also important that the level of financial authority be clear and documented. To what level can managers or committee chairpersons approve expenditures and make financial commitments?

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Financial Record Keeping

The third key component of a financial management system is financial record keeping. This refers to the method of collecting and organizing financial information for the purpose of analyzing the agency's financial well-being, and protecting the interests of its funders and clients.

Financial record keeping or accounting is the procedure of recording all financial transactions for the purpose of controlling; monitoring; and analyzing the agency's income and expenses. This includes effective cash management and bookkeeping.

Cash Management

Cash management involves understanding how much money, in total, is needed to operate the agency, and where these monies will come from. By knowing how cash flows in and out, the agency will be able to:

pay bills
anticipate any periods during which the agency will be short of funds and thus prepare for a short-term loan
anticipate any periods with surplus funds so that they can be invested in short-term deposits

Effective cash management will forecast cash that will be received and disbursed, and the resulting income or revenue shortfall over a specified period of time.

Bookkeeping System

There are two methods for financial record keeping or accounting; cash basis and accrual accounting.

Cash basis accounting is the simplest of the two methods. Financial transactions are recorded only when cash changes hands. When the agency receives money and deposits it in the bank, it is recorded as income. When the cash is withdrawn from the bank, it is recorded as an expense. The agency will know how much money is in the bank, but not how much the agency owes, or how much it is owed. It is for that reason cash basis accounting is not a generally-accepted method for financial record keeping.

Accrual based accounting is a more complex method but provides a more complete view of the agency's financial status. Financial transactions are recorded when expenses are incurred or when income is committed. An accurate picture of the agency's financial status helps the board make informed financial decisions.

An agency should implement an accrual based accounting system in order to monitor, control and manage its finances accurately.

Setting up a bookkeeping system

The following provides some guidance to those agencies who are new, or do not currently have an adequate bookkeeping system. In setting up a bookkeeping system there are three basic steps.

Step 1 - Open a bank account to make deposits and issue cheques.

Select a banking institution and choose the one that provides the best combination of price, quality and service. There are usually two kinds of non-personal accounts: a current checking account, and a savings account with daily interest and/or regular interest. A current account is better for control purposes and helpful in the auditing process. The bank will then provide the following forms:

a legal agreement that outlines the bank's terms and conditions for operating the account
a banking resolution form that indicates the agency has agreed to open an account, and lists the signing officer members who are authorized to deal with the bank on behalf of the agency

Step 2 - Open journals so that all transactions can be posted in the books of original entry.

Once the banking arrangements have been established, open a set of books (journals) to record all financial transactions - i.e. every deposit made or cheque written. Journals are the books of original entry used to classify and record all transactions.

There are many types of journals; the three most common types are:

cash receipts journal - to record all cash or cheques received by the agency
cash disbursement journal - to record all funds spent by the agency (as a cheque is written it is recorded in this journal)
general journal - to record all non-cash transactions such as receivables and payables

The financial information, gathered and recorded in these three journals, is transferred to the general ledger and organized by account headings which correspond to all the accounts in the agency's chart of accounts. Under each heading the financial activity of a particular item will be recorded. For example, the agency's annual general meeting will be an account heading in the ledger and all financial activity for the meeting will be taken from the three journals and entered on one pagein the general ledger. This summary of information, by account heading, provides basic information for analyzing and reporting the agency's financial affairs.

Step 3 - Reconcile the bank statement and the journals.

At the end of each month reconcile the bank statement to the records to ensure they match. The importance of keeping accurate records of all financial transactions cannot be over emphasized. Bookkeeping tasks may seem tedious at times, but they are essential for effective financial management. It would be beneficial to seek some advice in bookkeeping systems from an individual with a credible background in bookkeeping, or a funder.

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Financial Reporting

Financial reporting is the vehicle that allows the agency to assess its financial health. It provides the board with the documents that allow it to understand the agency's financial well-being, and to analyze its financial activity.

Once an agency has established a budget, financial controls and accurate record keeping, it must develop a procedure for communicating financial information. The purpose of financial reporting is to communicate the financial status of the agency, at a particular point in time, or its activities, over a specified time period. Presenting the agency's financial information in standardized "accounting language" permits access by anyone who has a basic understanding of financial reporting.

The two main financial statements describing the financial well-being of an organization are the statement of receipts and disbursements, and the balance sheet. If people know how to read these two statements, they will be able to monitor the financial affairs of the organization and make informed financial decisions. This knowledge is key to ensuring the financial stability of an agency.

Statement of Receipts and Disbursements

The statement of receipts and disbursements (also referred to as an income statement, profit and loss statement or operating statement) provides a summary of funds spent over a specific period of time. The money received is called revenue, and all monies spent are called expenses.

Important facts about the statement of receipts and disbursements:

it is prepared regularly (monthly)
the categories used for revenue and expenses should be the same categories used in the budget format
budget figures can be compared to the actual figures
the heading of a statement of receipts and disbursements includes:
- name of the organization
- statement of receipts and disbursements
- time period

The final line on every statement should be excess (or deficit) of revenue over expenses. By subtracting total expenses from total income, the agency will know if it has a surplus or a deficit. The detailed information in the statement will identify where the agency is under- or over-spending and, with this information, the board can take corrective action.

The Balance Sheet

The balance sheet is a snapshot of your agency at a particular point in time. It provides a statement of the financial position of the agency, or what would be left over if all assets were converted to cash and used to pay off all liabilities. It is the clearest demonstration of an organization's financial stability. Every agency should produce a balance sheet monthly.

The balance sheet has two parts and is called a "balance" sheet because both parts should add up to the same total. The first part lists all the organization's assets (everything the organization owns), the second part lists the organization's liabilities (everything it owes) and its net worth (organization equity). These terms are defined below.

Assets: The organization's assets might include cash on hand, accounts receivable and fixed assets (furniture)
Liabilities: The organization's liabilities may include accounts payable, grants to be returned, and bank loans
Organization equity: In a non-profit agency, the organization equity shows its financial net worth when its financial obligations are subtracted from its cash and non-cash assets

The treasurer presents the statement of receipts and disbursements and the balance sheet to other members of the agency. These statements should communicate accurately what has happened in the agency over the reporting period. The financial statements should be meaningful and informative so as to allow the executive director and the board to make effective decisions.

In summary, financial statements should:

be concise and easily comprehensible (one should not need a degree in accounting to read and understand financial statements)
include all the activities of the agency (although there may be separate funds for different projects, all funds are included in the financial statement)
have comparison figures (budget or previous year's figures)

Non-profit agencies usually have some special responsibilities with regard to record keeping and reporting because funds are received from a variety of sources. All of these sources expect that their money will be used properly, and require reports regarding the use of these funds. Although reporting requirements vary, maintaining an accurate record keeping system is an important part of the agency's obligation to these funders.

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The Audit

The audit is an examination of all the books and records of an agency to ensure that the financial statements are a fair representation of the facts. The audit is usually done annually and determines if the agency has followed generally accepted practices of reporting and recording. Many non-profit organizations are required to have an audit performed annually.

One of the major roles of the treasurer on the governing board is to coordinate and supervise the independent audit of the agency's accounts.

At times an agency may find a need to extend the scope of an auditor's role. The auditor is a valuable resource and may be requested to prepare supplementary reports on the agency's overall financial management. Recommendations may be made on such things as the agency's financial controls and procedures, methods of record keeping and their financial reports. Be certain to clearly document the board's expectations for the auditor.

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Finance Committee

Many organizations have a finance committee. The finance committee is a standing committee of the board that delegates many of the board's financial governance tasks. However, the ultimate responsibility for establishing the budget and monitoring the use of financial resources is that of the board.

Tasks a finance committee may be assigned include:

reviewing current operational financial policies and making recommendations for any changes or additions
reviewing the agency's budgeting process, bookkeeping and expenditure controls and making recommendations for improvements
preparing the annual budget and quarterly cash flow statements
coordinating and overseeing the annual audit
ensuring all year-end reports to funding authorities are prepared
preparing the plans for fund-raising
preparing the financial report for the annual general meeting

Accountability for the use of public funds, and for the management of the assets and resources of the agency, is an important part of the public trust placed on board members.

The following pages can be used as a review and assessment of an agency's strengths and weaknesses in financial management and the financial understanding of each board member.