The basics of financial management

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Financial management is more than keeping accounting records. It is an essential part of organisational management and cannot be seen as a separate task to be left to finance staff or the honorary treasurer. Financial management involves planning, organising, controlling and monitoring financial resources in order to achieve organisational objectives.

You can only achieve effective financial management if you have a sound organisational plan. A plan in this context means having set objectives and having agreed, developed and evaluated the policies, strategies, tactics and actions to achieve these objectives.

Sound financial management will involve you in long-term strategic planning and short-term operations planning. This financial planning should become part of your organisation's ongoing planning process.

Benefits of good financial management

Good financial management will help your organisation to:

• make effective and efficient use of resources
• achieve objectives and fulfil commitments to stakeholders
• become more accountable to donors and other stakeholders
• gain the respect and confidence of funding agencies, partners and beneficiaries
• gain advantage in competition for increasingly scarce resources
• prepare for long-term financial sustainability.
  

What makes good financial management

There are four components of good financial management:

1. a clear finance strategy
2. a plan for generating income
3. a robust financial management system
4. a suitable internal environment.

Financial management systems

There is no one model of a financial management system that suits all organisations, but there are some basics that must be in place to achieve good practice in financial management.

It is helpful to identify certain principles when developing a financial management system. These will act as a guide to your
trustees and managers when making decisions.

Guiding principles for financial management systems

• Consistency: your financial policies and systems must remain consistent over time.
• Accountability: you must be able to explain and demonstrate to all stakeholders how you have used your resources and what you have achieved.
• Transparency: your organisation must be open about its work and its finances, making information available to all stakeholders.
• Integrity: individuals in your organisation must operate with honesty and propriety.
• Financial stewardship: your organisation must take good care of the financial resources it has been given and ensure that they are used for the purpose intended.
• Accounting standards: your organisation's system for keeping financial records and documentation must observe accepted external accounting standards.

Key questions to consider during financial planning

• Are we satisfied with our budgeting process and other financial planning?
• What objectives are our financial management systems designed to meet? Is the link clear in practice?
• What are our key principles for financial management?
• How do our staff respond to the system? Do people use it? Is it a 'live' tool?
• Does our financial management system enable effective decision making when allocating resources?

Source: Published with permission from Cass Centre for Charity Effectiveness.This material is taken from "Tools for Success: doing the right things and doing them right", published in October 2008. Download or buy your copy from Cass Centre for Charity Effectiveness.

Useful links

• Guidance CC8: internal financial controls for charities - Charity Commission.

Further information

• Tools for tomorrow: a practical guide to strategic planning for voluntary organisations - NCVO

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