FINANCIAL MANAGEMENT TIPS: “AVOID KNEE JERK OR GUT-FEEL DECISIONS”
General
Financial Management (mgmt) includes financial accounting, cost accounting, budgeting, laying down depreciation policy, short-term investments, taxation, transaction recording and reporting and financial analysis. Critical areas, for non-profit organisations (NPOs), such as UV Welfare Maintenance Society (UVWMS), however are cash management and bookkeeping. Hence sound financial controls are needed. Mgmt must know how to generate financial statistics and analyse the same to understand the financial condition of the non-profit.
All NPO financial accounting has to follow: “management by exception”; fund based accounting system; and, cash basis except for non-cash items like depreciation, etc. The UV mgmt has to be guided by various regulatory controls and accounting standards applicable under various statutory provisions and legal frameworks for NPOs. At the same time, and in the absence of sponsorships, healthy financial practices must be adopted, especially since the main activity of UVWMS is to deliver services and build community supported by well-crafted missions, innovative programs, and motivated mgmt and volunteers. Some of the salient features of the “absolute essentials” for good financial mgmt of non-profits are given in the subsequent paragraphs.
Understanding of Financial Economics/Systems
Profitable use of knowledge of financial system should be made by the UV mgmt. This system comprises of domains, such as, for example: financial markets, both Money (Short-Term Instruments) & Capital (Long-Term Instruments); financial institutions, both banking and Non-banking; and, financial instruments/assets.
Mgmt of of Investments
Any purchase of financial instruments for returns will be fully justifiable if the mgmt carries out necessary due diligence for all financial aspects, such as, for example: risks; valuation; investment environment; rules and regulations; regulators; securities; intermediaries; underwriters; portfolio theory such as for institutional and managed portfolios; investment companies; evaluation of managed portfolios performance in case of GIC, LIC, Pension funds, Mutual Funds, etc; behavioural fin; alternative investments, etc.
Sinking Funds
Sinking or depreciation fund be constituted and invested on long term basis, along with the interest earned thereon, through modes permitted under the legal framework. The depreciation fund is only to be utilized in exceptional cases. It may be used for reconstruction of common buildings or for carrying out such structural additions or alterations to the buildings as in the opinion of the UVWMS’s architects would be necessary to strengthen them. Or, it may be used for carrying out such heavy repairs as may be certified by the architect as inescapable and essential, provided that such reconstruction/repairs do not fall within the ambit of any agreement with an external agency for maintenance of the UV residential complex.
Budgeting
The aim of any UV financial plan must be to finalise a master budget that reflects a surplus plan. For this, various functional area budgets would be required, especially those related to direct and indirect workers, operational expenses, administrative expenses, equipment utilisation, and capital expenditure (capex) if any. In addition, statement for reconciliation between budgeted surplus/standard surplus and actual surplus would have to be prepared so that variance analysis in respect of individual responsibility (cost) centre using control ratios can be done for financial performance evaluation purposes to complement mgmt’s analysis of financial statements.
Cost Accounting
For effective cost control, mgmt should rely on standard cost concepts, such as, for example: Costing Systems like Full Cost, Marginal Cost, and Differential Costing Analyses; direct costing; standard costing; and, classifications of costs
Cost Control. Costs can be controlled through practices such as profitability/responsibility accounting (Mgmt by Exception) and cost cutting, both, for direct and indirect costs.
Fund Raisings
Fund Raising may be necessary as part of a UV crusade for some serious sociological cause. The mgmt would have to think over carefully each ‘item’ in the situation, and create a human story with a strong appeal in it. And, it must be appreciated that different types of fund raising would require different types of systems, structures, relationships and communications.
Cash Planning
Short-term and long-term cash planning rests on well thought out working capital (WC) policy and mgmt, WC capital asset mix, analysis of change in WC account, WC sources of finance, operating cash cycle & cash conversion cycle. Arrangements for cash, cash flow analysis, and cash flow statement must be also made.
Shared Responsibility
Responsibility for financial mgmt is shared throughout the organisation. Therefore good information and frequent communication is a must. A well-tuned Management Information System (MIS), with appropriate authorities, should be good for financial mgmt of the organisation.
Reserves
Due to its non-profit nature, UVWMS must look for ways to build financial reserves in order to respond to contingencies and unexpected demands or opportunities.
Accountability
Transaction recording and reporting must follow accounting standards, and meet stakeholder expectations and information needs. Hence accountability and transparency must be enforced throughout the organisation.
Financial Integrity
Welfare, service and charity are the cornerstones of organisations such as UVWMS. Therefore, meaningful organisational missions, good values and effective leadership will ensure financial integrity of financial managers, whereas good practices and policies, job descriptions, and proper safety measures and internal controls will help to reinforce such integrity.
Professionalism
Due to the requirement of advanced accounting and financial mgmt systems such as fund based accounting, NPO require higher degree of professionalism. Hence having a well-trained, experienced and professional staff will stand the organisation in good stead. Training to develop financial literacy, to cover learning of special terminology and bookkeeping, and, upgrade of special financial accounting skills, will be of great value.
Credit and Collections
Due to ever persistent shortages of funds, grant of credits in transactions is to be consciously avoided. Even more so because collections deplete organisational resources.
Lease or Buy
The lease or buy decisions are another critical area for financial mgmt of NPOs. The various advantages and disadvantages of lease or buy decisions must be analysed with due care in every case of capex. Such decisions can impact the health of the NPO in the long run.
Audit and Assessments
Since financial analysis in case of UVWMS will be a complicated task, in order to check its financial health, it is important for it to ensure audit and assessments are carried out properly and regularly.
Software
Well-designed, economical and reliable software must be used for accounting, automation of payroll, etc. This will enable efficient and effective mgmt of UVWMS.
Objectivity
For the sake of objectivity, knee jerk or gut-feel decisions must be avoided. More so in the case of its most taxing, difficult financial analysis function. It is to be borne in mind that, due to its welfare and sociological engagements, unlike other entities, a NPO is naturally prone to irregularities in the conduct of its business. Consequently, it is ever hard-pressed to offer justifications for its decisions, or sustain a healthy financial mgmt system for itself. Therefore, objectivity in all decision-making is most crucial to it.
BELGAUM. As an outcome of my regular inquisitions during the last two years or so of my membership of this housing project, I have gained deep insights about the AWHO residential project offering, and all of those, I hope, will stand me, and other home allot-tees, in good stead. A sample guideline document crafted by me for management of Umed Vihar Residential Complex by the allot-tees can be found in the link page which may be accessed by clicking the link below.