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Understanding financial reports
We know you don’t want to read a long, technical article about accounting principles, balance sheet components and financial ratios… but we also know that as a senior manager or Board member of a not for profit organisation, you have a fiduciary duty to understand the organisation’s financial position and make decisions in the best interests of the organisation.
The Independent Commission Against Corruption’s strongly-worded recommendations to funding bodies following the 2018 Sharobeem fraud case will no doubt spark greater scrutiny of non-profits by funders as well as raise the level of sensitivity with donors.
Training program
Many years ago, Accounting For Good developed our Understanding Financial Reports training program to support NFP managers and Boards to, as the title suggests, understand their financial reports. And in every session we have run over the years, there has always been at least one person who says, “I am not a numbers person.”
We know from more than 25 years working in and with not for profit organisations, that many people responsible for the management and governance of not for profits are not ‘numbers people’ – their passion and expertise are in service delivery and engaging with the people, policy and practical issues at hand.
But equally, we know that those same people are competent managers of their personal finances and generally have a better understanding of accounting concepts than they give themselves credit for.
In our experience, it is the language that really puts non-finance people off financial reports. Like any specialisation, the accounting profession has a level of jargon that can seem impenetrable to the casual observer. So with COVID lurking and keeping a lot of us snugly in a smaller orbit than usual, we thought we’d bring the magic of Understanding Financial Reports to your desktop.
As we do in our live training sessions, we’re going to start this series by examining the context of financial governance.
Governance responsibilities
The Board or management committee of a not for profit organisation has three core responsibilities: to set direction, monitor performance and manage risk. Layered on that are your regulatory responsibilities.
Registered charities must abide by the ACNC’s governance standards and associations are governed by either your State legislation or the Corporations Act; NFP Law has a good resource on this.
The duties, whether a charity or an association, are fairly similar and broadly require you to act with reasonable care and diligence and in the best interests of the organisation, to avoid conflicts of interest, ensure the finances are managed responsibly and to ensure that you do not operate while insolvent.
How do you ensure the finances are managed responsibly, especially as a Board or Committee that might only meet monthly and rely on a set of papers to inform you?
Financial systems
You need to be confident that proper financial systems and controls are in place – accounting software is cheap and accessible these days, so the box of receipts just doesn’t cut it anymore. An appropriately skilled person needs to run the accounts, whether that is done by someone on staff or outsourced.
Controls are the processes and policies that ensure that there are clear rules and limits over what can be done, by whom, with your finances. This starts with delegated authorities and can run through to internal and external audit processes. These measures ensure the organisation’s accounts are accurate and mitigate against loss through error or fraud.
Detective controls detect discrepancies and variations from policy and procedure; examples might include a stocktake to confirm that what is in the warehouse matches the accounting records, or a bank reconciliation process checking that the accounting system balance is the same as the bank-issued statement.
Preventive controls are the processes that minimise the opportunity for errors or fraud, such as segregation of duties which ensure that no single person has end-to-end control of the whole finance process. This can be difficult to achieve in a small organisation but can be as simple as inserting a different person as an approver of invoices, implementing two-to-sign at the bank or making the audit trail transparent by providing the supporting documents to the bank signatories.
There are a few components that the Board can ensure are in place:
- Expect to be presented with an annual budget for your approval – this forms part of your ‘setting direction’ responsibility and is the mechanism for you to approve the income targets and expense limits associated with your strategic and operational plans (however formal or informal those plans might be).
- Require clear and accessible financial reports, against budget, on a regular and timely basis. The reports should be consistent in presentation and be not too much information so that they have you snoozing before you get past the third page, and not too little information so that they raise more questions than they answer. Ideally, they include some charts and some written analysis.
- Don’t stop at the Profit & Loss – make sure you get and understand your Balance Sheet, specifically that you can see the organisation is able to pay its debts as they fall due.
- Engage an auditor, read their report and accept their invitation to present the audit report if you get one.
Next in our series...
Tune in next month when we’ll look at cash vs accrual accounting and other exciting accounting basics that will help you better understand your financial reports.
Accounting For Good offers our Understanding Financial Reports training as custom training, delivered in the comfort of your boardroom or ours. Contact our team of dedicated professionals to find out how we can help you or learn out more about not for profit accounting.
Read more not for profit accounting articles.
