Financial Management for NGOs

This brief introduction outlines how to take proper care of your funds. Good financial management involves the following four building blocks:

• Keeping records
• Internal control
• Budgeting
• Financial reporting

1. KEEPING RECORDS

The foundations of all accounting are basic records that describe your earnings and spending. This means the contracts and letters for money you receive and the receipts and the invoices for things that you buy.

These basic records prove that each and every transaction has taken place. They are the cornerstones of being accountable. You must make sure that all these records are carefully filed and kept safe.

You must also make sure that you write down the details of each transaction. Write them down in a 'cashbook' - which is a list of how much you spent, on what and when.

If you are keeping your basic records in good order and writing down the details of each transaction in a cashbook then you cannot go far wrong.

2. INTERNAL CONTROL

Make sure that your organisation has proper controls in place so that money cannot be misused.

Controls always have to be adapted to different organisations. However, some controls that are often used include:

• Keeping cash in a safe place (ideally in a bank account).
• Making sure that all expenditure is properly authorised.
• Following the budget.
• Monitoring how much money has been spent on what every month.
• Employing qualified finance staff.
• Having an audit every year.
• Carrying out a 'bank reconciliation' every month - which means checking that the amount of cash you have in the bank is the same as the amount that your cashbook tells you that you ought to have.

3. BUDGETING

For good financial management, you need to prepare accurate budgets, in order to know how much money you will need to carry out your work.

A budget is only useful if it is worked out by carefully forecasting how much you expect to spend on your activities.

The first step in preparing a good budget is to identify exactly what you hope to do and how you will do it. List your activities, then plan how much they will cost and how much income they will generate.

4. FINANCIAL REPORTING

The fourth building block is writing and reviewing financial reports. A financial report summarises your income and expenditure over a certain period of time.

Financial reports are created by adding together similar transactions. For instance, this might mean adding together all the money you spent on fuel, new tyres and vehicle insurance and calling them "Transport Costs".

Financial reports summarise the information held in the cashbook. This is normally done using a system of codes, to allocate transactions to different categories. These categories might often be defined by donors.