Financial Governance: making sense of the dollars
Poor financial management has seen the downfall of many non-profit and commercial organisations over the years; the reasons are many and varied, ranging from outright fraud to basic incompetence. It is the responsibility of the Board to ensure that it has the capacity and capability to understand and monitor the organisation’s performance and thereby fulfil this most important aspect of corporate governance.
The keys to effective financial governance include:
- Creating a policy that guides the CEO in developing the business plan, including the budget and financial plan – this relates primarily to the operating revenue, costs of the business and surplus/profit expectations, as well as the cash flow management (including capital expenditure) of the organisation;
- Developing a delegation policy in relation to business expenditure; i.e. for operating expenditures, capital expenditure and staffing levels. A clear delegation policy will remove any doubts around who can spend how much on what:
- Creating a policy that establishes the basis for the organisation’s wellbeing – this relates to the management of the assets and liabilities of the business;
- Monitoring processes that provide the organisation with sufficient financial information to be satisfied that the finances are being appropriately managed towards the achievement of both the short and long term goals of the business. This includes establishing key performance indicators and benchmarks for performance evaluation and a framework that provides the board, management and staff with a reporting system in an accurate and timely manner; and
- Test the policies – are the intentions and direction of the Board being followed and adhered to in the day-to-day operations of the business? If the business is large enough (for example, with revenues greater than $10 million per annum) think about a small investment in an internal audit process to verify adherence to the policies.
Whilst there are many situations and practices that may cause a financial demise, the following conditions are likely to threaten financial viability:
- Unauthorised debt (for example, creditors, credit cards, banking facilities, financial and operating leases);
- Violation of generally accepted accounting practices and principles (such as inadequate accruals for employee entitlements, goods and services and debt recognition);
- Expenditure of funds greater than revenues received/generated;
- Misuse of reserves;
- Failure to collect debtors in a timely manner and incurring of bad debts through poor management systems;
- Unauthorised sale or purchase of assets (including property, plant & equipment);
- Failure to pay staff entitlements and taxes (superannuation, personal tax deductions);
- Unexplained variations between actual revenue/expenditure and the budgets; and
- Poor internal control systems and inappropriate or no delegations.
Good financial governance practices can mitigate many of the risks and adverse outcomes that can emanate from these conditions.
However, a key problem for many board members is that they simply do not have the knowledge or experience to manage this aspect of the business. Whilst a board member cannot totally abrogate their responsibility in this matter, ensuring the board has at least one experienced and knowledgeable person in the area of financial management will at least provide someone who should understand, in detail, the reports that are presented and be capable of asking probing questions in relation to the matters around financial governance.
Below are a few basic questions that can be asked by any board member, the answers to which should either provide confidence or raise alarm!
- Do all the assets listed on the balance sheet actually exist? When was the last time a physical audit was undertaken?
- Are the assets reasonably valued, especially the big ticket items such as land and buildings?
- Does the organisation own all the assets (i.e. no other entities involved)
- Are there any assets that the organisation owns, but are not listed on the balance sheet?
- Have all bad debts been identified and written off or provided for? Do the auditors verify major accounts and balances outstanding on an annual basis?
- What is the status of the debtor’s ledger in terms of collection days? (i.e. how long will it take to collect the outstanding amounts?)
- Have all the liabilities of the organisation been recognised and properly accounted for?
- Outstanding annual leave – what is the status of this in your organisation? Does any staff member have any more than 4 weeks leave outstanding? If so, why?
- Have the accruals and prepayments been appropriately recognised and accounted for? And
- What is the current cash position? Is the business solvent? Does the business pay its creditors on time?
- What would happen if the business lost its biggest customer/client/funding source? Does the business have a “Plan B”?
Remember, “Trust is an emotion, not a control system”; you don’t know what you don’t know, but that’s not an acceptable excuse for failure to manage the finances of the business.
A set of accounts is a snapshot of the organisation’s performance at a point in time. It can be easily manipulated by either intent or error and it is not necessarily a good predicator of future outcomes. Vigilance and attention to financial management will underpin good governance practices and it will probably keep you out of jail as well – it is that important.
For further information, go to www.governancetoday.com