Financial Management Handbook. Forum Syd Partners Financial Management Handbook

Transcription

1 Financial Management Handbook Forum Syd Partners Financial Management Handbook Revised December

2 Financial Management Handbook Financial Management Handbook Contents 1. INTRODUCTION TO FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT COMPONENTS PRINCIPLES OF FINANCIAL MANAGEMENT THE TOOLS OF FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT RESPONSIBILITY 10 5 INTERNAL CONTROLS CASH CONTROL PRINCIPLES BANK CONTROL PRINCIPLES BUDGETING AND ACCOUNTING CONTROLS PURCHASE AND AUTHORIZATION CONTROLS MANAGEMENT CONTROLS PHYSICAL CONTROLS PLANNING AND BUDGETING THE BUDGETING PROCESS GOOD PRACTICE IN BUDGETING GOOD PRACTICES IN BUDGETING BUDGET TARGET GROUPS SAMPLE BUDGET WORKSHEETS CASH-FLOW FORECASTING HOW TO PREPARE A CASH FLOW FORECAST 23 3 ACCOUNTING RECORDS IMPORTANCE OF RECORDS ACCOUNTING METHODS KEY RECORDS 30 4 FINANCIAL REPORTING BUDGET STATUS AND ADVANCE REQUEST ANNUAL ACCOUNTING STATEMENTS REPORTING TO DONORS REPORTING TO GOVERNMENT REPORTING TO BENEFICIARIES QUALITIES OF GOOD ACCOUNTING INFORMATION 46 6 FRAUD AND IRREGULARITIES STEPS TO MINIMIZE FRAUD HOW TO SURVIVE AND RESPOND 55 7 EXTERNAL AUDIT IMPORTANCE OF AUDITS INTERNAL AUDIT EXTERNAL AUDIT DONOR INITIATED AUDITS THE AUDIT REPORT 60 8 APPENDICES 65 APPENDIX 1 SAMPLE CASHBOOK FORMAT 65 APPENDIX 2 - SAMPLE ADVANCES SCHEDULE FORMAT 66 APPENDIX 3 SAMPLE BUDGET STATUS & ADVANCE REQUEST FORMAT 67 APPENDIX 4 SAMPLE STATEMENT OF RECEIPTS AND PAYMENTS FORMAT 68 APPENDIX 5 SAMPLE BANK RECONCILIATION STATEMENT FORMAT 69 APPENDIX 6 SAMPLE CASH COUNT CERTIFICATE FORMAT 70 APPENDIX 7 MONTH-END CHECKLIST 71 APPENDIX 8 SUPPORT DOCUMENTATION CHECKLIST 72 APPENDIX 9 FINANCIAL MANAGEMENT TOOLKIT

3 Preface Good financial management is instrumental in success of organizational development and is an integral part of program management. Financial management is a key way of achieving a more effective organization leading to improved program of activities. With strong financial management systems, the organization becomes more able to control its own affairs. Without it, the future is often uncertain: it may be impossible to predict when money will be short and, crucially, it may become impossible to fund programs. Chapter 1of this handbook provides an overview of financial management components, principles of financial management, tools of financial management and financial management responsibility. Chapter 2 covers basic principles in planning and budgeting, the first of the four specific tasks of financial management. It outlines the best practice in planning budgets, monitoring budgets, and forecasting cash flows. Chapter 3 looks at the primary records kept. The chapter outlines the importance of records, accounting methods and key records to be maintained. Chapter 4 covers the different types of financial reports needed for stakeholders. Chapter 5 considers financial controls and best practice in using them. Chapter 6 covers fraud and irregularities, associated risks and how these can be minimized. Chapter 7 outlines the internal and external audit processes, importance of audit and types of audit opinion. Finally the manual contains a list of sample formats under the appendices section. Acknowledgement In the development of this handbook we acknowledge reference from the Management of Non Governmental Organizations (MANGO) manual and the contribution of Forum Syd Africa Regional Office staff. Objective of the handbook This handbook describes best practice in the specific tasks of financial management for example, planning and budgeting and financial controls. It considers what leadership teams can do to guide their organization s long-term direction (an activity sometimes called governance ) and it describes other financial management aspects that can be built into an organization s structure. It is hoped that this handbook will be used by chairs and members of management committees, leaders, directors, managers, program staff, administrators and finance staff. 4 5

4 1. Introduction to Financial Management 1.1 Financial Management Components Financial management is an important part of programs management and must not be seen as a separate activity left to finance staff. Financial management entails planning, organising, controlling and monitoring the financial recources of an organisation to achieve objectives place to show how funds have been used. Accounting records also provide valuable information about how the organization is being managed and whether it is achieving its objectives Financial Reporting Provided the organization has set a budget and has kept and reconciled its accounting records in a clear and timely manner, it is then a very simple matter to produce financial reports which allow the managers to assess the progress of the organization. There is no model finance system which suits all organizations. But there are some basic components which must be in place to achieve good practice in financial management Planning and Budgeting Linked to the organization s strategic and operational plans, the budget is the cornerstone of any financial management system and plays an important role in monitoring the use of funds. Accounts and Record Keeping Accounting Records Planning and Budgeting Strong Financial Management Financial Controls Financial Reporting Every organization must keep an accurate record of financial transactions that take Internal Controls A system of controls, checks and balances collectively referred to as internal controls are put in place to safeguard an organization s assets and manage internal risk. Their purpose is to deter opportunistic theft or fraud and to detect errors and omissions in the accounting records. An effective internal control system also protects staff involved in financial tasks. 1.2 Principles of Financial Management It is useful to identify a series of good practice principles, which can be used as a standard in developing proper financial management systems. These principles provide a highlevel guide for trustees and senior managers to help them make sure that their organization is using funds effectively and that staff are working appropriately Consistency The financial policies and systems of an organization must be consistent over time. This promotes efficient operations and transparency, especially in financial reporting. This does not mean that systems may not be refined to cope with a changing organization. Inconsistent approaches to financial management could be a sign that the financial situation is being manipulated Accountability The organization must explain how it has used its resources and what it has achieved as a 6 7

5 result to all stakeholders, including beneficiaries. All stakeholders have the right to know how their funds and authority have been used. Organizations have an operational, moral and legal duty to explain their decisions and actions, and submit their financial reports to scrutiny Transparency The organization must be open about its work by making information about its activities and plans available to relevant stakeholders. This includes preparing accurate, complete and timely financial reports and making them accessible to stakeholders, including beneficiaries. If an organization is not transparent, then it may give the impression of having something to hide Viability To be financially viable, an organization s expenditure must be kept in balance with incoming funds, both at the operational and the strategic levels. Viability is a measure of the organization s financial continuity and security. The trustees and managers should prepare a financing strategy to show how they will meet all of its financial obligations and deliver its strategic plan Accounting Standards Accounting standards is a term used to refer to the standard framework of guidelines for financial accounting. These include conventions and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. The system for keeping financial records and documentation should be in line with the internationally accepted accounting standards and principles. 1.3 The Tools of Financial Management There are many tools, not necessarily financial, which managers can use to help achieve good practice in financial management and control. We can identify these tools under each of the four functions of financial management Planning Planning is basic to the management process and involves looking ahead to prepare for the future. In the course of putting a plan together managers will consider several possible alternatives and make a number of choices or decisions. Planning must always precede the doing. Tools: Strategic plan, business plan, activity plan, budgets, work plans, cash flow forecast, feasibility study etc Integrity Individuals in the organization must operate with honesty and propriety. For example, managers and Board members will lead by example in following policy and procedures and declare any personal interests that might conflict with their official duties. The integrity of financial records and reports is dependent on accuracy and completeness of financial records Organizing The resources of the organization staff and volunteers, vehicles, property, money have to be co ordinated to ensure implementation of the overall plan. It needs to be clear what activities and responsibilities are to be undertaken, when and by whom. Tools: Constitution, organization charts, flow diagrams, job descriptions, Chart of Accounts, Finance Manual, budgets etc Stewardship An organization must take good care of the financial resources it is entrusted with and make sure that they are used for the purpose intended this is known as financial stewardship. The governing body (e.g. the Board of Trustees) has overall responsibility for this. In practice, managers achieve good financial stewardship through careful strategic planning, assessing financial risks and setting up appropriate systems and controls Controlling A system of controls, checks and balances are essential to ensure proper application of procedures and resources during program implementation. Tools: Budgets, delegated authority, procurement procedure, reconciliation, internal and external audit, fixed assets register, vehicle policy, insurance...etc. 9

6 1.3.4 Monitoring This involves producing regular and timely information for managers and stakeholders for monitoring purposes. Monitoring involves comparing actual performance with plans to evaluate the effectiveness of plans, identify weaknesses early on and take corrective action if required. Tools: Evaluation reports, budget monitoring reports, cash flow reports, financial statements, project reports, donor reports, audit reports, evaluation reports etc. 1.4 Financial Management Responsibility It is important to understand organizations structure and legal status to appreciate who is responsible for what in financial management The Governing Body The governing body is legally responsible and accountable for governing and controlling the organization. This means that if anything goes wrong, then the law holds the members of the governing body responsible. The Governing body could have many different names depending on the organization Council, Board of Directors, Board of Trustees, Executive or Governing Board and several functions including: Responsibility for deciding on policy and strategy; Custodianship (or safeguarding) of the financial and other assets of the organization; Appointing and supporting the Chief Executive; and Representing interests of stakeholders. The Chairperson is usually the main point of contact for the Chief Executive Officer (CEO), and usually fulfils an important public relations role. The Treasurer oversees the finances of the organization. In a smaller organization the Treasurer may take on a more active role and act as bookkeeper, but where there are paid staff the Treasurer assumes more of a supervisory role. Even if they are not supervising the accounting process and preparing reports themselves, board members must still be sure that everything is in order. Board members are ultimately responsible for the financial affairs of the organisation and they cannot escape this duty except by resigning from the governing body Chief Executive Officer (CEO) As the governing body is made up of volunteers who meet only a few times a year, it delegates authority for day to day management to the CEO, appointed by the board to implement policy. The CEO then decides how to further delegate authority, to share out duties amongst the staff team. While it is acceptable for the governing body to delegate authority to staff members, it cannot delegate total responsibility since ultimate accountability rests with the trustees. Furthermore, authority without accountability is unhealthy the Board must set up monitoring mechanisms to make sure their instructions are being fulfilled Board Members Board members are volunteers (i.e. not paid a salary) and are known variously as trustees, committee members, directors or council members. If board members were to benefit financially from their membership of the board, there could be a conflict of interest. Honorary Officer are those who are elected or appointed to specific positions on the board such as Chair, Treasurer and Secretary. They oversee the execution of board decisions and often sign legal undertakings

7 The figure below demonstrates how the authority for day to day financial management tasks is delegated down through the line management structure. At the same time, the accountability process comes back up through the structure as people report back on progress. 2. Planning and Budgeting Planning and budgeting involves all the procedures necessary to ensure that an organization s activities are carried out effectively and in particular the financial information needed is provided in an efficient and timely manner. Planning is the process of determining how an organization will afford to achieve its strategic goals and D e l e g a t e d A u t h o r i t y Governing Body Chief Executive Officer Management Support Staff A c c o u n t a b i l i t y objectives. Budgeting is the process of planning income and expenditure for a specific time or project. It is an essential component of the planning process. Budgets are used to: Plan and implement our objectives Calculate estimated income and expenditure Maximize donor funding Co-ordinate activities Communicate plans Set clear targets Quantify the resources and people needed to achieve them Monitor, review and evaluate actual performance Be accountable to partners, beneficiaries and donors 2.1 The Budgeting Process The process should be a well-coordinated and consultative exercise. The budget process involves asking a number of questions: Objectivess Activites Ressources Cost Funding What are the organizational objectives? What activities are to be carried out in achieving these objectives? What resources will be required in carrying out these activities? What is the estimated cost of the resources? What will be the financing sources? Is the expected outcome realistic? Outcome 12 13

8 Once the budget has been agreed and the activity implemented, the process is completed by comparing the plan (budget) with the eventual outcome ( actual ), to see if there is anything we have learnt or could do differently next time. Summary of key budgeting steps 1. Identify project or organizational objectives Involve a range of staff and stakeholders in this. 2. Decide on limitations Identify any limits to resources and funds available at the start. 3. Gather data For example: Previous year s budget and latest information on actual income and expenditure Estimates of running costs, income and grants External factors influencing income and expenditure (such as exchange rates, predicted inflation) 4. Decide how much will be received (income) Be as realistic as possible. Show lower estimates of donations and charges. Only include guaranteed grant income. 5. Decide how much will be spent (expenditure) Separate items into types. This may need to follow your own organization s and/or your donor s standard list of budget headings. 6. Construct the budget List the budget item by item, making sure that income is at least as much as expenditure. Provide a note of calculations to justify them. 7. Obtain approval Obtain approval from your own organization s trustees and any donors involved. 2.2 Good Practice in Budgeting Clarity Since many different people will need to use the budget for different purposes, they should be able to understand it (and adapt it, when necessary) without any additional explanation beyond what is written down. Clarity and accuracy is key so it is important to keep notes on budgeting assumptions and how calculations have been made Timetable There are several stages involved in constructing a budget before it can be submitted for approval to the governing body, so it is a good idea to prepare a budgeting timetable and commence the process early. This could be up to six months before the start of the financial year, depending on the size of the organization and what approach has been adopted Budget Headings When setting a budget for the first time or when reviewing a budget, it is important to pay attention to the Chart of Accounts. This is because the budget line items also appear in the books of account and on management reports. If the budget items and accounting records are not consistent then it will be very difficult to produce monitoring reports once the project implementation stage is reached Estimating Costs It is important to be able to justify calculations when estimating costs. Even if you use the incremental method of budgeting, do not be tempted to simply take previous year s budget and add a percentage amount on top for inflation. While last year s budget could be very helpful as a starting point, it could also be very misleading and contain historical inaccuracies. One of the best approaches is to make a list of all the inputs required and specify the number and unit cost of each item. From this detailed working sheet it is a simple matter to produce a summarized budget for each line item and is very easy to update if units or costs change

9 2.2.5 Contingencies Provision may be made to cater for contingency in the budget and this may be a percentage of the total budgeted costs. Donors have different approaches and guidelines on calculation/provision of contingency Forgotten Costs There is a tendency to under estimate the true costs of running a project for fear of not getting the project funded. Here are some of the most often overlooked costs: Staff related costs (e.g. recruitment costs, training, benefits and statutory payments) Start-up costs (e.g. publicity, legal costs) Overhead or core costs (e.g. insurance, utilities) Vehicle running costs Equipment maintenance and repairs (e.g. for photocopiers and computers) Governance costs (e.g. board meetings, AGM) Audit fees Things to keep in mind Involvement of field staff, community representatives and all the stakeholders in the preparation of the budget. The administrative costs verses total program costs. For instance, the administrative costs may be a percentage of the total program costs or may be based on the actual costs to be incurred in support of the program activities Budget and price increases and provision for unforeseen or abnormal expenditure. Budget should be prepared in a draft form, the draft budget should be placed before the decision making body, where the feasibility of various individual budgets is discussed upon and a decision is made. On the basis of approval, the final budget should be prepared. In case the donors/funding partners are not able to meet the total requirement, rework the budget and you may drop certain activities which may not be a priority. 2.3 Good practices in budgeting Always start with the objectives for the organization/activity and involve other people. Ask the person responsible for each activity to prepare a budget. Use finance staff to provide technical advice, but not to decide priorities (unless it is their own budget). Be as realistic as possible. Add notes to the budget to show how calculations were made. Show whether income is guaranteed or not yet confirmed. Allow plenty of time and get approval from the management committee and/or donors before the start of the period/year. Show the agreed budget (and any alterations) to group members or staff. Tell them what they have to do to keep within the budget. If external funding is required, submit the budget (or part of it) to donors. Provide detailed budget-monitoring reports for those with day-to-day management responsibility, and a summarized report for the management committee. Monitor the budget against actual income and expenditure regularly. Take any necessary action. The management committee, leader, and managers should review these reports regularly. Add notes to budget-monitoring reports, to explain major differences between the budget and actual income and expenditure. Keep financiers informed of any changes to the budget (for example, if expenditure is more than the budget for one item and under budget in another). 2.4 Budget Target Groups Budgets are used by different people for different purposes. The Board of Trustees needs the organization s overall budget because it has to formally approve it and monitor its progress. Chief Executives need budgets to keep an eye on progress of the whole organization and the funding situation. Project managers need budgets to oversee the implementation of their project activities

10 Fundraisers need budgets to accompany funding applications. Finance staffs need budgets to make sure there are enough funds in the bank to cover anticipated expenditure. Donors need budgets so they can see how an organization intends to spend its grants. Community partners need budgets so they can see how an organization plans to spend and raise funds for their community projects. Information can be disseminated and shared with the community partners, for example through notice boards. 2.5 Sample Budget Worksheets Illustration 1 The table below shows a typical layout for an expenditure budget worksheet. The extract describes the inputs needed for a 4 day workshop for 20 participants with 2 tutors. A B C D E F G H I [D x E x F] Ref. Description Unit type No. Quantity Unit Cost Total cost Notes Account Unit $ $ Code 1 Workshop costs 1.1 Room hire for Days workshop 1.2 Tutors fees Days Tutors Nights accommodation 1.4 Lunch & Delegate refreshments 1.5 Course Delegate handbooks 1.6 Folders for Trainee papers Other typical columns (not shown in the example above) include Notes and Accounts Codes, as described in detail below. A Ref. Line reference useful if you are discussing the budget and need to draw attention to a particular line in the budget worksheet. An activity based budget is usually separated into sections, each with a sub total of costs. Each block will have a unique number, as in the above example where all workshop related costs are listed under section 1. B Description A short description of each line in the budget. Try to include different inputs on a line of their own rather than lump similar costs all together. C Unit type This is the basis for the costing and calculations. The unit type will vary according to the budget item. For example, in line 1.4 of the table above, the budget for lunches is being costed on a per delegate basis. See below for some further examples of unit types to use for different budget items D No. units This specifies the number of units required for the project. For example, in the budget above on line 1.4, we need lunches for 22 delegates (20 trainees plus 2 facilitators). E Quantity This is useful where multiple items are required. For example, in line 1.4 in the table above, we need to provide lunches for 22 delegates on 4 days as it is a 4 day course. In line 1.3, we need to provide accommodation for 2 tutors. Whereas in line 1.1 we only need to hire one room. F Unit cost That is, what does each unit cost as defined in column C? So, in line 1.4 we see that it costs $5 for lunch and refreshments for each delegate. G Total cost This is calculated by multiplying no. units x quantity x unit cost. So, the cost of lunch and refreshments for 22 delegates on each of 4 days at $5 per delegate costs $440 [22 x 4 x 5] H Notes A notes or comments column is useful to clarify what the item is for and how quantities have been arrived at. I Accounts Code The code used in the organization s accounting records (i.e. as listed in the Chart of Accounts) J Donor code It may be useful to add another column which details the donor code or line item reference as this makes it easy to transfer the budget figures into the donor budget and reporting formats. Sub total 2,

11 Unit Types Deciding on the unit type requires some careful thought as it is not always so obvious and it does depend on how the items are usually sold or priced. Here is a checklist to help you choose a unit type: Typical Budget Items: Personnel Costs Salaries, benefits & taxes Staff recruitment Staff development Subsistence allowances (e.g. per diem) Volunteers expenses Transport costs Fuel & lubricants Vehicle insurance Vehicle maintenance Air fares Bus/taxi fares Distribution costs Programme administration Office rent, electricity and water Office insurance Telephone & fax Office stationery 20 Examples of Unit Type: Month Advert entry Days, person Days, person, trip Session, person, trip Kilometre, month Month or lump sum per quotation Kilometre, month Trip/journey Trip, month Kilometre, trip, month Month Month or lump sum per quotation Month Month (or specify items, e.g. paper by the box, pens by the piece ) Month or lump sum per quotation Month Month Lump sum per quotation subscription Repairs & renewals Bank charges Audit fees Project Costs Room hire Days, month Publicity costs Advert entry, lump sum per quotation Publications/reference books Month or lump sum per quotation Training materials Trainee, or specify per item Professional fees (e.g. facilitator, consultant) Days Equipment (e.g. vehicle, computer, desk etc.) Piece, according to charging basis or lump sum per quotation Accommodation Night Food Person, meal Illustration 2 The table below illustrates an income and expenditure budget. East Africa Forum (EAF) Budget for the year 2010 Budget Item Notes Amount in US$ Income (a) Donor 1 200,000 Donor 2 600,000 Donor 3 2,000,000 Payments/expenditure (b) 2,800,000 Purchase of supplies 325,000 Salaries 500,000 Rent 400,000 Vehicle 100,000 Equipment 1,200,000 Utilities 75,000 Insurance 150,000 Travel 50,000 i) Budget item 21 2,800,000 The budget item is the broad classification of expected receipts and payments to be made during the financial year. Ideally the expected receipts should be equivalent to the expected cash outflows in form of payments. ii) Notes It is a god practice to explain in details each of the budgetary items (receipts and payments) For example; (a) During the financial year 2010, East Africa Forum is expected to draw its income from donor 1, donor 2 donors 3. It is important to include other forms of incomes under this header. (b) East Africa Forum has eight expenditure categories as listed in the budget. The anticipated total payments amount to US$ 2,800,000 million.

12 iii) Amount It is important to always indicate the currency of budgeting. If donor(s) regulations require budgeting in different currency other than the reporting currency, it is important to clearly disclose the exchange rate used on the face of the budget. iv) Reporting format It is a good practice to always ensure reporting is aligned as much as possible to the budgeting items/classification. 2.6 Cash-flow Forecasting The cash flow forecast (or cash budget) is based on the income & expenditure and capital budgets for the organization. It is used by managers to monitor the availability of cash. Whereas the income and expenditure budget shows whether the organization is covering its costs over the whole year, the cash flow forecast shows whether it has sufficient cash in the bank to meet all of its payments needs as they arise The cash flow forecast attempts to predict the flow of cash in and out of the organization throughout the year by breaking down the budget into smaller time periods, usually one month. This then helps to identify likely cash shortages and allows avoiding action to be taken such as: requesting donor grants early; delaying payment of certain invoices; delaying some activities; or negotiating a temporary overdraft facility 2.7 How to Prepare a Cash flow Forecast Cash flow forecast will show: When the money will be received and paid Whether there will be a positive or negative bank/cash balance over each month of the period If you need to plan to cover a shortfall, or invest a surplus To compile a cash flow forecast you need to: Use the organization s budget Decide when each budget item will be received or paid. Some may be received in a single amount (for example a grant), others may be paid equally each month (for example salaries) Write down each item, and enter each item when you expect it will be received or paid, regardless of when it is due Include the expected bank and cash balance at the beginning of the period as your starting point Calculate the amount for each month by taking: i) The opening balance for the month ii) Plus the money estimated to come in during the month iii) Less the money estimated to go out during the month iv) This equals the balance left at the end of the month (and the opening balance for the next month) Improve your cash flow by considering whether any money coming in can be received earlier, or any money going out can be paid later Update the forecast as new information becomes available Illustration 3 Using illustration 2 under the budget section, suppose EAF is to prepare 6 months cash forecast on the basis of the following notes:- a) The funding agreements between East Africa Forum and donor 1 shall provide full funding in 2 equal installments in January and July b) Similarly, the funding agreements between East Africa Forum and donor 2 shall provide full funding in 2 equal installments in January and July c) There is an anticipated delay in fulfilling funding agreement conditions with donor 3. The funding budgeted is expected to be received in two equal instilments in the month of May and October

13 d) EAF intends to spend US$ 50,000 per month in the first 6 months of the year on salaries. The Board of EAF has passed a resolution to restructure current staffing levels. This is expected to reduce the current salaries costs to US $ 30,000 per month. However US$ 20,000 is planned to be spent in July 2010 in the restructuring process. e) EAF current pays US$ 20,000 per month on rent. The current 2 years lease expires on June 2010 and EAF is planning to purchase office block in July 2010 for an estimated cost of US$ 280,000. f) EAF currently operates two vehicles that were purchased 5 years ago. The estimated running cost is US$ 15,000 per month. The management is seeking external funding to finance purchase of new vehicles. g) EAF is plans to spend US$ 5,000 per month in nth next 6 months on utilities. h) According to the procurement plan, EAF plans to purchase supplies worth US$ 50,500 in January 2010, US$ 150,000 in July 2010 and the balance of US$ 124,500 October i) Equipment shall be purchased in 2 equal lots in June and October j) Insurance is paid once annually in December. The estimated insurance for the 2011 amounting to US$ 200,000 is to be paid in December k) Estimated cost of travel per month is US$12,500 per quarter The 6 months cash forecast for the period January to June 2010 would be as follows:- East Africa Forum Cash Forecast for the 6 months January - June 2010 PERIOD Notes JAN FEB MAR APR MAY JUN TOTAL Money coming in Donor 1 (a) 100, ,000 Donor 2 (b) 300, ,000 Donor 3 ( c) 1,000,000 1,000,000 Total money coming in [B] 400, ,000, ,400,000 Money going out Salaries (d) 50,000 50,000 50,000 50,000 50,000 50, ,000 Rent (e) 20,000 20,000 20,000 20,000 20,000 20, ,000 Vehicle running costs (f) 15,000 15,000 15,000 15,000 15,000 15,000 90,000 Utilities (g) 5,000 5,000 5,000 5,000 5,000 5,000 30,000 Purchase of supplies (h) 50,500 50,500 Equipment (i) 600, ,000 Insurance (j) - Travel (k) 12,500 12,500 Total money going out [C] 153,000 90,000 90, ,500 90, ,000 1,190,500 Summary Opening balance [A] 247, ,000 67,000 (35,500) 874,500 Plus total money coming in [B] 400,000 1,000,000 Less total money going out [C] 153,000 90,000 90, ,500 90, ,000 Expected closing balance [A+B- C] 247, ,000 67,000 (35,500) 874, ,

14 Specific reference to Forum Syd General Conditions Budget Approval (GC 3) The agreed project budget is a part of the agreement between Forum Syd and the Swedish NGO, and ought to also be a part of the agreement between the Swedish NGO and its local partner Forum Syd General Conditions require that if there is a major divergence from planned activities, then the organization shall consult Forum Syd. Any changes in a budget item greater than 10%, and significant changes in project direction, length or financing, shall be discussed in advance with and have the written approval of Forum Syd. A self-funding component shall be paid by the Swedish organization and shall be at least 10% of the total budget of a project. It shall consist of monetary funds raised in Sweden. An organization s own or raised material goods, or the value of its own work may not be included as part of a self-funding component. Neither shall grants from abroad nor funds from other public grants be part of any self-funding component. 3 Accounting Records Good financial records are the basis for sound financial management of any organization. 3.1 Importance of Records Information All organizations need to keep records of their financial transactions so that they can access information about their financial position, including: A summary of income and expenses and how they are allocated under various categories. The outcome of all operations surplus or deficit, net income or net expenditure. Assets and Liabilities or what the organization owns and owes to others Credibility Donor funded organizations especially need to be seen to be scrupulous in their handling of money keeping accurate financial records promotes integrity, accountability and transparency and avoids suspicion of dishonesty Legal Requirement There is often a statutory obligation to keep and publish accounts and donor agencies almost always require audited accounts as a condition of grant aid Future Planning Although financial accounting information is historical (i.e. happened in the past), it will help managers to plan for the future and understand more about the operations of the organization. With information spanning two or three years, it is possible to detect trends

15 3.2 Accounting Methods Keeping accounts simply means devising appropriate methods for storing financial information so that the organization can show how it has spent its money and where the funds came from. Accounting records can be kept in a manual format i.e. hardback books of account or in a computerized format in one of many accounts packages available. There are two main methods for keeping accounts: Cash accounting Accruals accounting The two methods differ in a number of ways but the crucial difference is in how they deal with the timing of the two types of financial transaction: Cash transactions which have no time delay since the trading and exchange of monies takes place simultaneously. Credit transactions which involve a time lag between the contract and payment of money for the goods or services. Significantly, this produces different financial information so we need to know the basis of accounting to better understand of financial reports. When summarized, the records produce a Receipts and Payments Account for a given period. This simply shows the movement of cash in and out of the organization and the cash balances at any given time Accruals Accounting This involves double entry bookkeeping which refers to the dual aspects of recording financial transactions to recognize that there are always two parties involved: the giver and the receiver. The dual aspects are referred to as debits and credits. This system is more advanced and requires accountancy skills to maintain. Expenses are recorded in a General Ledger as they are incurred, rather than when the bill is actually paid; and when income is earned rather than when received. By recognizing financial obligations when they occur, not when they are paid or received, this overcomes the problem of time lags, giving a truer picture of the financial position. The system can deal with all types of transactions and adjustments. The system automatically builds in up-to-date information on assets and liabilities Cash Accounting This is the simplest way to keep accounting records and does not require advanced book keeping skills to maintain. The main features are: Payment transactions are recorded in a Bank (or Cash) Book as and when they are made and incoming transactions as and when received. The system takes no account of time lags and any bills which might be outstanding. The system does not automatically maintain a record of any money owed (liabilities) or to (assets) of the organization The system cannot record non -cash transactions such as a donation in kind or depreciation. These records provide an Income and Expenditure Account summarising all income and expenditure committed during a given period; and a Balance Sheet which demonstrates, amongst other things, money owed to and by the organisation on the last day of the period. 3.3 Key Records Examples of key records include the following Cash/Bank book Vouchers (Receipts, Payments and Journal) Imprest/ Advances Register Bank Statement/Bank Reconciliation 28 29

16 3.3.1 The Cash Book This is the analysis book used to keep track of the monetary transactions, which take place in an organization. In this book the organization s inflows (or deposits) and cash outflows (or withdrawals) are recorded. A cashbook is used for recording, classifying and summarizing an organization s cash transactions in such a manner that would enable anyone interested in the information contained therein to make an informed decision. When the cashbook is well kept, then as one looks at it one should be able to tell the amount of money an organization had (if any) at the beginning of a given period, how much money has come in (deposits) or how much has been paid out (or withdrawn) and the remaining or available balance as at a given period of time. Sample cashbook format is attached in Appendix Vouchers A voucher is a documentary evidence to support transactions. There are three types of vouchers. Payment Voucher used to record payments/expenses Receipt Voucher used for recording receipts whether by cash or cheque Journal Voucher used to record transactions other than those involving cash. Travel imprest or advance is an amount requested by and availed to an individual to be used for an authorized and scheduled field trip. The cash for the scheduled trip is availed using a Travel imprest or advance request form. This is a onetime imprest or advance and must be requested for every time a field trip is scheduled. The imprest or advance must be accounted, using a Travel expenses voucher which should be filled, signed, submitted and approved as soon as the individual returns from the field trip and must also surrender the cash balance if any. Refer to Appendix 2 - for a sample advances schedule format that should be prepared on periodic basis as a tool for monitoring outstanding advances Bank Statement A bank statement is a detailed record of one s financial transactions maintained by the bank, available to the customer on request. Besides the customer s deposits and withdrawals, the bank statement contains a record of such items as: Charges made by the bank for keeping the account Interest on loans and overdrafts Standing order payments made by the bank on the customer s behalf, as per the customer s written instructions Direct collections made by the bank on behalf of the customer Unpaid cheque for whatever reason Imprest/Advances Register This is a record that shows sum advanced, repaid, accounted for or still outstanding. Office imprest is a fixed amount of cash available in an office designated to be used for incidental and miscellaneous expenses, such as office milk, coffee, tea, nuts, bolts, plugs, casual labor wages, some stationery and the like. Cash is advanced from the office imprest by first using an approved requisition form. The various expenses incurred by using office imprest are entered and coded on a petty cash expenses voucher. These expenses get to be entered in the cash book when replenishing the office imprest Bank Reconciliation Statement The bank reconciliation is a record agreeing differences between the bank statement and the cash book. Refer to sample bank reconciliation statement format is attached in Appendix 5. It serves the following purpose; To check the accuracy of the cashbook and the bank statement before preparation of financial statements and reports. It is a tool of internal control for bank transactions, which allows the account holder to investigate and settle any differences arising between the account holder s cashbook and the bank statement. Ensures that undue delays are not occurring between cheque disbursements, deposits and 30 31

17 their clearance by the bank. To ascertain the correct balance of cash to be reported in the financial report. To check for any errors committed in the recording of banking transactions, either by the account holder or the bank. To update the account holder s cash records as regards payments made and items received by the bank, which appear only in the bank statement but not in the account holder s records. Illustration 4 - The Cash Book On 1 January 2010, East Africa Forum had US$ 200 cash in hand and US$ 200,000 in the bank. During the month the following transaction took place. Advance to Mike $500 Petty cash $500 Advance to Mary $500 Petty cash $500 e) Retirement/Liquidation of travel advance US$ 500 on 25 Jan 2010 i) James Expense US$ 500 in full Dr Cr Expense $500 Advance $500 a) Receipt of cash from donor into the bank US$ 100,000 on 5 Jan 2010 Dr Cr Bank $100,000 Income $100,000 b) Withdrawal from Bank to Petty cash US$ 2,000 on 10 Jan 2010 Dr Cr Petty cash $2,000 Bank $2,000 c) Payment of expense from Bank Salaries paid US$ 20,000 on 15 Jan 2010, Cheque 001 Dr Cr Expense $20,000 Bank $20,000 d) Payment of advances from Petty cash US$ 500 each to James, Mike and Mary on 20 Jan 2010 Dr Cr Advance to James $500 Petty cash $500 ii) Mike - Expense US$ 450, refund into petty cash US$ 50 Dr Cr Expense $450 Petty cash $50 Advance $500 iii) Mary - Expense US$ 600, reimbursed over expenditure from petty cash Dr Cr Expense $600 Petty cash $100 Advance $

18 The transactions will appear in the cashbook as follows: - East Africa Forum Cashbook for the Month of January 2010 EXPENSES Advance Voucher No Description BANK PETTY CASH Cheque No. Date DR (IN) CR (OUT) BAL DR (IN) CR (OUT) BAL INCOME Salaries Travel 1-Jan-10 PV001 Opening balance 200, Jan-10 RV001 Receipt of funds from donor 100, , , Jan-10 PV002 Petty cash replenishment 2, ,000 2,000 2, Jan PV003 Salaries for the month of Jan , ,000 2,200 50, Jan-10 PV004 Travel advance to James 248, , Jan-10 PV005 Travel advance to Mike 248, , Jan-10 PV006 Travel advance to Mary 248, Jan-10 JV 001 Liquidation expense PV004 - James 248, (500) 25-Jan-10 RV002 Liquidation expense PV005 -Mike 248, (500) 25-Jan-10 PV009 Liquidation expense - PV006- Mary 248, (500) TOTAL 100,000 52,000 2,050 1, ,000 50,000 1,550 - Notes Date This should be the date the payment is made. It is important to maintain a consistent date format. Cheque Number This should be the reference of the cheque number used to make the payment. Cancelled cheques should be listed and marked as cancelled. Voucher Number This is the reference of the voucher number used to support the payment. As a good practice vouchers should be pre-numbered and serialized. Any cancelled vouchers should be clearly marked cancelled and maintained in the vouchers file. Description This is the description of the payments. The description should be concise, sufficient and self explanatory. Bank The bank should have three sub-columns. The debit column showing funds coming in, the credit column showing funds paid out and the running balance column which shows the bank position at any given date. The bank column should be the mirror image reflecting what happens in the bank. Petty Cash The petty cash column should have three sub-columns. The debit column showing funds coming in, the credit column showing funds paid out and the running balance column which shows the petty cash balance at any given date. The petty cash balance at any given time should be equivalent to the actual petty cash balance at hand (in the cashbox). Income Every receipt of cash from an external source posted in the bank (debit/incoming) should be reflected as income. Non cash contribution (in kind contributions) should not be posted in the cashbook. Expenses Every expense paid out from the bank or petty cash should be allocated under the respective expenditure vote head. In the above illustration, the expenses incurred (travel and salaries) are posted in the respective columns. At the end of the month (reporting period), the 34 35

19 total summary of expenses posted is summarized under the row indicated Total. In this illustration, the total expenses under salaries are US$ 50,000 while the travel related expenses for the month is US$ 1,550. Advances This column is a summary allocation of advances issued and the respective retirement/ liquidations. In event that there are any outstanding advances, a summary of such advances should be prepared. 4 Financial Reporting Financial reports are needed primarily by those responsible for managing the organization and by current and potential donor agencies; but those responsible for financial management of an organization also need to give an account of their stewardship to a wide range of stakeholders. The table below summarizes the main recipients of reports and why they need this information. Specific reference on Forum Syd General Conditions Requisition and payment of funds (GC 6) The Forum Syd GC require that approved grants are paid out in advance by Forum Syd in accordance with original requisition orders on condition that prescribed reporting of any previous grant/part payment has been received. Each order for funds shall be accompanied by a forecast of financial disposal of the funds during the period covered by the submitted order. Financial accounting (GC 9) For grants transferred to local cooperating organizations, Swedish NGOs shall ensure that the recipient organization in project country holds proper and complete records and that the organization shall use and report on the Swedish grant in accordance with agreed budget and activity plans. Recipient organizations in project countries shall follow general accepted national accounting and taxation regulations. It shall be possible to deduce reported costs from the book keeping. Complete supporting documents shall exist verifying costs in a project. Stakeholder Project staff Managers Finance staff Board of Trustees Donors Government Project beneficiaries The general public Why do they need it? To know how much money and resources are available for their projects and what has been spent so far. To keep an eye on how project funds are being used, especially compared to the original plans. To help plan for the future. To make sure that there is enough money in the bank to buy the things the organization needs to run its programmes. To keep an eye on how resources are being used to achieve the organization s objectives. To make sure that their grants are being used as agreed and that the proj ect s objectives are being fulfilled. To consider whether to support an organization in the future. To make sure that the organization pays any taxes due and that it does not abuse it status as a not for profit organization. To know what it costs to provide the services they are benefiting from and to decide if this is good value for their community. To know what the organization raises and spends during the year and what the money is used for. 4.1 Budget Status and Advance Request On periodic basis (monthly or quarterly) depending on the reporting requirements, a report that combines the budget, expenses in the cashbook, cash flow statement and a reconciliation of cash balance at hand may be required. This report is divided into the following main sections:

20 I. Budget section a) Account code - this is a listing of budget line items in line with the organizational chart of accounts. Some organizations may not have a comprehensive chart of accounts; in this case the existing cost classification can be applied. b) Budget line items - this is the description of the account code in (a) above. c) Approved budget - this is the consolidated approved budget for the year. II. Expenses section d) Previous cumulative expenses - these are the sum total of expenses for the previous periods excluding those for the period being reported. e) Current expenses - these are expenses for the period being reported as reflected in the cashbook for the current reporting period. f) Total spent to date - this is the sum total of previous cumulative expenses plus current expenses i.e. column (d) plus column (e) g) Budget balance - this is the difference between approved budget and total spent to date i.e. column (c) and (f). III. Cash projection section This is the projected cash flow to meet the planned expenditure for the subsequent periods. This can be monthly, quarterly or any other period as may be agreed. It is a good practice to limit cash flow projection to a period of 3-6 months as it may be difficult to accurately project cash flow requirements beyond 6 months. IV. Fund balance reconciliation section This is a summary reconciliation of total receipts net of total payments, projected cash requirements, cash at hand and the expected additional cash requisition. Budget Status & Advance Request Report I II III (a) (b) (c) (d) (e) (f) (g) PROJECTIONS (h) BUDGET BALANCE TOTAL SPENT TO-DATE ACTUAL CURRENT MONTH CUMULATIVE ACTUAL PREVIOUS MONTHS APPROVED BUDGET DESCRIPTION BUDGET LINE ITEMS A/C CODE FEB MAR APR TOTAL IV FUND BALANCE RECONCILIATION US $ Advance 1 Advance 2 Total Receipts to date (i) Total spend to date = (f) Fund Balance (j) = (i)- (f) Projected cash requirement = (h) Cash request (l) = (h) (j) 38 39

21 Illustration 5- Budget status & cash request This illustration consolidates the information in illustrations 1 to 4 in the previous sections. East Africa Forum Budget Status and Cash Advance Request for the Month of January 2010 I II III (a) (b) (c) (d) (e) (f) (g) PROJECTIONS (h) A/C CODE DESCRIPTION BUDGET LINE ITEMS APPROVED BUDGET CUMULATIVE ACTUAL PREVIOUS MONTHS ACTUAL CURRENT MONTH TOTAL SPENT TO- DATE BUDGET BALANCE Purchase of supplies 325, ,000 Feb 2010 Mar 2010 April 2010 TOTAL Salaries 500, ,000 50, ,000 50,000 50,000 50, ,000 Rent 400, ,000 20,000 20,000 20,000 60,000 Vehicle 100, ,000 5,000 5,000 5,000 15,000 Equipment 1,200, ,200,000 Utilities 75, ,000 Insurance 150, ,000 Travel 50, ,550 1,550 48,450 12,500 12,500 Total 2,800, ,550 51,550 2,748,450 75,000 75,000 87, ,500 IV FUND BALANCE RECONCILIATION Notes US $ Funds Received From the cashbook 100,000 Total Receipts to date (i) 100,000 Total spend to date = (f) 51,550 Fund Balance (j) = (i)- (f) 48,450 Projected cash requirement = (h) 237,500 Cash request for the next 3 months (l) = (h) (j) 189,

22 Notes The budget items and the amounts are posted as they appear in the annual budget US$ 2,800,000 The cumulative actual previous periods is zero as this is the first reporting period The actual current month is the summary total for each of the expense category as reported in the cashbook in this case US$ 51,550 The total spent to date is the sum for the cumulative actual periods plus actual current month i.e ,550 = US$ 51,550 The budget balance approved budget less total spent to date i.e. US$ (2,800,000-51,550) = 2,748,450 The projection for the next 3 months (Feb, March and April 2010) = US$ 237,500. This is in line with the projection in the cash flow forecast. It does not show whether a surplus or a deficit has been made, only what money is left. The receipts and payments account is usually produced by small groups with a single purpose or activity and few staff. Its main advantage is that it can be prepared by someone who has not been trained in technical accounting Income and expenditure account The income and expenditure account is an annual accounting statement to show what has happened over the last year. It shows the cash and bank amounts, but also additional items. For example, an amount due for payment in the year (for example the outstanding end-of-year telephone charge) will be included, even though it has not yet been paid. This means that the account shows a full 12 months income and expenditure, and can be compared with the budget and previous year s accounting statements. 4.2 Annual Accounting Statements Most organizations, even small ones, produce a statement at the end of their financial year, to report what they have done with the funds given to them. These are presented in two main ways: Receipts and payments account The receipts and payments account (sometimes called a cash account ) shows a summary of all cash and bank money coming in (receipts) and going out (payments) over the last year. It is the simplest form of accounting statement. Items bought for longer-term use, for example vehicles or computers, are listed alongside the day-to-day items such as rent and salaries. (See a sample receipts and payments account appendix 7) All the information for a receipts and payments account comes from the organization s own records. It shows: The amount held in cash and bank at the beginning of the year Plus money received (receipts) Less money paid (payments) The amount held in cash and bank at the end of the year. 4.3 Reporting to Donors It is worth remembering that donor agencies are themselves accountable to stakeholders (trustees, government, tax payers, etc.) and they rely on you to provide them with the information they need. Financial accountability requires that you demonstrate to the donor that their funds have been used for the purpose for which they were intended. The reference point is the original funding application and guidelines are usually provided with the confirmation of grant aid and the contract or agreement signed by both parties. It is important to comply with the conditions and meet reporting deadlines to establish credibility and encourage confidence, and to make sure your grant arrives on time. It is important always to check what you have agreed to do as part of the agreement for funding from each of your donors. Conditions imposed by donors vary enormously but can include: Progress reports frequency, format and style of reports, usually quarterly to coincide with release of grant installments. Scope and designation of funds what funds may, or may not, be used for; whether funds can be carried forward from one financial year to the next. Administrative overheads the specific items that are allowable or excluded, or a 42 43

23 percentage limit based on the total grant. Budget line items specific budget headings/account classifications which correspond with the original grant application. Virement policy i.e. permission (or otherwise) to transfer surpluses in the budget from one budget heading to another, and within what limits. Accounting method Accruals or Cash accounting. Bank accounts and interest separate bank accounts are required by some donors and/ or they do not allow you to keep any interest earned on sums invested. Fixed assets policy how to treat fixed assets purchased with a grant. External audit some donors require a separate external audit. 4.4 Reporting to Government The government will require full disclosure of information related to taxes as well as development activities supplementing government efforts 4.5 Reporting to Beneficiaries Most organizations recognize the need for downward accountability. To participate fully in an organization s work, beneficiaries need access to information about its plans, resources and activities. Increasing transparency and accountability to beneficiaries has many benefits including: Strengthening trust and respect between organization s staff and beneficiaries; Improving the quality of program decisions, as beneficiaries provide feedback on how funds are being spent; Empowering beneficiaries to make their own decisions on their own behalf; and Reducing the risks of inefficiencies and fraud. Using white boards outside offices to display budgets, the amounts of funds available for each area and a monthly update of expenditure. 4.6 Qualities of Good Accounting Information Relevance The information provided should satisfy the needs of information users. In the case of company accounts, clearly a wide range of information will be needed to satisfy a wide range of users Completeness An organization s accounts should present a rounded picture of its activities Comprehensibility Information may be difficult to understand because it is skimpy (not large enough in amount or size) or incomplete; but too much detail is also a defect, which can cause difficulties of understanding Reliability Information will be more reliable if it is independently verified. It is a good practice that the auditors who verify accounts be independent of the organization and hold an approved qualification Objectivity Information should be as objective as possible. This is particularly the case where conflicting interests operate and an unbiased presentation is needed. Introducing this level of financial transparency may naturally hit some obstacles, such as adding to the burden of already busy staff. But if sensitively done, the benefits generally far outweigh the costs. Some good practice ideas on how to practically report to beneficiaries include: Making information easier to understand by using graphical presentations Timeliness The usefulness of information is reduced if it does not appear until long after the period to which it relates. What constitutes a long interval depends on the circumstances: management may need frequent information on cash flows to run the organization efficiently; but donors are normally content to see the accounts produced periodically as per the signed agreement

24 4.6.7 Comparability Information should be produced on consistent basis so that valid comparisons can be made with information produced by other sources (for example the accounts of similar organizations). Specific reference to Forum Syd General Conditions 5 Internal Controls Financial (or internal) controls are essential for any group or organization. They help an organization to prevent errors and the possibility of theft. Most importantly, financial controls help to protect reputations. The leadership team and managers are responsible for making sure that there are good financial controls in place. Reporting on results (GC 9) Swedish NGOs shall annually present a financial report informing on the total use of grant funds. Organization leadership is responsible for reports. Outcome shall be compared with agreed budget and where applicable present the accumulated outcome (if a project runs for more than one year). Accrued interest shall be specified. Costs for personnel: Where wage/salary costs are incurred in a project, the financial report shall show the principles used in distribution of wage/salary costs. Reliable routines shall exist permitting the monitoring and auditing of all work hours charged to a programme. Wage/salary costs shall be recorded on a continual basis during the implementation of a project in order to promote good monitoring. What are financial controls? Financial controls are the financial and management systems that aim to protect an organization s property and minimize the risk of error and theft. 5.1 Cash control principles Cash is the most liquid of assets, and is therefore most likely to be misappropriated. For this reason, establishing basic internal controls over cash receipt, maintenance of cash and cash disbursement is critical. Risks with cash are theft or loss of cash, disbursement of cash without proper document or authorization, incorrect charging of receipts/disbursements, (incorrect source codes or accounts), disbursements that do not comply with donor regulations. Keep the minimum amount of cash needed for you to operate efficiently. Record all cash items received or paid in a cash book as soon as possible after the transaction has taken place. Issue pre-printed numbered receipts, with the organization s name, for any cash received, and keep a copy. Request a receipt and keep it when money is paid out in cash. Keep cash in a secure place preferably in a lockable tin which is kept in a safe. If not, use a locked cupboard or drawer. A senior person should count the cash regularly and check that it agrees with the cash book. This person and the cashier should sign the cash book to confirm that the count has been made. Someone other than the cashier should authorize any large or unusual payments. Set a limit above which the cashier must obtain the approval of a manager

25 The person responsible for cash (the cashier ) should not (ideally) be the one dealing with other accounting records. The cashier should check regularly how much cash is left and tell a senior person if there is not enough for day-to-day operations. Make one person responsible for the control of cash at any one time. When a new person takes over, both people should agree and sign the cash balance. 5.2 Bank control principles Register bank accounts in the name of a group or organization never in the name of an individual. Tell the bank that all requests for withdrawals (cheques, for example) should be signed by two people. Sometimes it is more practical to require any two signatories from three named individuals. Never sign blank cheques, or expect others to do so. Each time that the bank statement is received (or the pass book is updated), check that the organization s own bank records in the cash/bank book agree with it. Write cheques for as many payments as possible, to avoid holding large amounts of cash. Transfer large amounts directly through the bank from one account to another. Pay money into the bank as often as practical, to avoid keeping large sums of cash on the premises. In rural locations, this cannot be done very often. Make use of people going to the town where the bank is, to pay money in. Cheques can sometimes be requested to avoid large amounts of cash building up. If cash is held, it must be kept securely. The person who is involved in the preparation of cheques should not also sign them. Keep cheque books in a safe, locked cupboard or drawer. Keep the fewest possible separate bank accounts, although some donors will insist that you keep a separate bank account for their funds. 5.3 Budgeting and accounting controls Prepare the budget in line with organizational objectives before the start of the year, and get the management committee to approve it. Produce the budget and actual reports as soon as possible after the end of the period. Add notes to explain large differences in the budget and actual statement. Compare regular summaries of income and expenditure with the budget. Make sure that the management committee and managers monitor the summaries. Prepare a cash-flow forecast to show when shortages may occur. Record everything, keeping accurate and up-to-date accounting records. Make sure that there is a supporting document (an invoice, for example) for every transaction, and file the documents in order. Keep a system to alert you when money is still owed to you. Record restricted donor funding separately in the accounting system. Provide financial reports when required and include them in work plans. 5.4 Purchase and authorization controls Make sure there is a budget for goods and services ordered. Allow only nominated people to place orders. Ask for at least three quotes for goods and services valued at more than a certain amount. Check goods and services received for quality before paying for them. Match invoices against original orders, and pay on original invoices only. Keep clear records of money owing and paid to other people. Do regular stock-takes of goods held, and check that they agree with stock records. A senior person should authorize expenditure before it is made. Cheques should be authorized by a different person from the one who signs them. 5.5 Management controls Allocate responsibilities to staff. Write job descriptions for staff and volunteers. Recruit suitably qualified staff and volunteers: check their references and qualifications. Identify and deal with staff who are not performing adequately. Make sure that everyone knows the policies and procedures. Write them down and talk about them regularly, for example in staff meetings. Develop staff and volunteers, for example through induction and training for new staff

26 Arrange an annual external audit. Act on the auditor s recommendations. Write minutes for all meetings. Communicate openly with staff, volunteers, and other stakeholders. 5.6 Physical controls Keep all premises locked and safe. Allow only authorized staff and volunteers to use premises and equipment. Keep an up-to-date record of items owned, and check it regularly. Register all items in the organization s name. Keep stock records for purchases, items issued, and the balance left. Count stock regularly and agree it with the records. Arrange insurance cover, if possible, for valuable items, including cash. Write clear policies on the use of equipment: for example, vehicles and photocopiers. Keep confidential information locked away. Use a safe for cash, cheque books, and other valuable documents. 6 Fraud and Irregularities There will be occasions when internal control systems fail to prevent losses through theft, fraud or other irregularities. Fraud is defined as a deliberate, improper action which leads to financial loss to the organization. This includes theft of goods or property; falsifying expenses claims; and falsification (or destruction) of records to conceal an improper action. Fraud does not include accounting errors, actions and condoned by established practice and cases where no loss is incurred. Other irregularities include unauthorized activities for private gain e.g. borrowing from petty cash, use of vehicles, or abuse of telephone and other equipment. Inevitably, the impact of fraud has a damaging effect on the organization. What is fraud? Using deception to obtain an organization s goods or services for personal gain. Specific reference to Forum Syd General Conditions Management of Funds (GC 7) Recipient organisation in the project country shall keep any grant including the selffunding component in a bank account signed jointly by at least two authorised persons of the organisation. Reporting on results, financial accounting and reporting (GC 9) Reports and accounts shall be drawn up and submitted in accordance with current instructions, report forms and agreements regulating approved grants. Recipient organisation in project country shall maintain proper and complete books and report on the grant in accordance with agreed budget and activity plans Reports, accounts and other relevant documentation shall be kept accessible to Sida, auditors appointed by Sida, Forum Syd and Forum Syd appointed auditors for 10 years following final financial payment. The damage done by fraud can be calculated in terms of the amount stolen, but the biggest damage is to the organization s reputation. There is also a hidden cost of staff time and morale in creating new systems and repairing the reputation of the organization. Knowing when things are going wrong Although it is impossible to detect all frauds, tight financial controls will help to alert you when things are not right. There are a number of other accounting signs or clues to look out for: Accounting records are inaccurate, corrected, and/or out of date; Bank statements and bank reconciliations are missing; Invoices, receipts, bank statements, and other documents are often missing; Financial and stock records contain many errors

27 6.1 Steps to minimize fraud Separation of duties Separation of duties affects every area of financial control. It aims to prevent errors and theft by making sure that one person is not responsible for the whole of any transaction, for example placing an order, authorizing a payment, and signing a cheque. There should be a different person to carry out each task. Small organizations do not always have enough staff for work to be separated. They should involve someone else on an occasional basis, for example counting cash when an outside member of staff visits, or asking a local firm of accountants to make surprise checks. Being a small organization is not an excuse for poor financial controls. It is a reason to think carefully about ways to introduce them. You may need to ask a qualified accountant for more advice Good financial controls The leader and senior staff should publicly make it very clear that theft of any sort is totally unacceptable. Explain to staff that controls are important for the protection of the organization and staff, even if sometimes hard to follow. Senior staff themselves should follow the rules strictly. The leadership team should implement controls and be prepared for possible fraud. Accurate and up-to-date financial information should be available in a user-friendly format. Leaders and managers should sign off monthly accounts and make random checks on financial systems. Leaders and managers should follow up any complaints received. When recruiting staff and volunteers, always follow up references and check certificates of qualifications. Provide training in financial management. Arrange a regular external audit Make it easy for staff to tell someone if they are suspicious Create a culture that makes it easy for staff to share concerns but this should be done responsibly and with specific evidence. Introduce a confidential whistle-blowing scheme, explaining what this is and the sorts of issue that might need reporting. What is whistle- blowing? Providing staff and volunteers with procedure for confidentially reporting a concern about the conduct of a colleague for example if mishandling of money is suspected. This would usually be reported to their manager, but a nominated senior member of staff or a member of the management committee should be an alternative. The organization then has a duty to investigate the issue and take any necessary action Have a clearly defined policy to combat fraud Set up routine controls. Specify how people can report their concerns. Specify when to tell the police. Identify the person who is responsible for any investigation. Prescribe how an investigation can be conducted sensitively. Identify the documents that should be protected as evidence. Prescribe how to record all incidents in a fraud register. This fraud policy should be made known to all staff. It should be updated after any theft or fraud is suspected or proved. 6.2 How to survive and respond The organization needs to be able to learn from any incidents of theft or fraud. Make sure that any lessons learned are written down in full, and any necessary changes to the financial controls are made throughout the organization. This may be a stressful time, and it is very important that those involved receive support from colleagues and friends. Members of staff who are not directly involved may feel that they too are suspected, so you need to rebuild their trust. This can sometimes be achieved positively by involving staff in a discussion about the possible risks and what could be done to avoid something similar occurring

28 Organizations are sometimes reluctant to tell their donors about an incident of fraud; but generally it is better that donors hear about it from you, rather than someone else. Specific reference to Forum Syd General Conditions Improper use of Funds (GC 13) Recipient organisations and their personnel, as well as consultants in projects/programmes financed by Sida, are expressly forbidden from receiving or allowing to be promised, requesting or submitting, promising or offering bribes or other improper rewards, recompense, compensation, improper gain or advantage of some form that may constitute illegal or improper behaviour Forum Syd s position on corruption Never Accept Always Act Always Inform Forum Syd Anti-Corruption Policy What is corruption? Corruption is a form of power-abuse. Corruption, in Forum Syd s meaning of the term, is the acquisition of undue or improper gain by someone or something an organization, institution, company or individual through the exploitation of position. This includes such phenomena as bribery, extortion, favoritism/nepotism, deception and bias. Forum Syd s definition of corruption also includes embezzlement. Several types of corruption, such as bribery, involve both a recipient and a giver. Forum Syd denounces both sides of the transaction, and anticorruption efforts should aim to reduce the incentives to both accept and offer bribes. Corruption violates the organization s basic values, such as justice, dignity, integrity, transparency and accountability. Corruption involves the abuse of trust or position and leads to the abuse of human rights. Fighting corruption in society is essential if we are to be successful in our efforts to help bring about sustainable poverty-reduction. It is for this reason that Forum Syd has produced an anti-corruption policy. The Forum Syd anti-corruption policy is based on Sida s policies and regulations for corruption, Forum Syd s fundamental principle is to reject corruption in all its forms, and always to act upon and inform others about suspected corrupt practices. Local partners are required to apply Forum Syd s anti-corruption regulations in development work for which they receive a grant/support. This involves, for instance: Informing Forum Syd of each incident of suspected corruption in their own development cooperation work. Acting upon suspected cases of corruption. Forum Syd is to ensure that:- Grant-receiving Swedish organizations and its local partners are all familiar with its anti-corruption policy. There are clearly defined procedures and systems for handling suspected incidents of corruption. All documented procedures, guidelines and forms that contribute to the prevention of corruption in its operations are known and applied within the organization

29 7 External Audit An audit is an independent examination of records, procedures and activities of an organization, resulting in a report on the findings. The internal auditor reviews the adequacy of the design of the systems of procedures, and checks that they are being properly implemented. A report is presented to the governing body and management, who respond by taking corrective action, perhaps changing a procedure, or further training, restructuring among other recommendations. The following are factors that There are two kinds of audit: Internal audit External audit As the name implies, an external audit is primarily for the benefit of those outside the organization, e.g. stakeholders and funders. Internal audit is undertaken for the benefit of those inside the organization, i.e. trustees and management. The audit should be a positive experience and it is an opportunity to receive feedback on strengths and weaknesses of organizational systems 7.1 Importance of Audits Audits are important to organizations as they demonstrate a commitment to transparency and accountability and bring credibility. It is also a legal requirement in most countries to have the financial statements reviewed by an independent auditor once a year. 7.2 Internal Audit An internal audit review is undertaken at the request of the management of the organization. It focuses on reviewing compliance with systems and procedures as set by the Board/ management. The internal auditor s report will highlight findings and make recommendations for action, where needed. It may be carried out by someone within the organization, or an outsider may be engaged to carry out an internal audit through an outsourcing arrangement. An internal audit will include a range of checks as part of the independent review, including: Financial accounting systems and procedures; Management accounting systems and procedures; Internal control mechanisms. influence internal auditor s approach: Economy paying no more than necessary for the resources needed. Efficiency getting the greatest benefit with the minimum resources. Effectiveness describes how successful we are at meeting objectives or doing the right thing 7.3 External Audit An external audit is an independent examination of the financial statements prepared by the organization. It is usually conducted for statutory purposes (because the law requires it). External auditors may also be engaged to do other specific assignments, (e.g. a fraud investigation). The purpose of external audit is to verify that the annual accounts provide a true and fair picture of the organization s finances; and that the use of funds is in accordance with the aims and objects as outlined in the constitution. The purpose of an external audit is NOT: To act as a fraud investigation To prepare the accounts To provide a certificate to say there are no problems Proof that internal control systems are effective Evidence that accounts are 100% error free Appointment of external auditors An external audit can be conducted either as part of the annual review of accounts or as a special review by a donor agency. It is conducted by a firm of accountants with recognized professional qualifications. Auditors are appointed by the Board of Trustees (or Annual General Meeting) or by a donor for a special audit. They are independent of the organization 56 57

30 employing them. Independence means that the auditor should not have been involved in keeping the accounting records and is not personally connected in any way to the organization audited. 7.4 Donor Initiated Audits On occasion, donor agencies may request an independent external audit of records and activities and will appoint a qualified person to undertake a review. The primary purpose of such a review is to check that grants are being used as intended and in accordance with the budget in the original funding agreement. The auditor or evaluator will almost certainly wish to interview staff and committee members and may even request to observe the organization in pursuance of its activities. Every cooperation should be given during such visits and an effort made to be open and honest about organizational strengths and weaknesses. 7.5 The Audit Report An audit results in a report addressed to members which gives an audit opinion as to the true and fair view given by the financial statements. (of the state of affairs of the organization and operations for the period.) What is an audit opinion? The auditor expresses an opinion at the end of the audit about whether the accounts give a true and fair view of the organization s activity. A positive (or unqualified ) opinion is given in most audits. A negative (or qualified ) opinion is less common and a cause of concern for the organization. It suggests that something is not right. If the auditors do not agree with the financial results as presented by the organization, they may issue a report saying that, in their opinion, the accounts are not fine. The table below summarizes the types of opinion. Auditor Opinion Unqualified Qualified: Subject to Qualified: Disagreement Qualified disclaimer Comment The accounts do give a true and fair view 'clean' audit report. The accounts are basically OK, apart from specific identified issues, e.g. an incorrect accounting policy, or specific unsupported expendi ture There are so many errors that the accounts do not give a true and fair view. The auditors are unable to give an opinion, because the records are so poor or incomplete. If the auditors propose any adjustments or changes to the draft financial statements, these must also be approved by the Board. The audit report is addressed to the members and it is usual to formally accept the report at the Annual General Meeting. Auditors will also often provide a Management Letter. This is separate to the audit report and is, addressed to management. The report highlights weaknesses identified in the internal control systems and makes recommendations for improvements. Managers have an opportunity to respond to the findings outlined in the management letter and explain what action they will take Recommendations Towards the end of the audit, the auditor will raise concerns which have not been resolved, and will make recommendations for change. These will be shared in a draft letter written to the management committee or leader. The organization clarifies and, if possible, answers the points made. Some items are then deleted from later versions of the letter. The final version of the letter may include comments by the management on the points raised. It will include recommendations and identify matters that need attention either immediately or, more usually, before the next annual audit

31 7.5.2 Management Letter An example of a management letter and corresponding responses by management is shown below Comment 1 A number of advances to staff were outstanding and not fully accounted for at 31 December. A more comprehensive system of financial control is required to ensure that these are followed up. Management comment on paragraph 1 These advances have subsequently been accounted for in full. A new advances register has been introduced, to ensure that no new advances will be issued until accounts are provided for any outstanding ones. Comment 2 Payment vouchers and connected documents have not been stamped to state that they have been paid. All of these should be so stamped and dated, to avoid the possible reuse of a document. Management comment on paragraph 2 The office has not held a paid stamp. However, one has now been purchased and a system introduced to make sure that all documents are stamped. Comment 3 Grant income received from international donors has not always been spent in the way specified by the donor. The organization s accounting records do not show income which has been given for a particular purpose identified separately. Management comment on paragraph 3 We accept the auditors observation that the accounting records do not separately identify all income received for a particular purpose. A new accounting procedure has been introduced which will rectify this. We do not, however, accept that grant income received was not used for the purpose given. We understood that this income was unrestricted and as such it was used towards the general running costs of the Centre Specific reference to Forum Syd General Conditions Audit (GC 10) Swedish NGOs are responsible for ensuring that the use of funds is annually audited by an external, independent and qualified auditor. Audit of grants up to SEK 50 millions requires an approved auditor. Grants beyond this amount in total require an authorized auditor. Audit shall be conducted in accordance with internationally accepted auditing standards. In cases where Swedish NGOs transfer grants to recipient local organizations, the local organization shall be responsible for a grant being annually audited. An unbroken chain of audit reports shall exist up to and including the final grant recipient organization. Current audit directions shall where applicable be passed on to the organization immediately following in the chain as show here-below Sida Forum Syd Swedish NGO Local NGO Each organization shall use the format for Terms of Reference for auditing, found in Appendix 1 of Forum Syd General Conditions. Auditors shall express an opinion in accordance with ISA 800 in their reports whether the submitted financial report corresponds with the organisation s accounting records and Forum Syd directions for financial reporting. The audit report shall contain the audit findings made by auditor during auditing process

32 The auditor s report shall also contain information on whether the organization has taken reasonable steps with regard to earlier audit recommendations. The audit report shall be submitted together with the annual financial report of the project. A management response to the audit report, containing the organization s standpoint and planned measures shall also be attached to the financial report. 8 Appendices Appendix 1 Sample Cashbook Format XYZ NGO Cashbook as at xxxxxxx Amount in xxxx BANK PETTY CASH RECEIPTS EXPENSES Advances (*) Equipm ent Travel Postage Travel Credit (Out) BAL Income Debit (In) Credit (Out) Balance Debit (In) Voucher No. Description Cheque No. Date Total (*) An analysis of advances should be prepared and pr esented in the advances schedule (appendix 2) Prepared by.. Signature Date. Approved by.. Signature Date

33 Appendix 2 - Sample Advances Schedule Format Date Description Amount Remarks Total Prepared by.. Signature. Date Approved by.. Signature. Date Appendix 3 Sample Budget Status & Advance Request Format A/C CODE LINE ITEMS XYZ NGO BUDGET STATUS & ADVANCE REQUEST FORM FOR THE MONTH XXXXXX (Amount in xxxx) PROJECTIONS APPROVED BUDGET CUMULATIVE ACTUAL PREV. MONTHS ACTUAL CURRENT MONTH TOTAL SPENT TO- DATE BUDGET BALANCE Month 1 Month 2 Mont h 3 TOTAL RECONCILIATION US$ Receipt 1 R1 Receipt 2 R2 a = R1+ Total Receipts to date R2 Total spend to date (b) Fund Balance. (c) = (a-b) Prepared by.. Signature. Date Approved by.. Signature. Date 64 65

34 Appendix 4 Sample Statement of Receipts and Payments Format XYZ NGO Receipts and Payments Account for the year ended XXXX RECEIPTS Total (US$) Grants Income generating activities Bank Interest PAYMENTS Printing & stationery Salaries Office rent Vehicle expenses Administrative and logistical expenses Telephone costs Marketing costs Computer Hardware and software Motorbikes SURPLUS/(DEFICIT) Prepared by.. Signature. Date Approved by.. Signature. Date Appendix 5 Sample Bank Reconciliation Statement Format XYZ NGO BANK RECONCILIATION STATEMENT AS AT xxx Total Balance per cashbook XX Add: Unpresented cheques XX Deposits in the bank NOT in the cashbook XX Interest in bank statement not in cash book XX Less: Deposits in cashbook NOT in the bank statements XX Bank charges NOT in the cashbook XX Balance per bank statement XX Prepared by.. Signature. Date Approved by.. Signature. Date 66 67

35 Appendix 6 Sample Cash Count Certificate Format XYZ NGO Cash Count Certificate as at XXXXX (Amount in xxx) Denomination Quantity Comments Total (US$) XX XX XX XX XX XX Total cash counted XX Amount per cashbook- Imprest Variance Explanation... Prepared by.. Signature. Date Approved by.. Signature. Date Appendix 7 Month-end Checklist Sample Month-end Checklist 1 CASHBOOK Is the cashbook dully -completed in the prescribed format? (Date, Voucher No. Cheque No, Bank columns, Petty cash columns and the respective cost codes columns)? Are all issued cheques posted in the cashbook? 2 BANK RECONCILIATION Is bank reconciliation correctly and accurately prepared and attached as part of the monthly returns? (No returns shall be accepted without bank reconciliation statements) Are there long outstanding reconciling items? (If yes please attach an explanation) Are copies of bank statements for the reported period attached? (Bank reconciliation statements are deemed incomplete without all copies of bank statements) Is the month end cashbook balance = Bank reconciled bank balance? 3 BUDGET STATUS Are expenditures correctly and accurately posted in the budgetary line items as outlined in the cashbook? Are the cumulative figures brought forward correct? 4 CASH CERTIFICATE Is a dully-approved month end cash count certificate attached? 5 TRAVEL IMPREST/ADVANCES /PAYABLES Are there outstanding project advances/payables prior period? Does the analysi s tally with the cashbook amounts? (The amounts per the analysis schedules must be equal to the amounts per the cashbook) 6 VOUCHERS Are all payments and receipts vouchers dully authorized by the respective persons? Are there any missing vouchers (if any please explain) Tick Comments YES NO Prepared by.. Signature. Date 68 69

36 Appendix 8 Support Documentation Checklist This checklist is not exhaustive list on all aspects of financial management and only focuses on selected key areas. The standard information outlined here may not be always completely relevant in every situation. It is important to note that this is a general guideline which should be used to complement any existing financial management procedures. Notes Charges should only be made to the projects if they are adequately and sufficiently supported, in accordance to the donor regulations, organizational procedures and approved budget. Such expenses should be reasonable, allowable, accurate, and legitimate. Every expense must be supported by an approved requisition (request) to incur such expense; the requisition/request must clearly indicate the objective or purpose of such expense. There should be documentation and calculation to show how such charges were arrived. (Develop a table of allocation) which form part of support documentation Each and every expense must be supported by an approved requisition from the designated personnel The following are the selected support documents for the listed classified costs:- Salaries and Benefits Dully authorized and approved payment voucher (must contain detailed, clear and concise description) Signed and approved payroll, Pay slips signed by the respective employees, Signed and approved bank wire transfers for the net amounts incases where salaries are wired to bank accounts of the employees All the payments for statutory deductions In addition the program should maintain a personnel file containing personal details such as salaries (including any salary increments), approved letters of appointment, designation, and all allowable benefits to the respective employees No salaries should be paid in cash 70 Professional Fees Professional fees must be supported by a dully signed contract Copy of payment cheque Approved contract clearly stating terms and condition for payment TOR and evidence for selection procedure/criteria Approved payment voucher (must contain detailed, clear and concise description) Original invoice (showing amount payable in an official letter head, unit cost, physical and postal, address, telephone contact, total cost, taxes etc) Office Expenses Approved payment voucher (must contain detailed, clear and concise description) Valid receipts Approved requisition to incur expenses (reason must be clearly stated) Calculation to show amount allocated to each project incase of pooled resources Receipts and original invoice Copy of payment cheque Office Occupancy In event that the program pays rent then such payment must be reflected in the project agreement and or the approved budget. Approved payment voucher (must contain detailed, clear and concise description) Original invoice Approved requisition to incur expenses Calculation to show amount allocated to each project incase of pooled resources. (Attach approved allocation table) Copy of payment cheque Office Repairs and Maintenance Approved payment voucher (must contain detailed, clear and concise description) Statement of work/quotation for the job to be done Copy of payment cheque Original invoice 71

37 Approved requisition to incur expenses (reason must be clearly stated) Calculation to show amount allocated to each project incase where expense is be shared out. (Attach approved allocation table). Office Assets Insurance A copy of insurance proposal form part of the support Quotation from the insurance company Valuation certificate where applicable Approved payment voucher (All such payment must be restricted to cheques) Copy of payment cheque Original invoice Approved requisition to incur expense. Calculation to show amount allocated to each project incase shared expenses. (Attach approved allocation table) Travel All travel advances must be requested in writing. The trip objective must be clearly indicated in the request form All travel advance requests must be dully approved All the advances must be accounted within a specified time (say 24 hours) upon return and such accounting must be done on a travel expense voucher All per diems and allowances must be paid in accordance to the approved rates. Approved Travel Advance Request Approved Travel Expense Voucher Receipts for all incurred expenses A list /schedule of outstanding travel advances must form part of the monthly financial returns. Vehicle Expenses All the program vehicle movement must be recorded in the vehicle log All the movement must be approved by an authorized personnel Vehicle fuelling must be made on basis of an approved request and reflected in the vehicle log and fuel consumption per kilometre must be reflected on the log. All the fuel receipts must have the vehicle log as the part of support documentation Fuelling of any personal vehicles using programs funds is strictly prohibited A dully-authorized person must approve use of personal vehicles on program work. A staff should not approve usage of his/her own vehicle for the program work Reimbursement for use of personal vehicle must be dully approved by a dullyauthorized person and such reimbursement should be made at AA approved rates. Approved payment voucher (must contain detailed, clear and concise description all such payment must be restricted to cheques as far as possible) Copy of payment cheque (for cases of non-cash fuelling) Invoice showing amount payable, or Valid fuel Receipts in case of cash fuelling Approved requisition and/or LPO to incur expenses even for cash fuel (such must be approved by another person other than the driver or the personnel fuelling. Dully completed and approved copy of fuel log. Calculation to show amount allocated to each project in case shared expenses. Material Supplies Procurement for all materials and office supplies must be initiated by a way of requisition from the user which must be dully approved by the responsible personnel Purchases over and above the prescribed amount should be subjected to competitive bidding Approved payment voucher (must contain detailed, clear and concise description) Approved requisition to incur expenses (reason must be clearly stated) Receipts and original invoice Copy of payment cheque Detailed and sufficient evidence of competitive bidding and selection criteria where applicable Suppliers contract where applicable Goods Received Note/Delivery Note as applicable 72 73

38 Training Charges for conferences halls, facilitators fees and allowances, training materials etc should be budgeted and charged to this account code. Approved payment voucher (must contain detailed, clear and concise description) Approved requisition to incur expenses (reason must be clearly stated) Receipts and original invoice Signed and approved list of participants Copy of payment cheque Appendix 9 Financial Management Toolkit Notes on using the financial management toolkit This toolkit helps you to assess your organization s financial systems and identify its strengths and weaknesses. A minimum standard is given for each question. The review is a way of identifying improvements that can be made to strengthen your financial and management capacity, rather than a way of judging the organization. If you score many 1s and 2s, you are likely to need some urgent action, and possibly to call on outside help. If you score mostly 4s and 5s, you have good financial systems, but there may still be some matters needing attention. The best person to complete the review is someone who knows the organization well. He or she can offer comments on most questions, or at least know where to find the information. Some questions will need to be answered by a senior person who understands the management committee. It is important that answers are as honest as possible, telling what actually happens, rather than what you think should happen. It works best if someone inside the organization conducts the review, rather than someone from outside. Not every question is appropriate for every organization, and you can add your own questions at the end. Small voluntary community-based organizations, for example, may not need all the systems covered in the review. As you go along, write down comments in the column headed Any action needed. When you have finished the review, write down the action points as a checklist, with a date by which you want to achieve them and send a copy to all concerned. For each question, circle the number that most closely matches the present situation. 1 = Never, or don t know 2 = Rarely 3 = Occasionally 4 = Sometimes 5 = Always Compare the response with the minimum standard and write down any action needed

39 Question Minimum standard Any action needed A. PLANNING AND BUDGETING 1 2 Is an annual budget prepared and approved by the management committee? Is the budget based on current objectives? The budget is prepared after talking with staff/other stakeholders. The management committee approves it, and checks that confirmed income covers expenditure. The budget is based on current objectives. 3 Do all relevant staff/volunteers discuss the budget details? Are budgets finalised before the start of the financial year/project period? Are notes added to the budget, justifying items and showing calculations? Does the budget avoid having more expenditure than income, unless this is planned? Relevant staff/volunteers are consulted about and/or contribute to budget discussions. Smaller organisations may include all their staff/volunteers. The process is started early enough for it to be ready before the year/project starts. The person responsible for the budget adds notes. If the budget shows tha t a deficit is likely, budgeted expenditure is reduced until more income is raised. 7 Is a cash-flow forecast prepared, especially when there is not enough money? A forecast is prepared regularly, and every time funds may run out. Best practice is to prepare a forecast which is updated each month. Question Minimum standard Any action needed Do the management committee and leader regularly review a summary of the budget and actual statement? Do managers regularly review their expenditure/income against budget? Are explanations for large differences between budget and actual noted on the budget and actual statement? Management committee regularly review the budget and actual statement. They ask questions about large differences between budget and actual figures. Managers review the budget and actual statement monthly/quarterly to make sure they are spending within budget. The person managing the budget writes notes on the budget and actual statement to explain large differences. 11 Are budget and actual reports produced quickly after the period - end? Budget and actual statements are produced within one month of the period- end. The management committee/leader/manager can then act quickly. B 12 1 Are meetings held between finance people and managers to discuss the contents of the budget and actual report? ACCOUNTS RECORD - KEEPING Is the record of transactions (the cash/bank book) updated regularly? Meetings, either one -to-one or in a group, are held immediately after the information is produced. The cash/bank book is updated daily, or whenever money is paid in or out. An up -todate balance can always be calculated

40 Question Minimum standard Any action needed 2 Is every cash/bank book entry supported by, for example, an invoice or receipt? 3 Are financial documents filed in order? 4 Is money received banked as soon as possible? Documents are kept and filed. If there is no external document, a payment voucher is written, showing the details, which a more senior person approves. Separate files are kept for money received and money paid. Documents are cross-referenced to the cash/bank book. Money is banked as often as possible, depending on how much and how close the bank is. 5 Is a separate register kept, listing money given as a cash advance or as a loan to staff? A cash advances/loans register lists all advances/loans and records when they are issued, accounted for, and repaid. It can easily show amounts outstanding, to be followed up. Loan repayments are deducted from salaries. 6 Do the accounting records show donor funds given for a particular purpose? Accounting records clearly show if funds are restricted. If funding is complicat ed and/or there are several donors, an extra system makes sure that restricted funds are monitored accurately. 7 Is there a record to make sure that money due is all received and is on time? Extra accounting records show money due and when it is paid, even if only in a notebook. Question Minimum standard Any action needed 8 Is a list of budget codes used to prepare the budget, and charge expenditure correctly? The list of codes may be given by a computerised accounting package or by a donor. It may need to be customi sed. 9 Is cash kept securely? There is a safe or locked cupboard. No more cash is kept than is needed. 10 Is the cash balance monitored? Someone takes action when the cash balance becomes too low. 11 Is a pre-numbered receipt issued for cash received? Receipts are pre-numbered and show the organisation s name. The original is given to the person paying in the cash, and a copy is kept. 12 Does someone other than the cashier authorise payments? The cashier only pays with authorised documents Does a senior person count the cash regularly? Are bank accounts registered in the organisation s name? Is there a separate cash/bank book for each bank account? A senior person agrees the cash balance with the cash/bank book at least weekly (on a different day each week). All accounts are in the name of the organisation/ project. There is a cash/bank book for each bank account. 16 Has each bank account at least two signatories? Each account has at least two people to sign cheques. If they are sometimes unavailable, more people will be needed

41 Question Minimum standard Any action needed 17 Are cheques and payment instructions signed by two people? Two people sign each cheque/payment instruction. This prevents errors and theft. 18 Are cheques signed after the details are entered? Blank cheques should never be signed Is a bank reconciliation prepared every time a statement is received or the pass book updated? Does the leader/manager approve the bank reconciliation? Are cheques used as often as possible? A bank reconciliation is completed regularly, to agree the bank statement with the cash/bank book. The leader or a manager approves the bank reconciliation. Cheques, not cash, are used whenever possible. 22 Are cheque books kept securely? 23 Do cancelled cheques have cancelled written on them, and are they kept for audit? Cheque books are kept in a safe or locked cupboard. Cheques are cancelled when necessary, kept, and filed. 24 Is there a list of all paid staff? A staff list is kept up to date. 25 Are staff taken off the payroll as soon as they leave? There is a procedure for making sure no one can be paid after they have left. Someone other than the person responsible for paying the salaries checks this. 27 Do staff sign for salaries received in cash? Staff always sign a receipt when they receive a salary in cash. 27 Question Minimum standard Any action needed Are legal deductions calculated and paid to the appropriate authorities promptly? Deductions required by law are made and paid when salaries are paid. 28 Are extra accounting records kept, for example ledger, journal, sales and purchase records, if needed? Larger organisations need extra records, appropriate for their size/activities. C FINANCIAL REPORTING 1 Are annual accounting statements prepared, and do they show restricted and unrestricted funds? Annual summaries of income and expenditure are produced. Larger organisations also have more detailed statements. They both show which funds are restricted for a particular use Do the management committee review and approve the annual accounting statements? Can the accounting system produce donor reports in the required format? Are donor reports always prepared on time? Do donors receive a copy of the annual accounting statements? Are financial information and reports used to plan for the future? The management committee review and approve annual statements. Accounting systems produce donor reports in the required format. Donor reports are prepared and sent on time. There is a list of donors, and annual accounting statements are sent to donors and other stakeholders. Financial reports are used to plan future programmes 80 81

42 Question Minimum standard Any action needed D FINANCIAL CONTROLS 1 Are financial tasks separated? No one person does the whole of any one financial transaction. This is to prevent errors and theft. 2 3 Is expenditure authorised by a senior staff member (or the leader)? Are there limits on how much expenditure staff can authorise? Expenditure is approved before it is paid. Someone asks Where is it in the budget? There are limits, and all staff, especially finance staff, know them Do different people authorise payments and sign cheques for those payments? Is there a list of authorised signatories, including their level of authorisation? Are payments made only with an original invoice? Is the invoice checked against the original order, to help prevent double payment? Are several quotes asked for when making large purchases of goods or services? Does someone check that goods and services are received and in good condition before they are paid for? No one person can authorise a payment and sign a cheque for the same transaction. A signatories list is available. There is a system to avoid duplicate payments. Purchase orders are attached to invoices, or a similar system is in place. Three quotes are required for goods or services (possibly only for items above a certain amount). The invoice is signed to show that the goods/services have been received and are of acceptable quality. 10 Question Minimum standard Any action needed Is a record of what is owned (fixed assets) kept up to date and reviewed regularly? A fixed-asset register is kept for details of items owned. This includes the date of purchase, the value, and where they were bought and are kept. This is ag reed annually with the actual items. 11 Is there enough insurance to cover the current value of what is owned and for other risks? Items owned are fully insured. Other risks (for example public liability, fire and theft, and cash in transit ) should also be covered, if this is possible in the country where you work Can items be replaced easily when they wear out? Is everything owned kept securely? Is financial stationery numbered, named, and held securely? There is/will be funding to replace essential items Valuable items are locked or kept in locked rooms All financial stationery is kept in a safe or locked cupboard Are the entrances to the premises and stores secured? Is there a log book to record mileage for each vehicle? Do staff pay for personal use of telephones and photocopiers? Are a stock register and records kept? Premises should be locked and (if necessary) guarded. Drivers should complete the vehicle log book each time a journey is made. Staff know the organisational policy and how to pay for use. There is a basic system of stock control, for example for drugs

43 E Question Minimum standard Any action needed Is stock counted regularly, and agreed with the stock register? Stock counts are carried out by an independent person at least every three months. EXTERNAL AUDIT ASSESSMENT Do the management committee select the auditors yearly? Appointing the auditors is on the management committee s agenda each year. Does a financial audit /examination take place each year? Is the audit firm (or individual auditors within the same firm) changed every four or five years? A yearly financial audit is conducted by an independent person/auditing firm. The auditor firm, or the individual responsible within a firm, is replaced every four to five years. Does the auditor provide a letter giving recommendations? The auditor makes recommendations (the management letter ) to the management committee at the end of the audit. Does the management committee see the auditor s recommendations and take the necessary action? Does the auditor provide a management (or systems) audit? Recommendations are implemented and followed up. The auditor looks at financial and management systems and the use of management information. 84