Financial skills are vital in the NFP sector

Many people become involved in not-for-profit organisations because they want to be involved in an organisation that reflects their values and which has a positive impact on the community.

But as organisations become more and varied, available resources are stretched further and there is a greater call for accountability. This means it is becoming imperative that organisations, and the people who work for them, become more financially aware.

There are four key areas of financial management at the core of financially sustainable organisations…

• Have a plan, not just a mission

Achieving an organisation’s social purpose is eminently more possible when time has been taken to put together a business plan. Many organisations have found that value lies in the planning process as much as it does in realising that process. Homing in on the organisation’s real objectives, finding the best way to achieve them, efficiently allocating resources and mitigating any circumstances that might be stumbling blocks can help bring focus.  

Developing a business plan can help to clarify:

• the objectives/purpose of the organisation,
• how those objectives will be achieved, and
• how the organisation will know when it has achieved its objectives.

Clarity with these matters helps keep everyone on the same path. Management can communicate a clear direction, employees or volunteers can work to meet well-defined expectations, and users of the service can be confident of the product.

Clarity also helps with developing funding channels, either through grant proposals or discussion with potential donors, sponsors or investors. Stakeholders are more likely to provide their time and/or money if they can see a clear path and real opportunity for the organisation to achieve its outcomes.

• Understand and monitor the financial position

Increasing accountability from a legal and community perspective means it is more and more critical to understand and monitor the financial position of a NFP organisation. However, the person undertaking the financial management role often does not have the required skills.

For monitoring financials, it is necessary to learn about:

• Keeping records and being able to produce the right information for financial statements,
• interpreting a balance sheet, income statement and cash-flow statement,
• understanding financial performance measures provided by the accountant,
• producing an accurate budget and cash-flow forecast;
• putting together accurate and understandable financial reports for the board of directors and other stakeholders.

This knowledge will go a long way in helping to oversee an organisation’s financial position and ensure it can continue providing its valuable service to the community.

• Manage cash flow

Having cash available on a day-to-day basis is critical to an organisation sustaining its service to the community. Understanding where the cash comes from and where it goes, and when, means it is possible to forecast how much cash should be available at any one time. Forecasting should be based on what has happened in the past, but also take into account what is anticipated.

An accurate cash-flow forecast will also help identify where there might be cash surpluses or deficiencies. Cash management should be about putting any excess cash to best use for the organisation, such as extra earnings from investment).  Any finance or bank lending should be structured in a way that best suits the organisation’s cash flow.

Growth often presents challenges when managing cash flow. As demand increases for an organisation’s services, there is a greater need for more stock, more people and, potentially, more equipment and space. Almost invariably these things need to be paid for before any increased funding is available, which means they become a drain on available cash.  

Managing growth and the associated cash flow is about understanding how much growth can be absorbed before the organisation runs out of cash. It is helpful to identify in advance the amount of cash that would be needed for growth, then establish the availability of that cash and, finally, explore whether growth is the best thing for the organisation.

4. Use resources efficiently

The resources available to an organisation to deliver on its purpose or mission include both the physical assets it uses and the people and processes that get the job done. Being able to make the most of these resources gives an organisation the best opportunity to be able to deliver.

Efficiency means gaining the maximum benefit from these assets, either in terms of service provision or in potentially generating extra income for the organisation.

It is important to ask how many hours a day, or days a week, an asset is used, and if there is a way it can be more fully used. Would it be better for the organisation to hire the equipment/premises when needed rather than tying up cash in an under-used asset? Would the efficiency gains of newer equipment justify the cost of upgrading?

Inefficient stock management can lead to inefficient cash management, such as having too much cash tied up in stock. Alternatively, if the organisation does not hold enough stock, it may not be able to deliver on its promise to the community.

People want to feel valued, be they staff members, volunteers, sponsors or donors. Similarly, sponsors or donors want to feel that they receive value for their money. To continue to receive their support, it is important to ensure their involvement is recognised and promoted.

As funding and grants become more scarce, it is becoming even more important that proposals or grant submissions are effective and crafted in a way to induce sponsors, donors or grantors to part with their money. It may be worth employing an expert in this field to compile these submissions, or even have someone else read them as a litmus test.

Many organisations start out as a small committed group of people who manage through good communication, but as an organisation grows and more people become involved, there can be a drop in efficiency. By having an operations manual in place early, an organisation puts itself in the strongest position to efficiently and effectively achieve its goals.

By Bronwyn Lawson, Content Development and Distribution Manager, Westpac’s Davidson Institute.

This article originally appeared in Third Sector’s June print magazine- subscribe here.

Bronwyn Lawson

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