Some people, when they hear the topic ‘financial management’, want to run for the hills. If you are one of those people, don’t worry. We are here to help. In this section, you’ll learn more about the most important aspects of managing your finances. Our aim is that you will feel comfortable, in control and empowered with your numbers.
5 Tips Towards Effective Financial Management:
1. Produce Numbers Quarterly:
Make sure you have your financial reporting in place focusing on key aspects such as proper and realistic estimates of income and expenditure and performance against a budget. This will allow you to catch when things are going wrong and still have time to fix them.
2. Understand the split between Restricted and Unrestricted funding:
Your restricted and unrestricted incomes are critical numbers, which can help you predict the success of your charity. Always keep one eye on your restricted and unrestricted income, to know how much is allocated to the delivery of specific projects and how much can go towards your overhead and running costs. Without this knowledge, you may run out of money thinking you have more than you have.
It is also important at this stage to have a clear reserves policy. Reserves are there to support your charity through rainy days. But they are also there to help you invest in opportunities to grow. Often, reserves are reduced to a simple formula, being the number of months operating costs they cover. We would recommend that you have a reserves policy that is fit for purpose and designed for the specific risks faced by your organisation. For more information, read OSCR’s fact sheet on reserve policy https://www.oscr.org.uk/media/2681/v10-charity-reserves-factsheet_pdf.pdf
The Charity Commission for England and Wales have also developed useful information on reserves and developing your policy, which can be found here.
3. Always have a budget
Today’s economic climate means that income streams are unpredictable, making it essential for leaders and managers to have a forecast.
In your budget, understand your income and costs. Are your income streams predictable or unpredictable? Do you have a lot of fixed costs or a flexible cost base? Make sure you are getting the right information to have reliable data sources and give yourself a 12 month view.
While this could be sophisticated accounting software, it doesn’t have to be – a spreadsheet can be used for this.
4. Compare your Actuals and your Budget
Now that you have your actual results and your budget, remember to compare the two on a quarterly basis. These differences are the key to understanding how things are evolving and to keep you solvent.
Financial reporting is the lifeblood of the organisation. Without appropriate and timely information, it is not possible to make the right decisions.
Share your financial reporting to your board and your senior management team. This will create a culture of using financial data and enable sound strategic and operational decisions based on current trading and your strategic aims.