This tutorial has been designed for the Board/Committee members of not-for-profit organisations of all types and sizes around Australia (we generally use the word 'Board' but you should take this to mean 'Committee' too - they are one and the same thing).
Note that the contents will appear to be particularly relevant for organisations that employ staff (in this tutorial we often refer to a 'Manager', though this word applies to a CEO, Executive Director, or whatever name you use for your organisation's head person). If your organisation does not employ staff, the tasks outlined will still need to be assigned and carried out (most likely by the Treasurer).
Click on one of the links below to go to the section you want, or work from start to finish through the tutorial.
Before you get started, you may want to take the Financial Self Assessment Quiz to assess your competency in this area.
At the end, complete the Tutorial Review to ensure you have absorbed all the key concepts.
One of the primary responsibilities of a member of a Board of a not-for-profit organisation is to keep an eye on the finances.
Your job as a Board member (presuming you are not the Treasurer) is not to produce the financial reports but to examine and assess this material once it comes before you.
You have to understand how it has been put together, you have to know what the jargon means, and you have to know the implications of what is in front of you. The better your Treasurer, the easier they will make it for you - but not every Treasurer is good at this, and an inarticulate Treasurer is no excuse for skipping over important information.
The Board has to
and then through the year
If you notice something that does not look quite right, and if no other Board member says anything, then it is up to you. Do not feel as if you are being pushy or suspicious or irritatingly punctilious - you are just doing your job.
A Board that is on top of the finances has the ability to move your organisation towards its mission.
Financial reports come in many formats - any time you tell anyone how things are going money-wise that is a financial report.
Reports can be made to the public, to members, to governments, or to grantmakers, and all of these may require different formats, with different points highlighted. It is the Board's legal responsibility to ensure that the financial reports required under legislation get lodged on time, and getting reports to other stakeholders is equally important.
All your opinions on your organisation's finances will be based on the central core reports that between them contain most of the actual information you need to keep track of your money. These are Income and Expenditure Statements, Balance Sheets, and Cash Flow Statements. Between all these, you should be able to keep track of every single dollar and know where it is come from, what it is doing, and where it is going.
The most basic measure of all is the Balance Sheet, which measures your position at a moment in time. It shows the assets your organisation owns, the liabilities it has, its current net position.
Once you know where your organisation stands at this moment in time, time starts again. On Monday some money comes in, on Tuesday some money goes out, and month by month and year by year you can see, looking at your Statement of Income and Expenditure, whether you are ahead or behind. You adjust your last balance by the amount of the increase or decrease and that is where you are now.
Beware of financial reports that rely entirely on averages. If high tide lifts your boat three feet over the reef and low tide leaves you a foot lower than the reef the average water level is a good foot over the reef - but if you sail gaily out at all hours because on average you are quite safe then you are sooner or later going to rip the bottom out of your boat. You've to know when low tide comes and take steps to work around it - and that is where Cash Flow Analysis comes in.
Income and expenditure statements record money coming in and going out and the final difference between the two - the surplus, if you are ahead, or the deficit, if you are behind.
An example of an income and expenditure statement is shown here.
Once you have these figures you can calculate how they compare with your benchmarks and whether they suggest the need for any action.
Note that your accounts will need to distinguish between operating and capital expenditure.
Operating expenditure is money you use to run your organisation and includes overheads, salaries, supplier bills and maintenance.
Capital expenditure is money you spend on items that will last longer than one year, such as computers, furniture and equipment, cars, land and buildings.
Operating and capital expenditure are treated differently as the cost of the capital expenditure is spread over the expected life of the asset. If the whole cost was put into one year's accounts this would give you a distorted view of your profit and losses, so a depreciation charge is made against the income each year instead. If your organisation bought equipment for $40,000, for example, and expected it to last five years, you would have an annual depreciation charge of $8,000 in each of those five years rather than a $40,000 charge in the first year.
The Statement of Financial Position (sometimes called the Balance Sheet) gives you a snapshot of the financial position of your organisation at a specific point in time - generally the end of the financial year. It lists your Assets (roughly, what you own) and your Liabilities (roughly, what you owe) and the upshot (which in accounting terms is known as Net Assets).
It is here that you get to see what's happening with your organisation's investments, if you are lucky enough to have any.
The Statement of Financial Position should also separate your assets and your liabilities into current (money and things that can be easily turned into money) and non-current (property that is going to take a while to realise). The 'short term' for these purposes is generally taken to be about a year.
The point of this is to make sure that you are not faced with a sudden squeeze despite being well in front on the total balance. If your assets are all long-term and you have a sudden requirement to pay a large debt in cash, you can get caught - so you need to keep an eye on it.
Some examples of current and non-current assets and liabilities are provided below.
|Assets||Cash at bank is a current asset, because you can go in and get it at any time.||Buildings, equipment, and long-term deposits are expected to be used up over an extended period.|
Superannuation and PAYG amounts
Trade creditors generally want to be paid within a month, which is short-term.
If one of the staff is coming up for long service leave in the next twelve months, that is a current liability.
If you have got a long-term loan from a bank, say, that does not have to be paid back for 10 years, that is a non-current liability.
If all your staff have just joined, long-service leave is a non-current liability.
An example of a Statement of Financial Position is provided here.
As you can see from the example provided above, it has been prepared for a mid-size organisation that has built up a fund over the years to buy a property to work in. This year it is taken most of the money out of the bank, borrowed another $240,000, and made the purchase.
The bottom line is that Total Assets minus Total Liabilities equals Balance (or Net Assets) - what you have in the kitty when everything has been sorted out, and the resources you have to work with.
A Cash Flow Statement reports on the cash payments out and cash receipts in, over the same period as the other statements. It can be particularly useful if you are using accrual accounting, since it then provides an alternative formulation, removing many accrual effects. Furthermore, it does not bother with depreciation.
Traditionally the statement is divided into money in and out in three categories - operating, investing, and financing.
An example of a Cash Flow Statement is provided here.
The most commonly used format for the cash flow statement is broken down into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash flows from operating activities include:
Investing activities include capital expenditures - spending that is not charged to expense but rather is capitalised as assets on the balance sheet. Investing activities also include investments that are not part of your normal line of business.
These cash flows could include:
Financing activities include cash flows relating to the organisation's debt or equity financing:
Cash for purposes of the cash flow statement normally includes cash and cash equivalents. Cash equivalents are short-term, temporary investments that can be readily converted into cash, such as marketable securities, short-term certificates of deposit, treasury bills, and commercial paper. The cash flow statement shows the opening balance in cash and cash equivalents for the reporting period, the net cash provided by or used in each one of the categories (operating, investing, and financing activities), the net increase or decrease in cash and cash equivalents for the period, and the ending balance.
Having decided what is to be done, the Board then has to keep an eye on the situation down the track. The Board does not have to examine every transaction itself - it just has to make sure that somebody (usually the Treasurer in conjunction with the Manager and/or senior staff) reports to the Board in as much detail as is needed.
The Treasurer needs to provide regular (monthly, quarterly and annual) reports to the Board. Staff usually prepare much of the detail of the reports, which should be reviewed by the Treasurer well in advance of the meeting. It is good practice to circulate these reports before the meeting so people have time to read and understand them.
At each Board meeting, you should receive an updated estimate of the year-end result, after taking actual results to date into account. As well as providing an overview of your organisation's finances, the reports need to separate the accounts for specific programs and projects.
It is the Treasurer's responsibility to make sure their fellow Board members understand the budget and their monthly reports. They must be able to explain, in everyday language, the meaning behind the figures. If people do not understand, they will either switch off, or there will be unnecessary discussions at each meeting about the same information. In the worst cases, poor reporting can result in the Board missing important financial signposts, threatening the health and even survival of the organisation.
The Treasurer's Report draws on the Income and Expenditure Statement to tell the Board how the organisation is travelling at this point in time.
The basic information comes in the Year to Date column; this is how much you have spent (or taken in) since the end of the last financial year.
In itself, that is not very helpful, because you do not know whether that figure is good, bad, or indifferent. The Treasurer thus adds extra benchmarks - columns giving Budget (this is the figure we had expected to see at this stage) and Previous Year (this is what we had spent by this time last year).
The Previous Year figure is simply read off the previous year's monthly accounts. The Budget column is generally calculated as Total Budget/(Elapsed Months/12), so at the end of September you check your expenditure to date against budget/(3/12). If you know that your income and outgoings are not evenly spread - if, say, you get nearly all your donations towards the end of the year, meaning that first quarter figures look horribly under budget - then the Treasurer can try and build that back-end-loading into the budget or, alternatively, can simply add a note to the accounts explaining why the September figures are not as bad as they look.
In general, however, any major difference between budget and actual figures is a marker for concern, and the Treasurer's report to the Board is the place to check these out. For this reason, you may want to double up on the variance figures, giving them as both numbers and percentages.
The argument against giving the percentages is the danger that the Board will spend hours discussing why Security has risen 20% since last month, from $75 to $90, while overlooking a 6% rise in Salaries from $350,000 to $371,000 - giving more time to $20 than $20,000. You need a filter that flags differences when they are over a certain percentage and a certain amount.
As a member of the Board, your job is to:
An example of a Treasurer's Report is provided here.
The terms 'bookkeeping' and 'accounting' are often used interchangeably, but they have different meanings, and these differences are significant. Accounting refers to the whole process of financial recording and reporting, while bookkeeping, as its name suggests, is about keeping the books, i.e. recording your income and expenditure.
There are two different kinds of accounting for income and expenditure - cash accounting and accrual accounting - and one thing that the Board absolutely has to do is to decide which one it wants. In order to decide on what it wants, the Board has to understand the pros and cons of each kind. And in order to operate either kind of accounting, the Board has to understand what that method can and cannot do.
Cash accounting is the simplest format, and most small organisations use it. It works on the basis of tracking the actual dollars in and dollars out as if they were actual crumpled notes. If on Monday someone pays your organisation $100 you enter it in the book as income under Monday's date. If on Tuesday you pay someone $100 you enter it in the book as expenditure under Tuesday's date.
That is very straightforward, and it may never have occurred to you that there was another way of doing things. But it does have its defects, and they have to do with the fact that your organisation is not in fact a processing machine for crumpled notes. What your organisation does is provide a social good. And your obligations here also have financial implications.
If your organisation gets all its income from fees, or from no-strings contributions, this is not going to be much of a problem. If, however, your organisation gets any significant proportion of its income as payment for services - if you get grants for particular projects, or if you contract with the government to deliver client services - then simple cash accounting can mislead.
Let's say, for example, that your local council contracts with your organisation to deliver a health program to local groups for $100,000; to be precise, they require you to hire staff and hire clinic premises. According to the budget you submitted for the tender this is going to cost you $92,000. Simple cash accounting will drop $100,000 into the income column as soon as you get the cheque. It is not a loan, so you do not have to make an entry into the liabilities column.
The risk is that the Board, looking at the accounts and seeing them boosted by $100,000 without any offsetting debits, will go off and spend that $100,000 on things like photocopying and computers and new carpets or salary rises without remembering that within the next year they are going to have to find $92,000 for extra salaries and rent. Yes, you would hope the Treasurer would speak up and point out the true circumstances, but if you cannot see something in the accounts it is always possible that it'll get overlooked.
Accrual accounting recognises income only when it is been earned, and scores expenditures when they are incurred rather than when they are actually paid. You put that $100,000 in the accounts when you provide the services you are charging for, not when you actually get the cheque. You debit the accounts on the date you write cheques - the day you actually promise to pay all these people - not the often much later date after people have got their mail, got your cheques down to their bank, waited five business days, and actually seen the money drop out of your account into theirs.
Small organisations can get by with cash accounting, but larger organisations that deliver services in return for payment (by clients, governments, or grantmakers) tend to use accrual accounting. It is more complicated, and requires more financial expertise, and it may require more resources for your staff.
It is also possible to have an accounting system that incorporates elements of both modes, but that is even more complicated.
Both modes - cash and accrual - have their advantages and disadvantages, and which your organisation chooses is going to depend on your size, your business model, and your available resources.
|Cash Accounting||Accrual Accounting|
Which model you settle on is not in itself so very important; what is absolutely vital, however, is that the Board knows which one is being used and the reasons for choosing that approach, and understands how to read the financial reports produced under that model. If the Board thinks the accounts they are reading are cash accounts and they are really accrual accounts, or vice versa, major misunderstandings are possible.
Debtors are people who owe your organisation money - either people you have lent money to, or people who have received your goods and services but have not yet paid you.
Creditors are people the organisation owes money to - either people you have borrowed money from, or people whose goods or services you have bought but not yet paid for.
Your organisation must have in place
These are matters that fall into the sphere of responsibility of the Manager, but the Board needs to be satisfied that these matters are properly regulated and under proper control.
Some Board members have been known to be rather puzzled by Depreciation, because it records money going out when no money was in fact spent. Every day that passes we are putting away a little in an imaginary fund to buy replacement equipment, and that is what depreciation is and why it is a running cost.
Looked at more broadly, it is because we do not treat investment in plant in the same way as we do paying for the cleaner. The cleaner does their work and goes away and leaves nothing behind, but when you buy a desk you have the desk into the future. If we are setting all these things out in the same way then you should only put down as much of the desk as you actually used this year - which is the depreciation.
Different items depreciate at different speeds.
Different states have different auditing requirements for community organisations. You can check the legislation for incorporated associations in your state by going to www.ourcommunity.com.au/legals.
Even if your organisation does not have to be audited, it is often a good idea to have an audit if you are fundraising or receiving government grants. An audit will help provide an assurance that your accounts are complete and accurate. The Board has to approve the appointment of the auditor.
If you do have an auditor, check that they:
When preparing material for the auditor, your Treasurer should review the previous year's accounts and ask the following questions so they can brief your auditor:
The auditor will perform tests on your accounting systems, review your internal accounting controls, examine corroborating documents, analyse your procedures, and check your cash accounts and other balances.
The auditor may want to see some of the following:
Once the auditor has reviewed your accounting principles and financial statements, you will receive a report which will include a Statement of Financial Position, a Statement of Activities, a Statement of Cash Flows, and footnotes. The footnotes include information such as the nature of your organisation's operations, a summary of significant policies or events, and information on your organisation's commitments and risks.
The auditor may also discover weaknesses in your internal financial systems, and in their report or covering letter may recommend changes to your processes and procedures.
Organisations have different accounting and financial reporting needs, depending on their size and the volume of their transactions. But every organisation needs some kind of bookkeeping system.
Bookkeeping is basically keeping track of your organisation's money by recording all income and expenditure and making this information readily available in an easy to understand format. You must be able to show how much was spent and received, what it was for and who authorised it.
This information should be recorded on your invoices, receipts, bills, cheques and other financial records. Then you need to classify your records into meaningful categories so the information can be sorted and analysed.
A chart of accounts is a list of the different type of expenses and revenue. For example, you might have an account for course fees, and another for events income and expenses.
Your bank statements are important financial records. Ask your bank for bank statements that finish at the end of a month as this makes them easier to reconcile with your accounts.
A bank reconciliation is a schedule that explains the differences between the bank statement balance and the company's cash balance. Your bank statement may not equal your cash records because of timing differences, for example, un-presented cheques, and other information not in your cash records, such as interest paid or received.
An example of a bank reconciliation can be downloaded here.
The Board need not involve itself directly with the conduct of bank reconciliations, but must be satisfied that a reliable system exists and is adhered to.
An Assets Register allows you to keep track of your assets and provides a fair estimate of their worth. It meets your taxation, statutory and sale-of-business obligations. It is also an appropriate place to record serial numbers, make, model, etc.
Your organisation needs an Asset Register to:
You can start your Asset Register by recording all physical assets, regardless of the funding source.
The types of physical assets that need to be recorded include:
After that, check each asset item at least once a year.
As a general rule, record each asset separately. The exception is multiple assets that combine to perform one function if the value of the individual components is less than $3,000 but the total value of the asset is more than $3,000. Examples are personal computers consisting of a monitor, keyboard and central processing unit, or a set of books and periodicals.
Treat replacing assets as a maintenance cost. When the purchase cost is not known, record the asset at the cost of a comparable item at current prices.
Record assets in the Register in the month they are purchased. The cost should include installation costs, computer cabling, transportation and other associated costs incurred to make the asset usable. Use purchase orders, invoices and delivery dockets to provide the detail.
You also need to record leased assets. There are two types of leasing arrangements: operating lease and finance lease. A finance lease finances the cost of a leased asset. These finance leases must be recorded in the Assets Register. An operating lease is when the leased item is 'given back' at the end of the lease period.
When you dispose of an asset - when you sell it, give it away or throw it away - update your Asset Register to include the date of disposal, the disposal amount and the method of disposal. Cease depreciation at the end of the month you disposed of the asset.
Treat trading in an asset as a disposal. When you sell an asset, record the proceeds in your financial records as well as your assets register.
Do not delete assets from your Assets Register until after the end of the financial year as the information needs to be incorporated into the annual statement of your financial position. At the beginning of the next financial year, record disposed-of assets separately.
The Board need not involve itself directly with the conduct of the Assets Register, but must be satisfied that a reliable system exists and is adhered to.
A Sample Assets Register can be downloaded here.
Very small organisations can get by with what's called 'shoebox accounting', with all your accounts kept in a box or filing cabinet.
One step up from shoebox accounts are ledgers or journals of income and expenditure. You can use books for ledgers, develop your own Excel spreadsheet or use commercial software.
The information in ledgers will include:
The most common types of ledgers are: assets, liabilities, equity, and income and expenditure. You can also have separate ledgers for large projects and fundraising events.
If you are registered for GST, when you record your income it should not include GST. Likewise, your expenditure will not include the tax input credits you are entitled to.
The GST components should be recorded separately as amounts you will pay and receive from the Australian Taxation Office.
A sample income and expenditure ledger can be downloaded here.
The Board need not involve itself directly with the maintenance of the organisation's financial ledgers, but must be satisfied that a reliable system exists and is adhered to.
Of course, many of your records will be kept primarily on your computers. Accounting software is readily available, highly varied, and immensely powerful. Your organisation's choice will be between simpler and cheaper packages and more complicated and more expensive ones. Do not just pick the cheapest; the real costs of such software comes not in the purchase price but in the training time required, and high-end programs with more capacity call for much more expertise. You may have to send your Treasurer off on a course, for example.
Whatever package the organisation selects must be capable of not only of handling the payroll and the accounts but also of generating reports for the Board that contain all the information needed to plot the course of the organisation.
Software must also be able to generate all the reports called for by external bodies such as government authorities and funders.
The Board is responsible for ensuring that your organisation is protected against financial risks.
A risk is any event or action that harms the organisation's reputation or its ability to achieve its objectives and carry out its operations. The risk of anything going wrong is usually small, but it can have disastrous consequences.
One way of managing your risks is through internal systems and checks and balances. For example, ideally no financial transaction should be handled by the same person from beginning to end. You need to decide who can authorise spending, and how much each person can spend before they need to have the spending agreed to by their manager or the Board. The Board must be satisfied that this information is recorded in your procedures manual and included in training programs.
It is common practice (and common sense) to have all cheques, or at least all cheques over a certain amount, countersigned by one or two office bearers or senior staff. Often one of these people will be the organisation's Treasurer.
This can be inconvenient, but it is important to have someone responsible for monitoring expenditure to keep a watchful eye on cash flow and prevent any opportunity for fraudulent behaviour. Make sure, too, that even approved signatories cannot sign a cheque made payable to themselves.
A list of all cheques issued each month should be provided to the Treasurer.
Some organisations allow any two out of three or four named people to sign cheques. While this is a practical and flexible arrangement, it does weaken the monitoring function.
The Board does not have to organise all this - that is a job for the Manager - but it must make sure there is a Cheque Authority Policy in place.
Make sure that if your organisation has an official credit card that
Other people may be added to the list by the Board, which may also delegate this power to any or all of:
Cards may be issued on a temporary basis and recovered afterwards.
Each of the organisation's credit cards should be issued to a specific person, who will remain personally accountable for the use of the card. Only the authorised signatory may use the card. No more than one card should be issued per cardholder.
Appropriate credit limits should be set for each card.
Your policy should state that the cardholder has to
The cardholder must not
The card must only be used for activities that are a direct consequence of the cardholder's function within the organisation. If there is any doubt as to whether or not an item is function-related, prior authorisation should be obtained from the Manager (or, in the case of the Manager's own card, the Chair or Treasurer of the Board, or the Chair of the Finance Committee).
The Board does not have to organise all this - that is a job for the Manager - but it must make sure there is a Credit Card Policy in place.
Petty cash allows staff members to make purchases or get reimbursements for small items such as stamps, teabags and parking.
There should be an upper limit on how much can be spent from petty cash on any one item. For example, your policy might state that items over $50 should be paid by cheque or EFT (electronic funds transfer).
Your petty cash fund should have enough money in it to cover expenditures for about a month - if it is too small, you will run out of money, if it is too large, it is a security risk.
Keep petty cash in a secure place and decide who can access it. It is best if only one or two people are responsible for petty cash.
Document each petty cash transaction with petty cash vouchers or in a petty cash book. It is good practice to keep all receipts as well.
The Board does not have to organise all this - that is a job for the Manager - but it must know that tight controls are in place.
The Board has ultimate responsibility for the prevention and detection of fraud and is responsible for ensuring that appropriate and effective internal control systems are in place.
The Manager must ensure that there are mechanisms in place within their area of control to:
All staff share in the responsibility for the prevention and detection of fraud in their areas of responsibility. All staff should have the responsibility to report suspected fraud. Any staff member who suspects fraudulent activity must immediately notify their supervisor or those responsible for investigations. In situations where the supervisor is suspected of involvement in the fraudulent activity, the matter should be notified to the next highest level of supervision. Any fraud by any staff member has to constitute grounds for dismissal.
Fraud prevention accounting procedures must be incorporated in your policies related to Cash Management, Credit Card Use, Commercial Transactions, and Investment.
All complaints of suspected fraudulent behaviour should be investigated thoroughly, whilst also providing for the protection of those individuals making the complaint, and natural justice to those individuals being the subject of any such complaint. Where a prima facie case of fraud has been established the matter should be referred to police. Any action taken by police should be pursued independently of any employment-related investigation by the organisation.
Your recruitment strategies, too, have to incorporate fraud prevention:
Fraud prevention and detection issues should also be included in relevant staff development and induction activities.
It is not just your organisation, either. Vendors and contractors must be asked to agree in writing to abide by these policies and procedures as well.
Use these questions to check your understanding of the material covered in this section. If you are unable to complete the quiz confidently, review the appropriate material.
Download the Tutorial Review here (PDF 200KB).
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