Understanding finances

No, talking is also part of the job.

Don't just do something - sit there. Take the time to think it through.

You're supposed to anticipate most issues in advance and just tweak them as the situation becomes clearer. If you live in crisis mode the whole time that just means you can't settle down and think ahead.

The following should walk you through the process.

Knowing what you need to know

Board meetings don't have to be like that, but good board meetings need good board members, and good board members need preparation.

Everybody has to know their job - and part of the job of being a board member is being on top of where the money's going.

You won't necessarily learn the finer points of how to draw up a balance sheet, but you should learn how to read and understand one.

Ignorance of the law is no excuse, any judge will tell you. If you're a Sydneysider driving through Melbourne and get pulled over by the police, you can certainly let them know that nobody told you that it was wrong to drive past a parked tram, but you're still going to get a ticket. It was your business to find out.

Ignorance of accounting, you'll find, is no excuse either. You probably won't get a ticket, but you may have an accident, which is worse.

How accidents happen, and the two types of accounting

One possible source of trouble comes at the very start. There are two different ways to run your accounts, which means that the treasurer may not be speaking Klingon at all - it may be Elvish, in which case your hard-won few words of Klingon are only going to increase the confusion.

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 can't do.

1. Cash accounting

Cash accounting is the simplest format, and is used by most small organisations.

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 you $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's 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 you do, and what people pay you to do, is carry out your mission. And your obligations here also have financial implications.

If your organisation gets all its income from no-strings donations, this isn't going to be much of a problem. If, however, your group 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 the government contracts with you to deliver psychological services to homeless people for $100,000; to be precise, they require you to hire 1.5 psychologists for 12 months 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's not a loan, so you don't have to make an entry into the liabilities column.

And 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 without remembering that within the next year they're going to have to find $92,000 for extra salaries and rent.

Yes, you'd hope the treasurer would speak up and point out the true circumstances, but if you can't see something in the accounts it's always possible that it will be overlooked.

2. Accrual accounting

Accrual accounting recognises income only when it's been earned, and scores expenditures when they're incurred rather than when they're actually paid.

It's more complicated, and requires more financial expertise, and it may require more resources for your finance section.

You put that $100,000 in the accounts when you provide the services you're 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 received their mail, taken 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 most large organisations that deliver services in return for payment (by clients, governments, or grantmakers) use accrual accounting.

It's also possible to have an accounting system that incorporates elements of both modes, but that's even more complicated.

3. Which?

Both modes - cash and accrual - have their advantages and disadvantages, and which you choose is going to depend on your size, your business model, and your available resources.