What Is Required To Have Effective Financial Management

Gabriel is the Chief Executive Officer of a fast growing medium-sized enterprise with 75 staff in 5 locations across the country. Looking through the window of his elegantly furnished office, and deep in thought, he stares hazily at the peaceful singing birds nested up one of the trees in the compound. “I just don’t understand what is going on anymore. I never know whether we have enough funds to clear our debts. I have no idea whether we are making profit or not. I don’t know whether we are spending money on the most important things or not. Everything just seems to be moving fast”, the troubled Gabriel mutters to himself as he shakes his head.

It is no secret that an organisation cannot thrive, let alone survive, if it does not have a full grasp of its financial management. Many leaders, like Gabriel, continuously grapple and struggle with the question of what is required to have effective financial management.

ACLAIM presents the simple “Face of Effective Financial Management” model to explain the key components of effective financial management. The premise of the model is that there are Hard components of the financial management system (eyes, nose and mouth) that are supported by the Soft ones, as discussed below.

Hard components of an effective financial management system

1. Budgeting

A budget is simply a “plan in numbers”. Budgets enable the organisation to allocate resources according to strategic areas of priority. As goes the saying “A budget tells your money where to go; otherwise you wonder where it went”. An organisation should develop budgets for each department or project, based on the plans for the year. These are then consolidated into a master budget and approved by the Board. During the year, to implement the approved annual budget, mini-budgets should also be prepared based on the events that are set to be conducted. As a rule of thumb, a good budget is one that a person who did not prepare it can implement it without referring to the preparer for clarity. In other words: it should be easy to read and understand, the calculations should be clear, the costs should be justified, and explanatory notes made for assumptions. Good practice in budget preparation requires involvement of staff from various departments to enhance ownership and ease implementation.

2. Accounting

Also referred to as bookkeeping, this relates to the process of organizing transactions in a manner that enables the organisation make sense of the financial transactions taking place. The transactions should be captured in standard accounting documents (payment vouchers, goods received notes, stock issue vouchers, receipts, etc) and categorized using various meaningful criteria (such as by transaction type, department, location, etc). The organisation should have an accounting software suitable for its financial reporting needs. The documents supporting the transactions should be adequately filed, both physically and electronically, in an orderly manner that enhances easy retrieval.

3. Reporting

Periodically, it is important for the finance department to prepare and share (and explain in lay terms) financial reports with the relevant users to guide their decision-making. The Board of Directors, Management, Banks (or Donors), Clients (or Beneficiaries), Government, among others, all have differing financial information needs. These may include: to ascertain the performance of the organisation against the budget; to keep tabs with whether or not it has adequate funds to meet liabilities as and when they fall due; to find out whether it is using various resources effectively and efficiently for the achievement of objectives; to confirm that the organisation is meeting its statutory obligations, etc. The finance department should bear the various users of reports in mind as it determines the depth, simplicity, frequency and format of the financial reports.

4. Internal controls

Every organisation faces threats that could deter it from achieving its set objectives. Some are within the control of the organisation while others are not. Internal controls are, therefore, all the actions taken by the organisation to prevent or detect or correct these threats to the organisation that are within its control. Internal controls include: checks conducted by management such as reviewing financial reports; limitation of access to unauthorized persons; carrying out reconciliations of positions that should ideally be the same, for example a cash count to the actual cash; physical verification, for example of fixed assets; authorizations and approvals of transactions; use of standard documents; and segregation of duties.

Soft components of an effective financial management system

1. Culture and Values

A saying goes that “Culture eats Strategy for Breakfast”. One could as well add that “Culture eats Systems for Lunch”. However good the Hard or Core financial management components discussed above are, if there is no culture of integrity, accountability, transparency and stewardship, among others, the organisation would still have a weak financial management system. For instance, the internal controls may require that one returns a receipt as evidence of a payment made, if there is no honesty, the person could submit a receipt that is fraudulently inflated, hence causing financial loss to the organisation.

2. Enabling environment

The environment in the organisation should support effective financial management. This may include: having a clear and appropriate organisational structure; Board members and Management who lead by example and do not manipulate the systems; proper integration between finance and non-finance departments; suitable working environment.

3. Staff

There is need for staff that have the right values, attitudes, skills, experience and knowledge to handle financial management roles. This also includes staff that fall in departments other than finance but have financial management roles to play such as authorization of expenditure, preparation of budgets, review of financial reports, among others. ACLAIM conducts a Finance for Non-Finance Managers’ Training to demystify financial management for the non-finance staff that may not possess the requisite skills to conduct their roles.

Each model may have flaws and gaps in design. However, it is anticipated that if the above Face of Effective Financial Management is fully operational with the Hard components well supported by the Soft components of financial management, organisational leaders like Gabriel will sleep more soundly at night.

ACLAIM Africa Limited offers Finance Consulting, Finance Training and Outsourced Finance Management services to support organisations to have a beautiful face of effective financial management.

By Alfred Brian Agaba

Insight Category: Finance, SMEs, Not for Profit