5. Financial management

Financial Management

To be a sustainable organisation, it is not enough to only monitor and evaluate your projects, strategic processes, personnel and knowledge. It is essential to also monitor and evaluate your operational and organisational budgets. Having a continuous stream of income and making the most of it is an essential element of the of  the stability of your organisation’s work. In doing so, cost efficiency and effectiveness are important to keep in mind along with the allocation of specific financial resources to monitoring, evaluation and learning activities.

In short, financial management entails planning, organising, controlling, monitoring and evaluating the financial resources of an organisation to achieve its overall objectives.

In this section, we explain how to ensure the two basic criteria of a quality financial management with a strong MEL dimension:

  • responsible personnel
  • a sound financial planning, monitoring and evaluation scheme, which includes:
  1. accounting
  2. budgeting
  3. control
  4. reporting

Below you can find advice and resources for improving your organisational practices related to these two identified criteria in the field of financial management.

If you first want to assess your organisation’s financial management practice or refresh your memory about the specific indicators per criteria click here.

Responsible personnel

In order to have an effective financial management an organisation needs to establish a suitable internal environment. Such environment depends to a large extent on the size of the organisation. In all situations it is essential to assign concrete responsibilities to positions/people related to the financial management at the organisational and the operational level.

Guiding questions that can help an organisation to create a suitable environment for financial management:

  • Who is legally accountable for the overall financial management of the organisation? (eg. Treasurer, chair of the board)
  • Who is overseeing the overall financial management of the organisation? (eg. Treasurer)
  • Who is responsible for the overall financial management of the organisation on a day-to-day basis? (eg. Director)
  • Who is implementing the overall financial management of the organisation on a day-to-day basis? (eg. Financial Coordinator).
  • Are all these detailed responsibilities per position listed in the respective job descriptions?
  • Is the overview of assigned financial responsibilities included in the written financial procedures of the organisation?
  • How are the responsible persons for financial management held accountable? Is there a double-check principle for expenditures on project and organisational level included in the procedures?
  • Are the responsible persons developing financial reports (project reports, annual reports)? Are these reports shared with other people in the organisation?
  • Are the lessons identified about the financial management aspects of each project and/or annually of the entire organisation internally shared, discussed and used in the development of new (projects) applications and plans?

Read more about…

  • Course Handbook. Practical Financial Management for NGOs- Getting the Basics Right (FM1) Part 1 Chapter 2 Getting Organised (p.13-22), 2009, Terry Lewis

Financial Planning, Monitoring, Evaluation & Learning

There are many tools to use in order to manage financial resources of an organisation and create a sound financial management system that includes monitoring, evaluation and learning.  We have identified the following four tools:

1. Accounting

Financial Management

Accounting for the money you have raised as an organisation is a crucial part of the financial management process. This does not solely refer to the accounting or bookkeeping system that an organisation uses, and it is not only about the money itself.  It also refers to the ways to show how the money was spend and, most importantly, if and how it helped the organisation achieve its goals.

Suggested steps:

  • Make sure that appropriate financial procedures and reporting standards are in place.  Include the following elements (amongst others):
    • frequency of monitoring moments of the project and overall budget (i.e. monthly, bi-monthly, trimestrial, mid-term, etc.)
    • Past year budget evaluation
    • Financial milestones (short and long-term)
    • Details on methods and tools used to include learnings in future financial planning
  • Create a separate account category for each project.

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2. Budgeting

The process of budgeting simply entails the following; calculating the expenditures, calculating income, compare income and expenditures and analyse the income and expenditures in order to create a cashflow (the total amount of money being transferred into and out of an organisation) forecast.

Suggested steps:

  • Use resources and needs assessments in order to plan its operational and organisational budgets
  • Make sure that the budget forecast is part of the annual planning process of the entire organisation
  • Ensure that there are clear responsibilities for preparing, managing and implementing the annual budget plans (see also the previous section about responsible personnel)  

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3. Financial control

Financial control systems are meant to provide sufficient security for the finances and assets of the organisation. The systems provide checks and balances which helps an organisation to prevent fraud or misappropriation or deviations from accepted policies and procedures. Examples of these systems are inventory controls, which means a system that records assets which are generally consumable or saleable and internal and external audits. In short, if there is a situation of financial control it means that the financial resources are correctly and effectively used.  

Suggested steps:

NOTE: It depends on the scope of the organisation, the  financial and human resource available if
these steps are feasible, especially related to an external audit.

  • make sure there is a stock/inventory control system in place which is followed
  • running budgets are monitored periodically and expenditures are adapted  accordingly.
  • annual external audits are conducted and review the financial management practices
  • recommendations derived from the audits are implemented

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4. Financial reporting

The final element of a sound Financial monitoring, evaluation and learning scheme is by producing financial reports in order to asses the progress and results of the financial affairs for the organisation. If the previous suggested steps  have been taken, which means that sufficient accounting, budgeting and checks have taken place, it is ‘relatively’ easy  to create a financial report.  Remember that a report should be timely, accurate and relevant!

Suggested steps:

  • Make sure that the reports are done in a timely manner (based on what is committed to in the financial procedures)
  • Include a balance sheet in the financial reports of specific projects and the organisational budget
  • Ensure that financial transactions are backed up by relevant supporting documents
  • Review and approve the financial reports by assigned personnel such as the board of the organisation/financial committee (based on what is committed to in the financial procedures)

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How to allocate specific financial resources to monitoring, evaluation and learning activities of the organisation?

When you are planning your MEL activities for the entire organisation (for example after the Strategic Plan has been finalised) or for a specific project or program, make sure that you include a realistic planning of the financial resources needed in order to conduct the MEL activities.  To be as realistic as possible it is helpful to make three different budget lines, for monitoring, evaluation and learning separately. This planning activity reduces the risk that running out of financial resources when the evaluation and reporting phases are starting.

It is often challenging to source and secure financial resources for monitoring and evaluation of outcomes of projects and programmes and to use the lessons learned identified. Since there is (often) not a specific project were the costs relate to and can be charged to directly.  

Tips to address this challenge:

  1. Draw financial resources together from different projects
  2. Create a separate monitoring and evaluation fund, facility or project associated with an outcome or a programme to which all the constituent projects would contribute through transfer of some project funds. This facility could be located in the same entity that manages the outcome or programme.
  3. Mobilise funds from partners directly for an outcome or programme monitoring and evaluation facility
  4. Allocate required funds annually for each outcome on the basis of planned costs of monitoring and evaluation from overall programme budget to the  facility or fund

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