INITIAL ASSESSMENT In seeking to arrive at a base level assessment the following questionnaire asks you to consider a series of statements about the organisation’s finances. How you report these to your Board of Trustees or Management Committee and more importantly to the funders and donors. The scoring system is designed to make you consider each statement in turn but not “manufacture” a result to leave you sitting in a comfortable average. In order to achieve 5 you must be certain that you can demonstrate with appropriate evidence or documentation that the organisation carries out that particular task. For example, 2.12: A bank reconciliation is done each month for every bank account, usually within three days of receipt of the bank statement, and signed off with either line manager or Treasurer. Can you produce this documentation in a format that shows: an opening balance from previous week or month the total lodgements for that week or month the total payments for that week or month a closing balance that reconciles your outstanding lodgements and un-cleared cheques matching the statement balance from the bank If it is not possible to produce a bank reconciliation in this form then it is likely that you will score 0 because there is no evidence available. To score 4 the organisation must be able to produce evidence that there are mechanisms in place which with some work will help move the score to 5. In other words, there has been some thought put into doing the work and it is substantially there and may need a bit of extra help and guidance to complete the process. If, on the other hand, you can only provide evidence which suggests a small element of the work or task has been started but is substantially incomplete then you should score 1. There is a glossary of terms at the end of the questionnaire which describes some of the words and phrases contained within the text and you might find this helpful. Finally as part of the Assessment process it would be helpful if at the first visit the following information could be made available: 1. 2. 3. 4. 5. 6. 7. 8. 9. Bank Statements for all accounts held by organisation Latest set of organisation’s accounts Latest bank reconciliations for each account and petty cash held Cashbook records – either hand written legers or computer records Cheque journal Receipt book Letter(s) of Offer from funder(s) and conditions for claiming and reporting on expenditure Chart of accounts / cost centres for each funder Copy of Financial Policies and Procedures NB – do not complete the questionnaire yet. This will be discussed and done together on our first visit. © Sector Matters 23 June 2011 SECTION 1 Planning & Budgeting In advance of your financial year you should sit down and prepare an annual budget that reflects the organisation’s expected income and expenditure for the coming year and how these relate to your aims. It is helpful if both your finance personnel and those engaged in delivering any of your programmes sit and discuss what will happen and how much it will cost to make it happen. Your budgeted costs are likely to fall into two categories – core or central costs and direct project expenditure. If you have a computerised accounting package then account codes are useful reminders to enable you to capture all the expenditure associated with both the project and the organisation. You might want to have a copy of these beside you as you prepare the budget. If you have more than one project it is generally useful to identify the income and costs associated with each project and match it against the projected expenditure. This should help you monitor accurately the costs incurred and make reporting easier. PLEASE NOTE – these statements are guidelines to best practice. If you have nothing relating to a particular statement in place at present DO NOT WORRY we will work together towards finding the ones applicable to your organisation and also to putting them into place during the course of the preliminary visit and in writing the Action Plan. PB 1.1 Statement of practice Budgets are prepared in good time for all the costs of running the 5 organisation 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 Both finance and programme staff are involved in setting budgets Project budgets are based on the costs of planned activities Budget worksheets include explanatory notes and clear calculations A separate budget is prepared for core costs (overheads) An apportionment of core costs shared between funders / cost centres is clearly identified and calculated by an agreed formula Organisational budgets are examined and approved by the Board of Trustees (Management Committee) A named individual (budget holder) is responsible for implementing and managing each budget Budget codes match (correspond with) accounting codes All planned operational costs are adequately funded The financial environment is regularly scanned to adjust budgets for changes in costs such as inflationary rises, VAT and other tax changes A cash flow forecast is prepared every month TOTAL SCORE for Planning & Budgeting © Sector Matters 23 June 2011 SCORE 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 5 4 4 1 1 0 0 5 4 1 0 5 4 1 0 SECTION 2 Basic Accounting Systems The primary aim of maintaining a financial record is to demonstrate that you have used the income received for the purposes it was meant. Each cheque written or each electronic payment made should have an accompanying invoice / purchase order to confirm that the payment was properly authorised and then should be filed in cheque / payment number order as back up to your cash book entries and bank reconciliations. Similarly every payment received whether in cash, by cheque or by BACS transfer should be recorded in the cash book and referenced to the appropriate lodgement slip or BACS reference on the bank statement. These records are critical to helping you accurately reconcile the bank statement against your cash book record at the end of each month. BAS 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 Statement of Practice Every payment made has a supporting document providing evidence All cash or cheques received are receipted and a copy filed in numerical order. (If you do not receive cash or cheques score 5). All payments and receipts are recorded in cashbooks and should include the date, a description and the amount All cash received is counted and verified by two people before it is securely locked away in a safe or drawer for the next bank lodgement, preferably within forty eight hours. Staff are aware of the cash indemnity limits contained within the organisational insurance policy document and will ensure at all times to adhere to these conditions. There are separate cashbooks or spreadsheets maintained for each bank, petty cash and business card (if held) accounts Every entry in the cashbooks is cross referenced to a supporting document All cashbooks are updated at least once a month. All cashbooks are written neatly in permanent ink or on computer A standard Chart of Accounts is used to code or classify each transaction. Transactions are also classified by project or donor using a standard list of "cost centres". A bank reconciliation is done each month for every bank account, usually within three days of receipt of the bank statement, and signed off with either line manager or Treasurer. Differences are examined and resolved quickly The petty cash account reconciliation is completed every month and agreed and signed off with either line manager or Treasurer. Differences are examined and resolved quickly The organisation maintains a record of amounts owed to (debtors) and by others (creditors) The depreciation charges on fixed assets is accounted for when preparing annual budgets to allow reserves to accumulate for replacement assets TOTAL SCORE for Basic Accounting Systems © Sector Matters 23 June 2011 SCORE 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 5 4 4 1 1 0 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 SECTION 3 Financial Reporting Your Management Committee or Board of Trustees is ultimately accountable for the finances of the organisation and need to be informed about the financial position on a regular basis to allow them to take strategic decisions and to measure performance of specific projects which may have a significant impact upon the organisation whether positively or negatively. You also need to report on the various balances in your bank account/s and on any grants or income owed to you at the end of any given period. With this in mind report structure is very important and should contain headings that capture all income and expenditure in the given period (month, quarter etc.) and then measure the results against the budget (as discussed in Section 1). If there are significant variances then it is important to satisfactorily explain these as the reports are issued. To ensure reports are designed to give the right information to the right audience it may be necessary to devise several formats which give the overall picture and then separately provide project information in a form that can be easily used to report to a particular funder. FR 3.1 Statement of practice SCORE The Board of Trustees (Management Committee) reviews financial 5 4 1 0 reports every month or at least every quarter 3.2 Senior managers discuss financial reports every month or at least 5 every quarter Reports include details of cash and bank balances and include 5 amounts payable (debtors) and amounts owed (creditors) 3.3 3.4 Budget holders receive budget monitoring reports every month 3.6 Budget monitoring reports include explanations and comments about variances (differences) Financial reports are used to help make decisions Financial information is shared with beneficiaries at least once each year in an accessible way Annual audits are up to date (signed within six months of the year end) 3.9 1 0 4 1 0 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 Board members receive monthly or quarterly cashflow, budget 5 monitoring and income / expenditure account reports 3.5 3.7 3.8 4 TOTAL SCORE for Financial Reporting © Sector Matters 23 June 2011 SECTION 4 Internal Controls Internal controls are there to protect the organisation, staff and volunteers, to prevent errors and unfortunately in some circumstances detect fraud. They also ensure that all assets belonging to the organisation are accounted for and that records are kept up to date and helps contribute towards strategic planning. IC 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 Statement of practice Cash is kept safely in a locked cashbox or safe in the custody of a named individual All cash received is banked intact, ie without any being spent. (If no cash received, score 5). All cheques are signed by at least two authorised signatories A record of batch payments by BACS is maintained detailing beneficaries and amounts payable and is signed off by at least two authorised signatories Cheques are signed only when all the details have been properly entered (signatories should never be asked to sign blank cheques) Bank reconciliations are checked by someone who did not prepare them There is a written policy detailing who can authorise expenditure of differing types and up to what value All transactions are properly authorised Cash payments are authorised by someone other than the cashier Different steps in the procurement process, (eg ordering, receiving and paying) are shared among different people where practical Expenses claims for staff advances are checked by the same person who authorised the advance Staff salaries (including advances and loan deductions) are checked each month by a senior manager Statutory deductions (eg payroll taxes) are properly made and paid on time All fixed assets (eg vehicles, computers, equipment) owned by the organisation are insured and controlled using a fixed asset register There is an approved Policies and Procedures manual in place which is relevant to the organisation and known by staff. The manual is regularly updated to take account of changing legislation and new funder requirements An accountant, independent examiner or auditor, in accordance with the conditions within your governing document and to comply with Charity Commission legislation, is selected by the Trustees TOTAL SCORE for Internal Controls © Sector Matters 23 June 2011 SCORE 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 5 4 4 1 1 0 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 SECTION 5 Income Management Grants provide a significant part of the income received by voluntary and community organisations. It is therefore important that the organisation is familiar with the terms and conditions contained in the letter of offer from each of its funders. This ensures that your project delivers on the proposed outcomes and you are clear on the timing of the release of the grant. Sometimes the grant is paid in full in advance or perhaps a part payment is made and then it is the organisations responsibility to demonstrate to the funder how the grant has been spent before remaining balances can be released. This could mean submitting quarterly claims in arrears based on receipted expenditure. These conditions may impact upon cash flow which in turn may mean that arrangements need to be made with your bank to provide overdraft facilities or just await the arrival of the grant. When reporting on expenditure to a particular funder there should be consultation between project and finance staff to maintain consistency and pick up on any conditions attached to the grant and projected outcomes. Income can also be generated by other means including fundraising activities, service charges, donations and through tender opportunities. The organisation must be clear on the purposes for which the money is generated and how and when it is to be spent. Donations are generally regarded as unrestricted income and the organisation has the freedom to allocate such income as it deems appropriate. IM 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 Statement of practice SCORE There is a signed Service Level Agreement / Letter of Offer in place 5 4 1 0 for each grant Senior managers check that the grant conditions are reasonable 5 4 1 0 before signing agreements Grant conditions on procurement, banking and record keeping are 5 4 1 0 known by finance staff, budget holders and procurement officer (s) There is compliance with the terms and conditions in grant agreements Funders receive financial reports in the right format and on time Funders financial and narrative reports are consistent and clearly linked to each other Donations are receipted and banked in full without costs being deducted Tenders are prepared using "full cost recovery" method to incorporate all service delivery and on-cost charges Fundraising income is identified with event and banked in full before costs are allocated Funds received are identified as either restricted or unrestricted income and are never "borrowed" to subsidise other projects or activities TOTAL SCORE for Income Management © Sector Matters 23 June 2011 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 SECTION 6 Staffing It is important that staff are both confident and competent to perform the financial functions for the organisation. This is necessary to allow the Trustees and senior management to make the right decisions in a timely manner based on up to date information that is presented. This should be in a clear format and include all the factors that need to be considered when taking decisions that affect the direction of the organisation. Depending upon the size of your organisation it may not be affordable to have full or part time finance staff to maintain records and deliver on the reports required. However, if the lead officer, manager or director is required to keep check on finances they should have a basic understanding of the finance role. S 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 Statement of practice The Board includes someone with the skills needed to oversee all financial activities The finance staff have the skills, financial knowledge and competencies needed to carry out all financial activities Managers and programme staff have the financial skills they need to manage budgets and implement controls Finance staff and budget holders work together well in payments processing and budget monitoring Different roles within the finance function are clearly defined, known and followed in compliance with the directions contained within the organisation's Procedures Manual Senior staff lead by example in following control procedures Finance staff are recruited freely and fairly on the basis of merit only All staff receive the training and support they need to carry out their financial management responsibilities Finance staff and managers have the confidence to present financial information and reports at Board of Trustee level and are adequately prepared in advance of meetings to provide explanations on identified variances (under / over spend) that may affect the projected outcome for the project and / or the organisation Senior staff have the necessary competencies to contribute to the Annual Report by commenting knowledgeably on the organisation's financial activity and are informed on the requirements of Charity Commission for NI legislation pertaining to financial reporting TOTAL SCORE for Staffing Interpreting your scores © Sector Matters 23 June 2011 SCORE 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 4 1 0 5 5 4 4 1 1 0 0 5 4 1 0 5 4 1 0 5 4 1 0 In tables below record your scores from Sections 1 – 6 and then compare these with the columns on the right. Add up final scores to determine your organisations financial health status. SECTION Your score 1. Planning & Budgeting 2. Basic Accounting Systems 3. Financial Reporting 4. Internal Controls 5. Income Management 6. Staffing TOTAL SCORE High Risk 0-25 0-30 0-20 0-40 0-15 0-20 0-170 Medium Risk Low Risk 26-40 41-50 31-50 51-60 21-35 36-40 41-60 61-75 16-25 26-35 21-30 31-40 171-260 261-360 INDICATORS Your score is less than 170 Your score is between 171 and 260 You are financially on the Your financial health is not critical list. bad. Your financial management is With some good practice in poor and needs some serious place you have highlighted corrective action. You run the those areas which could be a risk of not being able to lot better. Assess those with deliver your programmes and poorest results and start to thus face problems with your discuss with your Trustees funders, donors and and senior managers ways in supporters. You need to meet which with a serious effort urgently with your Trustees your procedures and ways of and senior managers to look managing finance can make at an action plan which will be sure that you deliver on aims implemented in the and objectives. Your action immediate future with regular plan should start with those reviews on progress reported areas where control and to the Trustees. Don’t management is weakest hesitate to call in help because that is where sometimes a view from the attention to detail could help outside in can make make the improvements in corrective action more easily other areas more easily manageable. managed when you get there. Your score is over 261 Your financial health is good. However, there is no room for complacency. Look carefully at the scores in each section. Although you may have scored well in some areas effective financial management requires high scores in all six areas. If there are some showing room for improvement then an action plan to correct the weakest areas needs to be devised and implemented. GLOSSARY OF TERMS Cost Centre © Sector Matters 23 June 2011 The term used to describe each project your organisation runs in accountancy terms. If you have 5 projects then it should follow Core Costs Chart of Accounts / Accounting codes Cash flow Cash indemnity Bank reconciliation Debtors Creditor Budget monitoring reports Service Level Agreement Fixed Asset Register © Sector Matters 23 June 2011 that you will prepare 5 separate budgets to reflect the activities in each. This represents the costs incurred in running the organisation. These will include rents, telephone, stationery (unless project specific), electricity, gas and any other costs associated with “opening the doors”. Description of the codes used to identify costs in your accountancy software. Working document that reflects the cash position of the organisation at end of each month. Will start with an opening balance and record the cash in and out of the bank accounts. A term used in your insurance policy to advise of the amount of cash that can be kept on the premises either in locked drawer, safe or cash boxes, carried in night safe bag, kept at home of named individuals. An exercise to be completed each time statement is received to cross check the statement balance against book recorded balance. Differences should be matched to un-cleared lodgements or cheque payments not cashed. Individuals or other organisations who owe your organisation money. Individuals or other organisations to which your organisation owes money. Records financial activity of project and organisation against agreed budget and notes reasons for differences in under or over spend. Letter from funder detailing the expected outcomes from funding provided. May also be described as Letter of Offer. Contains record of purchases of equipment such as computers, printers, project equipment, furniture, motor vehicles. Should have details of date of purchase, cost, where located, when disposed of, disposal proceeds