Strategic Financial Management
This article focuses on how organizations such as nonprofits may create a financial system that allows them to manage their operations and maintain financial stability. The article provides recommendations on how to create and implement policies that will support a strong financial system as well as a process that auditors may use in order to audit the records.
Keywords 501(c) (3); Audit; Board of Directors; Dollar Unit Sampling; Financial Statements; Frame; Population; Reserves; Sampling Unit; Statistical Sampling
Finance: Strategic Financial Management
In order for organization's to be successful, they must create a strategic plan that will position the firm for growth and competitiveness. The senior management team will need to analyze all data, including the financial records, to ensure that the organization can make a profit, remain competitive and be positioned for continued growth.
A social service organization (Making Ends Meet, n.d.) identified four important stages in the financial planning process. These stages are reviewing the past, forecasting the future, setting strategies and plans, and setting annual budgets. Each of these phases is of equal importance and some of the tasks at each phase include:
Reviewing the Past:
- Monitor recent trends in demand and expenditure
- Monitor trends in funding streams
- Monitor and report on actual performance and outcomes, including end-of-year position and performance against specific performance indicators for similar organizations
- Collect comparative information about actual costs and cost drivers
- Review the results and evaluate the recommendations from any external inspection reports and management letters from external auditors (Strategic financial planning, n.d., “Stages of financial planning”).
Forecasting the Future:
- Evaluate the impact of national policies and strategies
- Identify and estimate levels of the various funding streams
- Review the impact of local policy initiatives and priorities
- Determine the future impact of known trends on demand and expenditure
- Identify the financial implications of demographic trends and other "drivers" of demand which are outside the control of the organization (Strategic financial planning, n.d., “Stages of financial planning”).
- Take into account the corporate context for strategic planning
- Link financial planning with service, human resource and asset management planning
- Collect information on the knowledge and skill base required for effective budget management at all organizational levels
- Engage all key stakeholders in the strategic financial planning (Strategic financial planning, n.d., “Stages of financial planning”).
Set Annual Budgets:
- Come to consensus on what the budget process should be
- Ensure budgets are informed by financial plans
- Involve budget managers in budget setting
- Match commitments and expected changes in demand with resources available
- Respond to unexpected changes
- Review budget structures
- Engage with key stakeholders
- Ensure short term decisions in budget setting do not undermine longer-term priorities and strategies.
As the organization goes through the financial planning process, key decision makers should determine the types of policies that need to be in effect in order to be successful at each of the individual phases.
The board of directors is very important in the governance of non-profit — 501(c)(3) organizations. Individuals who accept these positions are committed to organizational oversight. Part of this responsibility includes making sure that the organization is fiscally sound. Loyalty, care and obedience are considered to be three basic functions of trustees and these three functions are the benchmark for financial policies created by the board of directors (National Center for Nonprofit Boards, 1996).
What does each of these functions symbolize?
- Loyalty implies that the board members will act in the best interest of the organization and avoid any actions or decisions that will appear to be a conflict of interest with the mission of the organization.
- Care refers to the promise that board members will review, critique, and respond to any reports that are related to the organization, especially as it relates to management, programs and financial matters.
- Obedience ensures that the organization will adhere to all laws and regulations that affect the operation of the organization.
In order to successfully fulfill these obligations, the board of directors should ensure that they are able to:
- Make decisions that are in the best interest of the organization;
- Enforce guidelines that prohibit the use of assets to benefit professional staff or the board members;
- Assist in preventing conflicts of interest;
- Make sure there is a quorum at each meeting so that important decisions can be made; especially at meetings that will allow the organization to operate smoothly (National Center for Nonprofit Boards, 1996, p. 5).
One of the most important decisions that a board can make concerns the daily operation of the organization. The board should have a clear understanding of the organization's financial status. Financial decisions and transactions are critical to the daily activities of the organization. Therefore, it is imperative that there are policies in place that will assist the staff members with performing daily activities. In order to achieve financial stability, the board must develop and implement a "system of financial accountability, a financial plan that reflects the organization's mission, a sound investment strategy, and adequate reserves" (National Center for Nonprofit Boards, 1996, p. 6).
Creating a Successful Financial Plan
Once the board has an understanding of the organization's financial position, it can create strategic policies to manage the organization's financial structure. The National Center for Nonprofit Boards (1996) recommended a five step process to creating a successful financial plan for 501(c)(3) organizations.
- Step 1 — Establish the Structure Since the magnitude of work would be too much for a single person, the responsibilities of an effective financial planning and oversight should be divided among all of the board members. The professional staff and other resources should be used as necessary. Although the full board is ultimately held responsible for decision making, there are laws that support delegating the task of financial evaluation and assessment to committees. When establishing the financial structure, the board is responsible for:
- Making sure that the responsibilities for financial oversight are covered through the committee structure;
- Scrutinizing all financial considerations before they come to the floor for board vote; and
- Overseeing everything that the board does.
- Step 2 — Define Responsibilities and Set Limits The designation and clarification of financial responsibilities and limits are necessary so that an organization can avoid confusion and minimize conflict. By adhering to this rule, an organization should be able to successfully complete and submit Form 990 to the Internal Revenue Service. When the board defines responsibilities and sets limits, it should:
- Make clear assignments of financial responsibility;
(The entire section is 3532 words.)