Ever thought your organisation was ruled by an accountant? Susan Royce explains why finance systems are much more than a necessary evil and gives advice on how they should be ? and should not be ? set up.
Why do financial systems matter? First of all, because there are a number of obligations imposed by statute on companies, employers, charities and trusts to maintain proper books and records which must also meet specific requirements. These requirements include the ability to identify and separately account for trust or restricted funds, VAT and payroll taxes, and the preparation and submission of annual accounts in prescribed formats. The penalties for failing to comply with these requirements for companies, directors, officers and trustees are both civil and criminal and can be severe.
Secondly though ? and just as important - no organisation can expect to succeed if it does not know where it has been, where it is now and where it is going. Good financial information is not the only source of knowledge for this journey, but it is an essential component. Historic information, such as annual accounts, tell you where you have been, while management information tells you where you are now and forecasts should tell you where you are going. Thirdly, organisations move forward as result of managers making and implementing decisions. It is impossible to make the best decisions unless you have relevant, accurate and timely financial information. Finally, this information can be a superb tool for communicating internally with staff and externally with stakeholders, customers and potential supporters. It is quantitative and therefore perceived to be relatively objective. It lends itself well to graphical representation and, if presented sensitively, can be easy for everyone to understand.
Setting up a system
You need to invest time upfront in deciding what financial information the organisation needs now and may need in two or three years? time. The process of analysis should include:
? Determining what transactions are going to be processed and how they will need to be dealt with. For example: the need to pay staff; the need to account separately for different projects and funds; the level of likely capital expenditure and the resulting need for a fixed assets register; the volume and level of transactions (£5 tickets as well as £500,000 grants).
? Assessing the main risks that the financial systems need to control. Examples may be high levels of cash, extensive use of freelance staff, sales of alcohol, unauthorised contracting, wide oscillations in cashflows.
? Being realistic about the level of financial expertise the organisation can afford. If you cannot afford to employ an experienced finance manager do not buy a sophisticated accounting system.
? Considering how the financial systems could/should interact with other systems, e.g. ticketing, marketing databases and planning software.
? Agreeing what different users need or want by way of financial information. The main user groups (staff, board, funders, prospective funders) should be consulted and their requirements as to content and timing agreed.
Your system should be simple and easy to use, and procedures should be clear and unambiguous. You will need to document all significant paper-based and computerised systems and update the documentation regularly. A simple finance handbook should be available to all staff, preferably on a shared network. This should take the form of a series of questions with flowcharts and screen downloads to illustrate how processes work.
The management information must be relevant to the users it is intended for, accurate to the level needed and timely bearing in mind the needs of users. You need to know where you are by ensuring that transactions are posted promptly and know what you have committed to by running a purchase order or commitment accounting system.
Shared responsibility
Responsibility for key financial duties must rest with more than one person so that no one in an organisation should be able to order goods or services, authorise payment for those services and then sign the cheque. In the case of chief executives, this will require the involvement of board members in signing cheques for significant sums.
All staff with financial responsibilities must be involved in the setting and monitoring of budgets. No one can or should be held accountable for a budget into which they had no input. All staff should have access to financial information about their organisation and should be encouraged to develop a basic understanding of what the figures actually mean. Accountability for financial performance by budget holders must be clear. Budget-holding responsibilities should be set out in job descriptions. Where necessary, training should be provided and this is often best done by finance staff within the organisation. I suggest also that finance must sit at the heart of the organisation and the finance manager must be a member of the management team. The finance function must be staffed by people who are committed to the organisation and to supporting other members of staff in developing their own understanding of financial matters.
Remember that finance is not, and should never be seen as, an end in itself. Financial systems are only tools that can help you achieve your goals ? make the most of them.
Good and bad financial systems
Here are the hallmarks of good financial systems:
? They are easy to use: Easy-to-use systems get used! Staff supply information more promptly resulting in better and faster figures. Systems are not circumvented, so controls remain in force. Ease of use also builds staff confidence in the numbers and the staff who produce them.
? Outputs are meaningful: Users receive the information they want when they want and so they use it.
? Integral to the operation of the organisation: Finance is seen as making a positive contribution to the achievement of the organisation?s aims rather than as a killjoy.
? No nasty surprises: Good forecasting will enable an organisation to identify most problems early enough to prevent them leading to a full-blown crisis.
And the price of failing to invest in financial systems is:
? Lack of trust resulting from inaccurate, late and misleading figures: Staff do not feel comfortable relying on the systems either because the figures are out of date or just plain wrong. As a consequence, they devise their own mini-systems which waste resources and hinder communication. Stakeholders are unable to rely on the figures they receive and become unwilling to believe the forecasts they are presented with. In such a climate negotiations about funding get harder.
? Poor decision-making: Staff will rely on incomplete or wrong information when making decisions and they may cease to rely on financial information at all in making decisions, preferring to rely on ?gut instinct?
? Cycle of repeated crises: A lack of solid information about past and current performance makes accurate forecasting impossible. As a consequence, the organisation faces recurring financial crises that absorb substantial amounts of management time, sap morale and damage creditability.
? Going bust: In a sector as resource-constrained as the arts a persistent failure to control revenues and costs will lead to insolvency. Staff will be made redundant, the directors and trustees may face civil penalties and the organisation will cease to exist.
Susan Royce is a chartered accountant who works with arts organisations.
t: 01223 263212; e: susan.royce@virgin.net