Unfortunately, for a lot of entrepreneurs and social change agents, issues in finance operations rarely make a leader’s to-do list until one of the following things happen:
· The leader wakes up worried about the risk of a reporting misstatement.
· He/she runs out of money or related resources.
· A board member or stakeholder asks questions about stewardship or accountability.
· An organization discovers its cost structure is either nonexistent or badly out of line (btw, most organizations fail because they don’t know what their costs are).
· The organization’s decision-makers lack confidence in their financial information and conclude that they don’t have the support they need to make smart, fast decisions.
· If none of the above happens, leadership can also choose to stick with what has been working, even if it means sacrificing the speed and accuracy they’d want and need. The result? Mediocre performance is ok.
So, as a leader and change agent, my guess is that you want to be a good steward and you want the information that a strong financial system can give you, but you also don’t how to construct the system. The goal of this article is to give you the information necessary to initiate the process of building a financial system that will grow with your organization, AND promotes that good stewardship of the financial resources of your organization by sharing with you in some detail four building blocks that will serve you and your organization well.
If your organization is young and/or core financial processes fundamentals might be lacking, investing in a solid financial system with pragmatic and timely reporting will pay dividends in both immediate and long-term decision-making effectiveness and just as importantly, it will drive sustainable cost savings leaving more money to do important stuff. Sounds like a great benefit? Without a doubt. Foundational to every well-run organization is a solid finance operation. One of the main reasons most new organizations fail is that they don’t know what their costs are. In other words, they don’t know exactly where their money comes from or exactly where it goes.
Here’s why that is such a big deal. And, if you remember nothing else from this presentation, remember this:
The success of any endeavor is determined by how well your scarce and precious resources are applied for their highest and best use in pursuit of a goal.
The maxim above is only valuable if first, you define your scarce and precious resources. Secondly, you and your organization MUST articulate a clear and inspiring goal? Finally, you must establish ways to know if you are applying your scarce and precious resources for their highest and best use.
Your financial system when properly developed and maintained will give the MAJORITY of the information you need to answer all the above questions. Along with human passion, your money resources and how you steward them comprise most of the fuel that runs your missional engine. Getting your financial processes right means you’ll have more time and better information to make better organizational decisions. Getting it wrong means you and your team are in for a world of worry. Rock-solid finance processes give you and your team FIVE significant competitive advantages:
1. Improve information quality and data integrity for more reliable and accurate decision-making information,
2. Implement streamlined and more efficient and effective processes that are scalable and dynamic, (which are key to making you money)
3. Have more time and better information for decision-support activities such as financial analysis and strategic planning,
4. Build stronger cases for resource expenditure throughout the organization, and finally
5. Reduce cost and time spent on compliance activities.
Let’s dive into the four building blocks of process fundamentals are the keys to improved performance:
1. Policies and Procedures,
2. Technology,
3. Talent, and
4. Data.
While some organizations have the time and talent and understanding to take on that challenge in-house, many do not. No matter where you’re starting from, it’s important to have the end goal in mind (that is, a clear idea of what you want from your financial system), and for most organizations that is most likely the accurate and efficient management of your financial details that enhance making your mission happen.
Let’s look at each of the four building blocks of a rock-solid financial foundation in more detail.
Policies and Procedures - These are the “Rules of the Game” for your financial processes. Your policies must clearly define what will be done, by whom, when, and how. The best way to get your arms around what areas your policies should cover is to first map every step money must go through to come into, reside, and exit your organization. Once you have this, which will constantly need tweaking and reconsidering as the organization changes and grows, you have a template to start building your Policies.
Here’s a quick way to help determine what policies and procedures you need to develop. Build a “Process-Flow” diagram of how money comes into your organization, what it does while it resides in the organization and then how it gets spent.
Also realize that there is no reason to reinvent the wheel. It will take little effort to find other organization’s policies and for the most part, they will all be similar. Investigate how other organizations are handling their money well and use that information as a template to build your own policies and procedures.
Here is a short, basic list of common areas that benefit from well-thought out and clear financial policies:
· Writing and Recording Paper Checks
· Depositing and Recording Checks/Cash
· Recording Online Income Transactions
· Recording and Authorizing Internet Purchases
· Recording and Authorizing Credit and Debit Card Purchases
· Recording and Authorizing Recurring Expenses
· Bill Payment Procedures and Authorizations
· Check Request Procedures and Authorizations
· Salary and Wage Specifications and Authorizations
Technology - Sure, you can manage your finances without the modern conveniences of software and the internet but, why would you? If you believe that all you need the check register that came with your checkbook (and your math skills are infallible), you need more help than I can give you here.
There are quite a few software programs that you can use to manage your finances that can be resident on your own computer or available over the internet. By far the most popular for small businesses and nonprofits is QuickBooks. It is not overly expensive and it is well supported. The problem with QuickBooks is simply the learning curve and the knowledge based required as your financial processes mature. As with most software programs the more bells and whistles they offer, the steeper the learning curve and, Quickbooks offers a lot of bells and whistles.
On the positive side, there are certified QuickBooks coaches who can help you through your set up and answer operational questions if you need help (usually for a fee). And there are quite a few third-party training resources besides the videos on the QuickBooks website.
When evaluating and choosing software avoid financial software that is too simple (the likelihood is that you won’t be able to effectively transfer historical information to a more sophisticated service) or one that doesn’t offer the opportunity to download your information into a spreadsheet for analysis and “what if” scenarios.
Talent - People, make up any and every organization and without a doubt they are also key to the success and effectiveness of your financial system. So, what kinds of people do you need? What should they be able to do? How many of them do you need?
My experience is that your financial person first must be someone with whom you and your life partner could enjoy at a casual dinner. Really. This position requires trust, accountability, intelligence, attention to detail, and above all a heart for the organization’s mission. For the characteristics listed, they must be a lot like you. Your financial partner must be a person who while respectful, is also able to start and participate in difficult discussions; someone who can confront you and other decision-makers with both facts and well-considered opinions. Consider especially early on, contracting out your financial services to someone that has expertise and success.
If you decide you want someone in-house, a capable financial person should be a very early hire and depending on the complexity of what you do and how you do it, your organization probably needs about one financial person for every $500,000 to $750,000 of expenses.
Data - This is the product that your financial department produces and their clients are you and the other decision-makers in your organization. If you believe in positive customer/client relationships, then your financial department and processes must serve your mission first, your team members second and lastly, themselves. This means that the product of their efforts, the data reflecting how money comes into your organization and how it is invested to make the mission happen must be accurate, timely, and practical calling team members to some sort of action.
The financial department of any organization is a service team. Normally, they do not provide direct services to clients nor produce goods for sale. The job of any effective financial team is to provide actionable, decision-making information to those responsible for getting the mission of the organization accomplished. Financial people are not the police, they are trusted, responsible partners to those doing the work.
Building a rock-solid financial process is not easy and it never ends. It is a process driven by both the CEO and the person knighted with making the financial system work. While the process of building and maintaining rock-solid financial processes can be challenging, it will more than bring value to the organization. If done right, it will bring a culture of strong and informed decision-making to your organization.
It is to the benefit of every stakeholder in your organization to initiate the process of building a financial system that will grow with your organization, AND promote good stewardship of the financial resources of your organization.