ACF Compassion Capital Fund

Increasing the Capacity of Individuals, Families and Communities

Capacity Benchmarking Tool
For Faith- and Community-Based Organization

Table of Contents | Part VII: Managing Technology and Volunteers | Useful Websites

Part VIII: Financial Management

What is Financial Management?
Sound financial management involves budgeting, creating effective tracking systems for all financial transactions – including revenues (money coming in) and expenses (money spent), and reporting the organization’s financial activity and status. When carried out effectively, financial management enables organizations to plan and monitor financial activities, and show that all financial resources are responsibly applied to the organization’s charitable mission.

Why is Financial Management important?
Effective financial management tools and systems inform the board and staff about the organization’s financial status and enable them to:

Operate within their resources and avoid cash flow issues (and bankruptcy);
Make sound decisions about spending funds wisely (i.e., serving more clients, serving them more effectively, and operating without service interruptions); and
Demonstrate fiscal responsibility (an ability to account for how funds were spent) to 1) ensure compliance with regulatory requirements, and 2) give funders confidence to respond favorably to future funding requests. Funders have an interest, with respect to their own mission and image, in the organization’s sound fiscal management. This is true for internal funders, such as faith-based institutions allocating their own funds to provide services, and external funders, such as private foundations and public entities.

What topics are covered in the Financial Management section?

Budgeting

Financial Recordkeeping

Financial Reports

Financial Accountability

Budgeting
Budgeting	Needs a lot of work (1)	Needs some work (2)	Needs a little work (3)	Meets Current Needs (4)
Best Practice: The budget clearly and accurately conveys the organization's planned financial status in terms of anticipated expenditures and revenues.
Basic Benchmarks
1. An organization-wide budget is prepared annually.
2. The board analyzes, discusses, modifies if necessary, and approves the organization's annual operating budget.
3. The budget includes expenditures for all salaries, services, space, and supplies.
4. The budget includes revenues from all income categories.
Enhancement Benchmarks
5. Budgets inform fundraising plans and fundraising progress reports, in turn, inform budget reviews.
6. Budgets for each program and/or site are prepared and adjusted annually to comply with the organization's overall budget.

Tips and strategies for creating budget categories:

Some examples of expenditures (money spent):

Salaries, hourly fees, stipends, consulting fees, health and life insurance, payroll taxes, unemployment insurance, workers compensation, Social Security, and staff development;
Rent, utilities, telephone, janitorial services, equipment (purchased and rented), equipment maintenance, supplies, postage, service agreements, printing, copying, petty cash, and bank fees; and
Publications, conferences/meetings, travel, advertising, insurance, and fees.

Some examples of revenues (money coming in):

Fees paid for organization’s services;
Income from the sale of products/ publications;
Third party reimbursements (such as insurance and sub-contracts);
Contributions from individuals or corporations;
Membership fees;
Grants; and
Earnings on endowment investments.

Financial Recordkeeping
Financial Recordkeeping	Needs a lot of work (1)	Needs some work (2)	Needs a little work (3)	Meets Current Needs (4)
Best Practice: Guidelines and procedures for responsible handling of finances are written and followed.
Basic Benchmarks
1. All financial transactions are recorded in a systematic way. These transactions include: receipts, expenses, deductions, and credits.
2. The organization separately tracks fundraising, program, and general/management expenses.
3. Supporting documentation of all financial transactions are systematically filed and retained as required by law.
4. Cash balances are reconciled monthly.
5. Person(s) maintaining financial records is (are) knowledgeable and skilled in the area.
6. Financial data is backed up on a regular basis with a copy of electronic data maintained off-site.
7. The organization has a computerized bookkeeping system.

Achievement of basic benchmarks is sufficient for this area; no enhancement benchmarks provided.

Financial Reports

Needs a lot of work (1)

Needs some work (2)

Needs a little work (3)

Meets Current Needs (4)

Best Practice:
The organization's leaders analyze revenue and expense activity to manage the organization's finances.

Basic Benchmarks

1. The organization has an established fiscal year for which it tracks and reports income and expenses.

2. The organization uses either a cash or accrual accounting method to report its income and expenses.

Cash-basis accounting – records revenue when money is actually received and records expenses when bills are paid.

Accrual-basis accounting – records revenue when earned and expenses when incurred.

Modified cash/accrual accounting –records revenue and expenses on a cash basis because of its ease, while reporting revenue and expenses on an accrual basis because 1) it gives a more complete picture of the organization’s finances, and 2) is required for auditing purposes.

3. The executive director and board members understand the organization's financial position because they regularly review financial statements and reports comparing budgets and actual expenditures.

4. Financial reports are concise, easy to understand, and produced in a timely manner.

Enhancement Benchmarks

5. The board reviews financial reports, including budget projections, on a quarterly basis to prevent under- or over- utilization of funds.

The executive director prepares the budget and budget explanation (comparison of revenues and expenses) for board review.
The board treasurer often delivers the budget report to the board.

6. All board members understand the financial reports. Board members ask clarifying questions during the review process.

7. The board authorizes an annual audit and chooses the auditor.

Tips and strategies for financial reporting:

Financial reports include:

Documentation and explanation of important trends and transactions;
A comparison of actual revenues and expenses to budgeted revenues and expenses; and
Initial questions for the board to address.

Reports are based on an analysis of the following:

Budgets divided by quarters or months;
A Balance Sheet (summary of assets, liabilities, and fund balance of the organization as of a specified date);
A Statement of Activity that shows the support (grants, donations, in-kind donations), revenue (payments from services, product sales), capital (building, equipment), and program activity expenses of the organization over a specified period of time; and
A Statement of Change in the Fund Balance (summary of financial resources that became available during a period and the purposes for which they were used).

Financial Accountability

Needs a lot of work (1)

Needs some work (2)

Needs a little work (3)

Meets Current Needs (4)

Best Practice:
The organization's assures financial accountability for the funds its receives. Internal financial management processes are monitored to prevent errors and/or misuse of funds.

Basic Benchmarks

1. The board reviews and authorizes major financial commitments.

Examples of major commitments: space rental, building purchase, new services, adding health insurance or retirement plan.

2. The budget is reviewed prior to authorizing expenditures.

3. The board assures submission of required state, federal, and other reporting necessary to maintain the tax-exempt status. For example, the organization files an IRS Form 990 annually.

4. Federal, state, and local payroll tax obligations are met.

5. The board assures the organization has appropriate insurance, including:

General liability insurance;
Directors and Officers (D & O) insurance;
Commercial Property insurance;
Professional liability insurance; and
Liability related to clients (e.g., malpractice).

6. Processes for handling finances and money ("internal controls") are written and followed.

7. The use of restricted is monitored.

Enhancement Benchmarks

8. The financial statements are reviewed in an independent audit conducted by a Certified Public Accountant (CPA).

9. The board decided how to manage the organization's funds (e.g., which banks and types of accounts).

If the organization has investments, the board establishes investment goals, decides who is responsible for investing assets, evaluates investment policy annually, and reviews and authorizes any proposal investment policy changes.

Tips and strategies for internal controls:

Examples of internal controls:

The person depositing funds is not the person recording money received. This includes petty cash disbursements.
Only certain individuals are authorized to write agency checks or process on-line banking transactions.
More than once authorized signature is required when spending in excess of pre-set dollar amounts.
Employee timesheets are compared to payroll check register prior to release of paychecks.

Congratulations! You have completed your assessment of the Financial Management capacity area. Use your responses to determine the most important capacity building priorities. Please review the "How to Use This Tool" section on page 4.

Part VII: Managing Technology and Volunteers | Useful Websites

Capacity Benchmarking Tool For Faith- and Community-Based Organization

Part VIII: Financial Management

Capacity Benchmarking Tool
For Faith- and Community-Based Organization