Free Micro-eMBA Module #8

Managing Your Organization's Finances

© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC. Adapted from the Field Guide to Leadership and Supervision.

This module is in the organization development program. However, this module can also be used by anyone as a self-study exercise to learn more about managing finances.

Sections of This Module Include the Following

Introduction
Outcomes
Materials for Review
Suggested Topics for Reflection and Discussion
Activities to Build Systems and Practices
Assessments
Tracking Open Action Items



INTRODUCTION

New business leaders and managers have to develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New leaders and managers should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such, financial management is one of the most important practices in management. This module will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business.

In the case of a corporation, the board has final responsibility for the overall financial health of the organization. Therefore, it's critical that new corporations quickly build up the roles of the board treasurer and board finance committee. The treasurer and finance committee can be wonderful assets to the chief executive when managing the finances of the organization -- however, the chief executive should never completely ignore the finances by leaving them for the treasurer and other board members to manage. The board's role in ongoing governance of finances can include ongoing review of financial reports during board meetings, approving yearly budgets and financial statements, approving a set of fiscal policies (guidelines for managing finances), reviewing results of a yearly audit conducted by an outside auditor, co-signing checks that are over certain limits and approving contracts, and ensuring the organization conforms to relevant rules and regulations.

NOTE ABOUT LEARNING FINANCIAL MANAGEMENT: At first, when learning financial management, many people might react that the learning experience seems mostly like filling one's head with strange concepts and processes. Typically, the learning process starts with this experience -- it probably isn't until the learner actually enters an accounting transaction and analyzes a financial statement that learning about financial management seems more "real". But the learning process almost always starts by reviewing concepts and processes. Financial management almost always tells the truth about the situation of a business -- so the learning process is well worth the effort.

NOTE ABOUT BOARD COMMITTEES: Consider establishing a Board Finance Committee to review and help guide implementation the information in this learning module. Major activities and goals from this learning module could be incorporated in that Committee's Committee Work Plan.

Also see
Related Library Topics



OUTCOMES

Learners who complete this module will achieve the following outcomes:

  1. Learn Basics of Bookkeeping and Finances
  2. Understand Budgeting and Deviation Analysis
  3. Understand Basic Cash Management Practices
  4. Recognize Major Financial Statements
  5. Know Basics of Financial Analysis
  6. Evaluate Your Financial Management Practices


MATERIALS FOR REVIEW

  • The following materials will help you address each of the topics and learning activities in this module.
  • Note that additional materials for review are associated next to certain topics and activities listed in this module.

Background Reading

Quickly get a "big picture" view of the aspects of financial management by scanning the types of topics and their order at
All About Financial Management in For-Profits

Basics and Getting Started

Basics of Financial Management
- - - Role of Treasurer (read link "Role of Treasurer")
- - - Charter and Work Plan for Board Finance Committee
- - - Getting an Accountant or Bookkeeper if Needed (read "Getting and Using Accounting Services")
- - - Buy Accounting Software to Help You? (scan each of the articles at the links)
- - - Getting a Bank and Banker (read "Getting and Using a Banker")
- - - Basic Overview of For-Profit Financial Management
- - - - - - Basics of Financial Management in U.S. Small For-Profit Businesses
- - - - - - Free Introductory Accounting & Bookkeeping Tutorial (scan the topics in the tutorial)

Activities in the Yearly Accounting Cycle

Bookkeeping Basics:
Bookkeeping Basics, including:
- - - Understanding Financial Statements (basic tutorial -- be patient; get a sense ...)
- - - Bookkeeping and Accounting Tutorial (more detailed tutorial ... be patient)
Financial Controls
- - - Internal Controls for a Small Business (scan the controls to get a sense for them)
- - - Sample Financial Procedures Manual

Critical Operating Activities in Financial Management:
Managing a Budget (read all)
- - - How Do We Prepare a Budget?
- - - Small Business Budget Example
Managing Cash Flow (read 2 of "Basics of Cash Management" and of "Preparing Cash Flow Statement")
- - - Internal Controls for Petty Cash and Receipts
Credit and Collections (read at least 3 articles)
- - - Collection Letter Secrets to Getting Paid
Budget Deviation Analysis (read all)

Financial Statements and Analysis:
Financial Statements (read 2 of the articles)
- - - Profit and Loss (Income) Statement (read all)
- - - Balance Sheets (read all)
Financial Analysis
- - - Profit Analysis (read 2 of the articles)
- - - Break-Even Analysis (read 2 of the articles)
- - - Ratios (read 2 of the articles)



SUGGESTED TOPICS FOR REFLECTION AND DISCUSSION

  • Learners are strongly encouraged to discuss the following questions with peers, board members, management and staff, as appropriate.

Preparation for Financial Management

1. What is the role of the board treasurer? See Role of Treasurer.

2. What are at least 3 goals of a Board Finance Committee? See Charter and Work Plan for Board Finance Committee.

3. What needs to be considered when selecting an accountant? See Getting an Accountant or Bookkeeper if Needed.

4. What needs to be considered when buying accounting software? See Buy Accounting Software to Help You?

5. What needs to be considered when selecting a banker? What services might a business need from a bank? See Getting a Bank and Banker.

6. What is the board's role in financial management? See Basics of Financial Management in U.S. Small For-Profit Businesses.

Basics of Accounting

1. What is the accounting cycle? See Basics of Financial Management in U.S. Small For-Profit Businesses.

2. What are the elements of an accounting system? See Basics of Financial Management in U.S. Small For-Profit Businesses.

3. What is a fiscal policies and procedures manual? See Basics of Financial Management in U.S. Small For-Profit Businesses.

Bookkeeping and Financial Controls

1. What general activities are included in bookkeeping? See Basics of Financial Management in U.S. Small For-Profit Businesses.

2. What types of information are in a financial fiscal policies and procedures manual? See Sample Financial Procedures Manual.

3. What is cash-basis vs. accrual-basis accounting? See Basics of Financial Management in U.S. Small For-Profit Businesses.

4. What bookkeeping journals might you start out with? See Basics of Financial Management in U.S. Small For-Profit Businesses.

5. What is a Chart of Accounts? See Basics of Financial Management in U.S. Small For-Profit Businesses.

6. What is the purpose of financial internal controls? What are some practices in internal controls (HINT: think about signing checks, opening mail, how to verify that account totals are accurate, etc.)? NOTE: The concepts in financial controls are essentially the same between a for-profit and nonprofit organization. See Internal Controls for a Small Business -- scan the controls to get a sense for them.

Budget, Cash Management, Credit and Collections, and Budget Deviation Analysis

1. What is a yearly (or operating or annual) budget? How is a yearly budget prepared? See Basics of Financial Management in U.S. Small For-Profit Businesses, How Do We Prepare a Budget?, How Do We Prepare a Budget? and Small Business Budget Example.

2. What are fixed expenses and variable expenses? See How Do We Prepare a Budget? and Small Business Budget Example.

3. What is petty cash? How should it be handled? (The concept is essentially the same in nonprofits and for-profits.) See Internal Controls for Petty Cash and Receipts.

4. What is a cash flow and how should cash be managed? See Managing Cash Flow.

5. What is a cash flow statement? What is a cash flow projection? See Managing Cash Flow.

6. What is a budget deviation analysis? What information is considered during this analysis? See Budget Deviation Analysis.

Financial Statements and Analysis

1. What are two major forms of financial statements used by for-profit organizations? See Financial Statements.

2. What general information is included a Profit and Loss Statement? Balance Sheet? See Financial Statements.

3. What can be detected from a profit and loss statement? See Profit and Loss Statement.

4. What can be detected from a balance sheet? See Balance Sheet.

5. What is the purpose of profit analysis? Break-even analysis? Ratio analysis? See Profit Analysis, Break-Even Analysis and Ratio Analysis.



ACTIVITIES TO BUILD SYSTEMS AND PRACTICES

  • Learners are strongly encouraged to complete the following activities, and share and discuss results with peers, board members, management and employees, as appropriate.
  • As you proceed through the following activities, be sure to note any incomplete actions in the Action Item Planning List.

Building Role of Treasurer and Board Finance Committee

1. In the case of corporations, one of the greatest assets to a chief executive can be the board treasurer and finance committee. Do you have a board treasurer and a finance committee? If not, make it a high priority to recruit a treasurer and organize a board finance committee. See Charter and Work Plan for Board Finance Committee.

Designing Operating (or Annual or Yearly) Budget

1. Your operating budget depicts the revenue the organization expects to earn. It also depicts how that revenue will be spent. Budget development starts from strategic planning. If you completed Module 6: Developing Your Strategic Plan. then you already have designed a basic yearly operating budget. If you completed Module 7: Marketing Your Products, then you've updated your operating budget to include revenue and costs of your products and services. If you have not completed these two modules, you should review information and materials in those modules to draft and update a basic operating budget.

2. Obtain authorization of the operating budget by the board (in the case of corporations). Board members should receive copies of the operating budget for their review and authorization in a board meeting. The minutes of the board meeting should reflect member's approval of the budget. Approval indicates that the board expects the organization to operate over the coming year according to the expected expenses and revenues depicted in the approved operating budget. Note that if board members have been involved in previous strategic and product/program planning, then their approval of the budgets should be very straightforward at this point.

Building Basics of Bookkeeping and Financial Controls

1. For your business, do you use a cash-basis vs. accrual-basis accounting system? How do you know? What system should you be using? What about for generating financial reports? See Basics of Financial Management in U.S. Small For-Profit Businesses.

2. Will you be using a software tool to do your bookkeeping and accounting? See Buy Accounting Software to Help You?

3. What bookkeeping journals do you use for your business? If you do not have journals, then start with a simple cash journal. See Basics of Financial Management in U.S. Small For-Profit Businesses.

4. Do you have a Chart of Accounts for your business? If you do not have one, then consider an example provided in the following links. If you have selected a software tool to help you manage your finances, then that tool might already have a Chart of Accounts in it. See Chart of Accounts.

5. What financial controls do you have in place? If you have not yet done so, draft a set of financial controls for your organization. Think about controls to guide signing checks, handling petty cash, opening mail, how to verify that account totals are accurate, etc.) (The concepts in financial controls are essentially the same between a for-profit and nonprofit organization.) See Sample Financial Procedures Manual.

Credit and Collections

1. Imagine that you did not get paid by a client or customer. What would you do? Write down your answer and consider it to be a basic draft of a financial procedure to handle collections. See Credit and Collections and Collection Letter Secrets to Getting Paid.

Budget Deviation Analysis

1. A few months after implementing your operating budget (that includes expected expenses and revenues), modify the budget report to include the column headings listed in your reading in the section Budget Deviation Analysis. Analyze how closely actual expenses and revenues are matching planned expenses and revenues. What is the percentage difference for each item or account or line item in the report? Is that percentage difference a problem? What caused the difference? What are you going to do about the differences in the future? Conduct a budget deviation analysis each month in your business.

Financial Statements -- Profit and Loss (Income Statement)

1. Generate an Income Statement for your business. Generating an income statement requires that you have been entering business financial transactions either by hand in a journal(s) or in an accounting software package. Ideally, you have an accounting software package that will produce a statement for you merely by entering a command or clicking on the button on your computer screen. If you generate a statement by hand, see examples in Profit and Loss (Income) Statements to provide direction. Do you have an operating profit or loss?

Financial Statements -- Balance Sheet

1. Generate a balance sheet for your business. Similar to an income statement, generating a balance sheet requires that you have been entering business financial transactions either by hand in a journal(s) or in an accounting software package. Ideally, you have an accounting software package that will produce a sheet for you merely by entering a command or clicking on the button on your computer screen. If you generate a sheet by hand, see examples in Balance Sheets to provide direction. Do you have a positive or negative net worth? Calculate your current ratio. See Ratios. What does your current ratio indicate about your organization? Calculate your quick ratio. See Ratios. What does your quick ratio tell your about your organization?

Financial Statements -- Cash Flow

1. Generate a cash flow statement for your business. A cash flow statement can be one of the most important statements for a new business because it can depict whether you can pay your near-term bills or not. Generating a balance sheet requires that you have been entering business financial transactions either by hand in a journal(s) or in an accounting software package. Ideally, you have an accounting software package that will produce a sheet for you merely by entering a command or clicking on the button on your computer screen. See Managing Cash Flow.



ASSESSMENTS

1. Evaluation of Financial Practices in Businesses



REMINDERS FOR THOSE IN THE ON-LINE DEVELOPMENT PROGRAM

Reminders About You

1. Are you using your skills learned in previous modules? For example, as you using methodical approaches to problem solving and decision making? Are you using strong practices of meeting management? Are you communicating key information to others throughout your organization?

2. Are you discussing topics and materials with peers, board members and others, as appropriate? Discussion and ongoing feedback are some of the best methods to really learn new information and materials.

3. Are you helping others to hold you accountable to your times that you committed to reading and study in this program?

4. Are you reflecting on learnings from past modules and how they build on the learning in this module? For example, are you seeing your organization from a systems view, as explained in the module "Starting and Understanding Your Organization?"


TRACKING OPEN ACTION ITEMS

1. One of the first indicators that an organization or a person is struggling is that open action items are not tracked and reviewed. (Open action items are required actions that have not yet been completed.) Instead, people only see and react to the latest "fires" in their workplaces or their lives. Whether open action items are critical to address now or not, they should not entirely be forgotten. Therefore, update and regularly review a list of open action items (identified while proceeding through this program) that includes listing each open action item, who is responsible to complete it, when it should be completed and any associated comments. When updating the list, consider action items as identified during discussions, learning activities and assessments in this module. Share and regularly review this action item list with the appropriate peers, board, management and employees in your organization. You can use the following Action Item Planning List. (At that Web address, a box might open, asking you which software application to open the document.)

2. If you have questions, consider posing them in the national, free, online discussion group HRNET, which is attended by many human resource and organization development experts.



(Learners in the organization development program can return to the home page of the organization development program.)


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For the Category of Financial Management (For-Profit):

To round out your knowledge of this Library topic, you may want to review some related topics, available from the link below. Each of the related topics includes free, online resources.

Also, scan the Recommended Books listed below. They have been selected for their relevance and highly practical nature.

Related Library Topics

Recommended Books

Basics and General Information

Budgeting

Bookkeeping and Accounting

Cash Management

Financial Statement and Analysis



Basics and General Information

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Budgeting

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Bookkeeping and Accounting

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Cash Management

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Financial Statement and Analysis

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Also See

Organizational Sustainability -- Recommended Books

Taxation (For-Profit) -- Recommended Books




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