Financial literacy; contributing to your organisation’s financial wellbeing
For many trustees and governors in the Not for Profit sector (NFP), a passion for what your organisation believes in and the ability to make an impact on the community, combined with particular skills, are the reason you find yourself sitting at the board table. However, when it comes to the organisation’s finances, we often see board members duck for cover and leave the questions to their peer who has a financial skill set. Our view is that all board members need a good level of financial literacy. In this article we set out three financial metrics relevant to boards of NFP organisations.
1. Understanding sources of income.
Income, or the value generated from activities you carry out, is vital to the financial health of your organisation. Outside of loans from third parties, this is the primary source of funds for an NFP. Income comes in many forms, including: government grants, donations, membership subscriptions, interest & dividends received, rent received, and sponsorship.
Understanding how your organisation earns income is important not only from a financial point of view but also in relation to risk. If all of your income is earned through one source, could your organisation survive if a change in law, the economy or competitor behaviour diminished or completely removed that source of income?
Conducting an analysis of your income by source and understanding the key risks associated with each source, is a valuable exercise for any organisation. Once the sources and their risks are clearly articulated, the Board can make strategic decisions about whether new sources of income need to be investigated and if some of the risks associated with existing sources can be minimised.
2. Net surplus.
Net surplus is what is left after expenditure has been deducted from income. In the For-Profit sector, there is a strong focus on increasing net surplus (also called profitability). In the NFP sector, net surplus is sometimes seen as a less important measure than the impact the organisation had on its community, perhaps measured with reference to non-financial indicators.
In our view, net surplus is just as important in the NFP sector for several reasons:
- Achieving a net surplus (versus a net deficit) allows an organisation to build its financial reserves, providing some certainty and options for the future;
- Focusing on net surplus can shine the light on potential inefficiencies in expenditure; and,
- Presenting the net surplus result combined with non-financial measures can powerfully reframe the message on how an organisation is performing, for example: “Although we incurred a net deficit this year, our increased investment in training staff has already resulted in higher customer satisfaction”.
In broad terms, reserves are an accumulation of prior year net surpluses. Reserves (also called equity) allow an organisation to weather unexpected costs, invest in new assets, and provide a level of financial security. Ensuring that your Board has a reserves policy and is regularly tracking actual reserves against minimum and target levels helps keep this metric top of mind. Find out how implementing a reserves policy can help your organisation.
Understanding finances can seem daunting at first, but it is one of the cornerstones of any healthy organisation and Board. Building your financial literacy in a fun learning environment with the support and engagement of your colleagues can make all the difference. That’s where BDO comes in. We offer the internationally recognised Colour Accounting. Find out more about our one day public workshops, or contact your local BDO adviser to discuss a tailored workshop for your organisation.