trust financial management

8/2/2019 Trust Financial Management

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MAISHA TRUST FINANCIAL MANAGEMENT

Financial Management for

NGOs NOTE TO ANYONE WHO USES THESE GUIDELINES 08/12/00These guidelines have been posted to PNGDEV as of 08/12/00 however they are still in draft formand generally untested in terms of their comprehensiveness or usefulness. If you have comments

please post them to the author at . Plans are in place for further refinements in 2001 with a possible workshop. Again please contact CUSO PNG, GabrielleAppleford if you are interested in further information.

IntroductionThe following guidelines on NGO Financial Management are broken down into three differentsections. The first section, introduces basic concepts and components of financial management.The second section provides practical steps and considerations for setting up a financialmanagement system. Examples are done using Excel and Quicken (Quickbooks) software. Thethird section provides additional information on further financial management considerations againusing direct examples from Quickbooks.

Basic Concepts and Components of Financial Management All NGOs require a financial management system, however, many NGOs may only have anaccounting or bookkeeping system. Accounting or bookkeeping are a subset of financial

management (diagramme 1).

Financial management systems can be broken down into administrative systems and accountingsystems:

Administrative systems assist all NGO managers in decision-making, planning, communicating,controlling and evaluating.


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Accounting is concerned with identifying financial information, expressing the information innumeric terms and communicating this information to interested parties. An accounting system

provides the framework for this to happen.

Administrative and accounting systems may be required to change over time in relation to changes

within the NGO and changing information needs.

Financial InformationFinancial management is generally the responsibility of the finance manager however all sectionmanagers should contribute to and benefit from a financial management system. The role of thefinance manager is a key role within an organisation. This individual must act as an 'interpreter' of information. Information can be in three different forms:

Problem-solving information Attention-directing information Score-card information

Examples of these include:

Problem-solving information: An NGO would like to host a workshop. This workshop will befunded through donor funds, income earned from the sale of workshop books and by charging asmall participants' fee. The finance manager can provide information to management on how muchfunds exist currently for the workshop and how much money would be required to be raised byadditional fees.

Attention-directing information: The finance manager provides reports to activity or sectionmanagers on actual expenditures to budget. S/he further highlights the areas where there are

considerable over or under expenditures. This information directs the activity manager toinvestigate or justify delays in implementation or unforeseen expenditures.

Score-card information: A donor requires a report on their funds twice yearly in order access if planned activities are on track or if there are any deviations noted. The numbers laid out in thefinancial report comparing actual expenditures to budget provide a 'score card' on how the NGO is

progressing with their proposed activities. The written report will further support the story that thenumbers tell.

Qualities of a Financial Manager In addition to acting as the NGO's 'interpreter' of accounting information, the finance manager

must also be able to manage and administrate. This implies that the finance manager must have the'technical' accounting skills but also the more qualitative 'softer' skills of a good manager.

The first principal of successful management [this applies equally to the financial management aswell as management within other sections of an organisation] is the importance of competent staff.

No matter who performs the work, the manager will be responsible for the result. Therefore thefinance manager must be:


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Adaptable: able to serve as teacher, disciplinarian as well decision-maker; Strong leader: person capable of maintaining authority; Diplomatic: able to communicate constructively (objective, tactful, cooperative and firm

without being overbearing);

The major causes of managerial failure include: Inability to maintain competent staff (this could be due to poor selection of candidates or

by not providing an environment that motivates and satisfies staff); Reluctance to delegate responsibilities and assign tasks: being the do-er versus the co-

ordinator of tasks. [Finance] managers must rely on staff capabilities which requires patience and understanding;

Inability to make effective decisions.

The Finance manager must remain aware of the pitfalls to his/her management role and constantlymonitor or check how s/he is doing in relation to these. Technical skills are not enough to avoid

managerial failure.

Strategic Planning The financial manager must also be able to maintain perspective so that activity and administrativeobjectives are directed towards achieving organisational goals. The finance manager is in a

position to have a bird's eye view of the day-to-day operations of the organisation and will be ableto see trends, strengths, weaknesses and opportunities for improvement. This unique positionallows the finance manager to play an active role in strategic planning. Strategic planning focuseson the long-term goals and objectives of the NGO and should, at a minimum, include the Board of Directors and the key management staff of the organisation.

Internal Control sAccounting and Administrative systems should not be looked at as static or unchanging; they needto be responsive and flexible but at the same time provide strong and consistent internal controlmechanisms.

Internal controls can be broken down into two types: accounting and administrative controls.

Administrative controls are techniques that aid in achieving organisational management goals and promote operational efficiency and adherence to organisational policies. These can include budgetsand quotas, check lists, sign out sheets, etc.

Accounting controls assist in the preparation of fair and honest reports and the safeguarding of assets. Controls can include insurance, compliance with generally accepted accounting principles,vouchers systems, dual cheque signing, double approval for large expenditures, etc.

Internal controls can be built into the organisation in the following ways:


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Organise structure and responsibilityExamples: staff duties segmented so that no one person has complete control over one section of the information flow, custodian responsibility of assets separated from accounting for the assets.

Mechanical devices

Examples: pre-numbered forms and cheques;regularly accounting for all forms and cheques.

ProceduresExamples: Double signatures, double approval, payment vouchers, stock take (if an organisationhas stock), bank reconciliation, and employee annual holidays (ie: covering for absent employeemay bring up any inconsistencies or irregularities)

Qualified personnelExamples: ensure that employee responsibilities are consistent with their qualifications; employeesmust fully understand the purpose of internal control procedures if these procedures are to be mosteffective. Control systems need flexibility in order to respond appropriately to demands for change.

It is inevitable that as an NGO matures, policies will need to be reviewed and the goals and valuesof the systems kept up-to-date. In particular, the accounting information system needs to beexamined continuously to ensure that it is as efficient and accurate as possible and meets the needsof the users in terms of both the information provided and the manner of presentation.

BudgetingAn important internal control is the operating and activity budget of an NGO. This is the 'master

budget' and should include all monies approved in donor proposals and all activities planned for agiven period of time (preferably the fiscal year of an organisation). The line items in the budgetshould coincide with chart of account line items so that expenses can easily be tagged to budget.The budget can be set up in Excel but ideally will be inputted into an organisation's accounting

software (ie: accounting package used for entering all deposits and disbursements) so that performance reports can easily be generated.

An example of a master budget is included below:

Account number anddescription

Donor: ICCO Donor: SCF Donor: GEF Total

700 Education officer 5,000 6,000 0 11,000750 Education supplies 500 1,000 3,000 4,500760 Education workshops 2,000 1,000 5,000 8,000

770 Edn housing subsidy 3,000 2,000 0 5,000800 Community awareness 2,000 0 2,000 4,000810 Foot patrols 3,090 400 0 3,490820 Theatre performances 0 1,000 2,000 3,000

A master budget is an important method of communicating plans to all levels of the organisation;


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can assist in guiding and coordinating activities and is an important cash flow planning tool.Although the above budget does not indicate time frames for expenditure, this budget can beentered into the accounting system on a monthly basis and will provide a projection of fundsneeded for a given time period.

The more that key people are involved in the discussions and decisions that result in a finalised'master budget' the more receptive and cooperative their attitude towards the budget will be. Thiswill add meaning to the budget, which can then assume the role of an achievement indicator for the

NGO's performance.

This involvement of key people forms the basis for participative management. Participativemanagement broadens the perspective of activity managers from a narrow concern with day-to-dayimplementation issues to a consideration of overall organisational objectives and plans. Activitymanagers can see how their particular responsibilities fit into the overall operation of theorganisation and consequently of the necessity for inter-departmental cooperation.

The financial manager has a lot of responsibility in the budgeting process.; His/her responsibilitiesinclude pre-planning, budget layout, education of fellow employees and the coordination,compilation and interpretation of budget information.

Performance ReportsWithout performance reports, the meaning and purpose of the budget would be lost. Performancereports allow activity managers to remain accountable to the budget and can be designedspecifically to facilitate internal management control. Different reports can be designed for thevarious levels of management. For example, the Board of Directors of the NGO may only need asummary report. Activity managers will require more detailed information.

Basic Guidelines for Performance Reports Design reports to fit organisational structure; Report periodically in a standard format; The report(s) can be designed to implement the exception principle [ie: report highlights

areas in need of most attention]; Taylor reports to meet the needs of the users; Keep reports simple and understandable report only essential information; Report actual to budget; Measure performance in achieving goals and objectives with a focus on what the manager

can control [ie: there may be very good reasons for being off budget that are out of the

control of the manager].Financial Reporting

NGOs are generally expected to produce financial reports for various interested parties includingthe Board of Directors, the NGOs appointed auditor and donors. These reports generally include aBalance Sheet and a Statement of Receipts and Disbursements. The Statement of Receipts andDisbursements is the equivalent of a Profit and Loss Statement for companies.


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The balance sheet provides a picture of the assets, liabilities and capital reserves of an NGO at agiven point in time. The Statement of Receipts and Payments shows the amount of money cominginto an organisation, how this money was paid out and any leftover money for a given period of time (ie: three months, one year, etc). These two reports in combination with more frequentlygenerated performance reports can form the basis of financial reporting for NGOs.

Cash FlowIt is not necessary for an NGO to have all of its grant monies in a chequing account (ie: itsoperating account). Cash on hand does not earn a return for the NGO. It may be more prudent toinvest some grant monies in interest-bearing accounts or to keep portions in hard currency (ie:USD) so that funds can maintain their value [please refer to section three for further discussion onthis topic]. However, it is important that adequate funds are available and planned for from whichto cover operating expenses. This is called cash flow planning.

What is the appropriate level of cash to have on hand? There is no set formula for this and dependslargely on what the finance and general managers of the organisation deem appropriate. Many

NGOs try to have from a month to six weeks of projected operating expenses available at anygiven time. The bank balance needs to be continually monitored to assure that this level of fundingis available. In addition, the projected monthly budget, if fairly accurate, can be used as a cash flow

projection.

Practical Steps and Considerations for Setting up a Financial Management System

Step one: Choose an accounting software package

Look for an accounting package that is clear and concise and easy to operate and maintain. Beaware that all software packages are designed for businesses and may have more functions than arerequired by an NGO. Choose a package that suits your needs in some instances a powerful packagewith lots of additional functions can 'confuse' NGO reporting and accounting needs. In this sectionand the following sections, Quickbooks and Quicken have been referred to and practical examples

provided.

It may be necessary to export information from your accounting system into Excel for formatting purposes. Donors often have specific formats in which they require their financial information. INaddition, the Board of Directors will require reports (ie: balance sheet and statement of receipts and

payments) that may be better or more 'cleanly' presented in Excel.

A part from formatting in Excel, all cash entries and disbursements and adjustments should bereflected in the one accounting programme.

Step two: clarify purpose of organisation (if required) and have this reflected in a clear and concisechart of accounts


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Chart of accountsIt is important that a chart of accounts reflect all of the major functions of the organisation. Thefollowing lists the benefits of investing time into this process:

Clarity in purpose/activities of the organisation and subsequently in each of the activities

themselves; More accurate view of activity costs as all direct costs are grouped under their respectiveactivities;

More accurate accounting due to a simplification in the chart of accounts; Improved ability to identify funding needs (activity and core funding); Improved ability to report to donors and to justify costs in proposals; Activity budgets will encourage further accountability for each activity; Improved ability to incorporate monitoring of activity objectives by better utilising the

accounting system as a management information system as well.

If reorganisation is required to produce a chart of accounts that incorporates the above, the Director

or General Manager (and other managers) should be briefed and/or provide feedback on proposedchanges. In addition, the Board may need to see a mock-up of the proposed reporting format before proceeding. If major changes to the chart of accounts are deemed necessary this should be done atfiscal year-end in order that current year reporting remain consistent. Changes may also affect theability for year comparisons however if changes are done well the first time, then additionalchanges should not be required. The chart of accounts should be set up with the ability to growwith the organisation (ie: accommodate changes to the organisation such as new activities or newsections, etc).

Example:

NEW NGO is and environmental NGO which has several activities including conservationeducation workshops for teachers, a conservation and development project, newsletter, landowner educational tours, water supply, school fee subsidies, annual landowner meeting, quarterly DECadvisory committee meetings, etc. NEW NGO has all of these activities lumped under theconservation and development project however many of these activities occur outside of the

project area and in fact are done on a national or regional scale. The general manager and financemanager together with NGO staff examine their activities and decide that in fact the NGO actuallyhas two major activities in addition to its administrative support.

These are defined as:

Conservation Education Programme conservation education workshops for teachers newsletter quarterly DEC advisory committee meetings

Conservation and Development Project


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landowner educational tours annual landowner meeting water supply school fee subsidies

With this greater clarification of what NEW NGO does, the finance manager is able to set up achart of accounts that reflects the major sections of the organisation. A mock up has been provided below:

NEW NGO Chart of Accounts100 Cash on Hand 100 Kina Bank Account200 Fixed Assets 201 Furniture and Fixtures202 Computer Equipment203 Field Equipment300 Grantor Funds Available 301 Grantor Funds Available - ICCO302 Grantor Funds Available - SCF303 Grantor Funds Available - GEF

400 Other Liabilities

500 Conservation EducationProgramme 501 Education Officer Salary

502 Education Officer HousingSubsidy

510 Conservation EducationWorkshops520 Newsletter 530 Travel

600 Conservation & DevelopmentProject 610 Field Staff Salaries611 Project Manager Salary612 Field Staff 1613 Field Staff 2620 Project Housing 621 Project Manager Housing Subsidy622 Field Staff 1


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623 Field Staff 2

630 Water Supply

640 Landowner education 641 Landowner meetings

642 Landowner study tours660 School Fee Subsidies 670 Project Travel 680 Project materials & supplies 700 NEW NGO Administration 710 Administrative Salaries711 General Manager

712 Finance and AdministrationManager 713 Bookkeeper/Office Manager 720 Other Administrative costsEtc........... Etc...........

Expanding and collapsing accountsThe chart of accounts can be set up to expand and collapse.

A collapsed report may be more useful for Board members or donors as it will provide a clear 'snapshot' of all major expense areas and by section if necessary. It can also indicate all receipts bydonor and if appropriate a total for income generated by the organisation itself.

NEW NGO: Performance Report Conservation & Development Project Conservation & Development Project

Conservation & DevelopmentProject ACTUAL BUDGET

610 Field Staff Salaries 20,000 22,000620 Project Housing 16,000 16,000630 Water Supply 14,000 10,000640 Landowner Education 5,000 10,000660 School Fee Subsidies 2,000 2,000670 Project Travel 3,000 2,000680 Project materials & supplies 4,000 7,000

Total Conservation & DevelopmentProject 64,000 73,000


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This report could be further collapsed to the total only for the project.

An expanded report is more useful for section heads who may want to see line-by-line how theyare performing compared to budget. They may also want to more detailed information on receipts

in order to access which activities are profitable or self-sustainable.NEW NGO: Performance Report Conservation & Development Project Conservation & Development Project

Conservation & DevelopmentProject ACTUAL BUDGET

610 Field Staff Salaries 20,000 22,000 611 Project Manager Salary 8,000 8,000

612 Field Staff 1 6,000 6,000613 Field Staff 2 6,000 8,000

620 Project Housing 16,000 16,000 621 Project Manager Housing Subsidy 9,000 8,000622 Field Staff 1 4,000 4,000623 Field Staff 2 3,000 4,000

630 Water Supply 14,000 10,000

640 Landowner education 5,000 10,000 641 Landowner meetings 2,000 6,000642 Landowner Study tours 3,000 4,000

660 School Fee Subsidies 2,000 2,000

670 Project Travel 3,000 2,000

680 Project Materials & Supplies 4,000 7,000

Total Conservation &DevelopmentProject 64,000 73,000

Sub-classes


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Chart of accounts are one way in which to clarify reporting and allow for section reporting.Another way to make your programming respond to your needs is to set up sub classes for reporting. The above example is further used top show sub-classes for donors. When entering anaccount payable, receivable or doing payroll, the screen will allow the user to indicate a 'class'.Classes can be set up for all donors. As long as all expenses (and payments) are tagged to a donor

(ie: assigned a class), then a report can be generated to show all receipts and payments for onedonor. If the system is set up like this, it is important that everything is tagged or the consolidatedreport will not add up to the sum of its parts (ie: all donors). In addition, if the organisationgenerates income itself, then this can be tagged to the organisation.

NEW NGO: Performance Report Conservation & Development Project by Class (Donor)

Conservation &Development Project

ICCOACTUAL

ICCOBUDGET

SCFACTUAL

SCFBUDGET

GEFACTUAL

GEFBUDGET

610 Field Staff Salaries 8,000 10,000 8,000 8,000 4,000 4,000620 Project Housing 6,000 6,000 5,000 5,000 5,000 5,000630 Water Supply 5,000 3,000 5,000 4,000 4,000 3,000640 Landowner Education 2,000 2,000 3,000 5,000 0 3,000660 School Fee Subsidies 2,000 2,000 0 0 0 0670 Project Travel 0 0 2,000 1,000 1,000 1,000

680 Project materials &supplies 2,000 2,000 2,000 2,000 0 3,000

Total Conservation &Development Project 25,000 25,000 25,000 25,000 14,000 19,000

Step three: accustom management and the Board of Directors to format of financial reports

Monthly score cards NOTE: Monthly has been chosen here but another suitable time period could also easily be used.Managers should receive a performance report at the end of every month. These should bereviewed preferably with the director (general manager) and the finance manager. The report willindicate where budget has been spent and where it has not. This will tell the manager(s) if anactivity is proceeding according to plan or alert manager(s) to problems related to implementation.

In addition, the manager should refer to this report when approving cheques. Preferably there is acheque writing form where the manager can approve a payment and indicate from which line item(and which donor) the expense should come from. This report will allow management to remainaccountable to their budget(s) and also assist in future planning and budgeting. These reports can

be set up in Quickbooks as 'memorised' reports so that formatting is uniform and they are easy togenerate.


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Reporting for the Board Reporting for the Board should be done quarterly (or as required). This reporting should include aBalance Sheet and a Statement of Receipts and Payments. This will entail accounting for all funds(ie: including USD funds if the organisation has these). A uniform and consistent format should beused. It may be easier to do this in Excel as this provides a cleaner, clearer report than what is

generated from accounting packages such as Quickbooks. This is also the report that should be provided to auditors and used in the annual report (if the organisation has one).

Reporting for donorsDonors have their own reporting requirements and specifications and an NGO should attempt tomeet these as much as possible. Conversely, if donors are amenable, a generic format may beagreeable. All donor files should be kept in the finance department and contain donor reportingspecifications and the person to whom reports should be directed. Donor reports, where possible,should be submitted no more than one month after the close of the accounting period beingreported upon. This will ensure timely receipt of funds from the donor, which is often pendingthese reports. A donor tracking schedule can be set up to monitor due dates and for work planning

purposes.Fundraising is a direct function of the Finance Department in conjunction with the organisationand project/section management. It forms part of the budgeting cycle, and medium and long-termstrategic planning process. Narrative reports should mirror what a financial report indicates. For example, if only one out of four water supplies have been installed, the narrative can explain anydelays or reasons for not spending funds as specified; the financial report will also indicate that alarge variance exists in planned and actual expenditures. More information is provided onfundraising in section three.

Step four: Assist managers in 'interpreting' and analysis of reports

Using the following performance report, the project manager can provide an analysis of projectexpenditures to date. For example:

Field staff salaries: Field staff 2 was recently hired and is on three month probation and isexpected to receive full benefits after passing the probation.Water supply is over budget due to the introduction of VAT.Study tour cancelled due to a tribal fight; budget will be reallocated to next quarter when the tour has been rescheduled. Air travel over budget due to VAT and the introduction of a 5% increase in

flights. Iron roofing not purchased for the project as it was out of stock.

Conservation & Development Project

Conservation &Development Project

ICCOACTUAL

ICCOBUDGET

SCFACTUAL

SCFBUDGET

GEFACTUAL

GEFBUDGET

610 Field Staff Salaries 8,000 10,000 8,000 8,000 4,000 4,000620 Project Housing 6,000 6,000 5,000 5,000 5,000 5,000630 Water Supply 5,000 3,000 5,000 4,000 4,000 3,000


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640 Landowner Education 2,000 2,000 3,000 5,000 0 3,000660 School Fee Subsidies 2,000 2,000 0 0 0 0670 Project Travel 0 0 2,000 1,000 1,000 1,000

680 Project materials &

supplies2,000 2,000 2,000 2,000 0 3,000

Total Conservation &Development Project 25,000 25,000 25,000 25,000 14,000 19,000

More steps to come....

Additional Information on Further Financial Management Considerations

Multiple Currency Reporting Quickbooks can be set up to report on multiple currencies. The example provided here uses USDand Kina. Two 'companies' can be set up using file names such as Kina.data and USD.data. Thetwo sets of 'company' data combined make up the complete set of records for an NGO. Alloperating expenses would be handled from the Kina books. The USD bank account acts as aholding account; the USD data in Quickbooks reflects this.

An NGO might want to keep two currency bank accounts as it may be prudent to keep funds inanother currency due to currency fluctuations. This is discussed further under investmentstrategies.

Setting up the Chart of AccountsThe US Dollar 'Company' in Quickbooks is used to track in-flows and outflows from the US bank account and to assign donors accordingly to these cash movements. In order to do this, the data filemust first be set up. A chart of accounts would have to be set up which includes accounts for the

bank (to show deposits and withdrawals) and the corresponding affects on Grantor FundsAvailable (liability account). These can have sub-accounts for the various donors that an NGO has.An example of a chart of accounts is provided below:

100 USD Holding Account

101 USD Holding - ICCO102 USD Holding - SCF103 USD Holding - GEF

200 Kina Operating Account 201 Kina Interest Bearing Account


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202 Etc (whatever kina bank accounts are reflected in theKina chart of accounts)

300 Grantor Funds Available

301 Grantor Funds Available - ICCO302 Grantor Funds Available - SCF302 Grantor Funds Available - GEF

400 Grantor Funds Transferred 401 Grantor Funds Transferred - ICCO402 Grantor Funds Transferred - SCF403 Grantor Funds Transferred - GEF

These types of accounts (ie: asset bank accounts and liability grant accounts) are the only accountsthat would be required in the USD chart of accounts for entering deposits.

Entering Deposits and Transfers in the US Dollar 'Company 'Example: ICCO has sent a wire transfer for USD $50, 000 to the UDS bank account in PortMoresby. This money needs to be recorded in the accounting system. The following are the stepsthat would be required in order to do this:

Open the US data file in Quickbooks Under activities, choose 'make deposits' (use 'make deposit whether it is a wire transfer or

an actual cheque deposit) Deposit to 101 USD Holding - ICCO Enter the date of the wire transfer from the bank statement Under received from, enter donor name and the amount Under 'from account', enter 201 Grantor Funds Available ICCO

Entering transfers from USD Account into Kina Operating Account Example: Based upon cash flow needs, the finance and general managers decide that USD $25,000 of ICCO funds will be transferred into the Kina operating account (with the remaining $25,000 to stay in USD). The following steps would be required in order to do this:

Open the US data file in Quickbooks Under activities, select 'make transfer' For 'from account' choose 101 USD Holding - ICCO. For 'to account' select the Kina operating account (whichever is appropriate) A separate journal entry would be required to reflect the transfer in Grantor Funds

Available:


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DB Grantor Funds Available $25, 000CR Grantor Funds Transferred $25, 000

These entries will show $25, 000 withdrawal from the ICCO Holding Account and a balance of $25, 000 remaining in Grantor Funds Available. In addition, the accounts will show $25, 000transfer to the Kina account as well as in Grantor Funds Transferred.

Next close the USD Company and open the Kina Company on Quickbooks Choose 'make deposit' from activities For 'Deposit To' select the Kina operating account For 'Received from' type in USD Account For 'From Account' enter Grant Funds Available - ICCO in the Kina chart of accounts For 'Payment Method' write in TT (so that the auditors don't go looking for a deposit that

was actually a transfer).

NOTE: The transfer from USD to Kina cannot be entered as such but rather must be entered as adeposit as Quickbooks cannot operate in duel currencies in the same company. That is the reasonfor the separate 'companies' in Quickbooks and for the need to make a deposit from USD to Kinarather than a TT.

Including the USD on the Kina ReportsThe USD monies would need to be included on the Kina balance sheet when this is generated for official purposes (ie: for the Board, the auditor or donors). This can be done by taking a Kinaapproximation [using the most recent exchange rate] of the USD. This amount would be added tothe Cash Available under Assets and the Grantor Funds Available under the Liabilities section of the balance sheet. The example below highlights these additions in italics:

Current Assets

Cash on Hand K100, 000 Kina Operating Account K30, 000USD Holding Account ($35, 000 convertedat .5 on xx/xx/xx) K70, 000

Fixed Assets K75, 000

Total Assets K175, 000

Liabilities, Capital & Reserves

Grantor Funds Available K100, 000 Grantor Funds Available - ICCO 10, 000


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Grantor Funds Available - SCF 10, 000Grantor Funds Available - GEF 10, 000Grantor Funds Available - in USD 70, 000

Other Liabilities 60, 000

Capital and Reserves 15, 000

Total Liabilities, Capital & Reserves K175, 000

Investment strategies for donor fundsPart of an NGO's responsibility to donors is to manage their funds well. This normally includesspending the money on agreed upon activities or items in an agreed upon time frame, andacquitting those expenses per the requirements of the donor. In addition, it is the NGO'sresponsibility to manage donor funds to guarantee their value over time (especially in situations of high inflation).

As donor funds are generally given in lump payments in advance, the NGO must safeguard thesefunds (i.e. deposit them in the bank) for future use. As well, it is generally expected that thosefunds should be deposited in interest bearing accounts, so that they will in fact be productive assetswhile they await expenditure. Some donors make a provision in their reporting so that interestgained can be itemised. Generally speaking, an interest bearing account would be the financialinstrument of choice for donors and their money because they are:

1. Easily accessed2. Secure (rather than other forms of investment which may be riskier in both terms of capital andincome potential).

This kind of financial policy is especially important to NGOs in PNG due to the instability of thekina and the related high rate of inflation. Although the letter of a donor contract may specify thattheir money be placed in an interest bearing deposit (IBD) account that may not be the most

prudent course for an organisation given the context in PNG. However, an NGO can easily adhereto the spirit of that policy and in fact manage that money better if it capitalises on other alternatives.

For example, an organisation may choose to hedge against devaluations by keeping funds in non-interest bearing USD accounts, and placing the remainder of the funds in IBD's (term and on-call).Term IBDs mean that you can not access the funds until after a specified period of time (ie: 90days); on-call IBDs allow access to funds at any time but do not give as high a return. Both of these instruments are easily accessed and secure. This same approach can be used with TreasuryBills with the Bank of PNG. Investing in term IDBs and T-bills effectively 'locks up' money for aset period (1-3 months for example). These investment strategies must consider an organisation'scash-flow needs in order to be effective.


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Treasury BillsTreasury bills operate as follows:There are two ways in which to purchase T-bills. One way is the auction process (occurs everyWednesday) in which you are allowed to bid on a rate of return (this averages between 17 and 19

per cent). The other method is the return market (open every day) in which you are offered the

average weekly rate of return. Bids are available through invitations. The invitation gives theaverage rate for the previous week. As well, T-bill returns are published in The Independent everyFriday.An example of the four different terms on offer for this week:

28 days 17.03%63 days 18.53%91 days 19.63%182 days 19.43%

Contact on 322-7200. Note, it is difficult for investors outside of POM but telegraphic transfersthrough the banks are one option to consider.

While this financial policy may not conform to the letter of a contract, it certainly does in spirit.Furthermore, interest from savings accounts in PNG is significantly lower than inflation, so in fact,to conform to the letter of the contract would mean that an organisation would loose 15% p.a. of the funds in real terms! (interest on savings accounts is approx: 5% p.a. and inflation is about 20%

p.a.).

Another issue is income realised from investments (FOREX gains and interest). The economic

situation in PNG and prudent financial management may allow for significant FOREX and interestincome. So, while an investment strategy may be sound and consistent with the spirit prescribed bydonors it creates a new dilema: how do you apply gains? This is certainly a grey zone. Gains cangenerally be spent on items agreed to within the grant. This is certainly reasonable as inflationraises costs significantly, even with in a single year.

Examples of donor wording in this regard are below:

...and income earned thereon, not expended or committed for the purposes of the grant will bereturned to the Foundation.

'forex and interest on XXX funds...have to be utiised within the framework of the Agreement and the objectives of the project, and may not be added to the general funds of the Organization. Theway that the Organizations uses these gains is subject to approval by XXX donor.

It appears that with the donors' permission, an organisation can expect to apply gains againstsimilar line items to those agreed to in the grant. For funding to activities other than those specifiedin the grant agreement or to an endowment fund, it may be permissible but only at the funder'sdiscretion.


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Fundraising It is important to remember that proposals are only one step in the fundraising cycle, which isintegral to running an organisation. Firstly, an organisation must be very clear in its purpose andthe activities it wishes to undertake to realise that purpose. Secondly, based on an analysis of thefunds required to undertake those activities, a fundraising strategy will be developed.

Good fundraising is not realising half way through the year, 'Hey, yumi nidim niupela computa. Yugo aut na kisim sompela funding long em' Instead, it is the outcome of serious forward planning.

Below is a list of how fundraising can fit inside the normal planning process of an organisation:

Identifying needs Developing Goals, Strategies, Activities, Budgets Financial Planning

1. Developing Relationships With Funders2. Proposal writing skills

Implementing Monitoring and evaluating funding and projects

1. Reporting to funders on the outcome of the project or activity funded.

Myths about Proposal Writing

Myth 1: Proposal writing = fundraising

Fundraising includes strategies to secure funds (who will you ask, building relationships withthose funders/people, how and what will be presented to those funders, and for what period of time, etc.), ongoing relationships and reporting to those funders.

A proposal, is the document presented to a funder to request funds based on the organisation's planning and funding strategy.

Myth 2: Proposal writing takes too much time away from my real job.

Proposal writing can be a powerful tool for:

Project Management Consensus-building Communication

Myth 3: Proposal writers write proposals.

Everyone involved in a project should have input into the proposal; input should be co-ordinated by a designated person, but that person is not officially known as the 'proposal writer'.


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Main Components of a Proposal

Cover letter Executive Summary Text

Budget Attachments

Generally donors will provide proposal guidelines which should be followed. Often theseguidelines will indicate how long a section should be. The 'attachments' section can be used to

present information that you feel is useful or relevant, but does not 'fit' into the body of the proposal.

What is the Purpose of an Executive Summary?

An Executive Summary should clearly define the following:

What you want funded Why it is important Why your organisation should be selected How much money you need and when

After the covering letter, the Executive Summary is what the donor will read (if you managed to gettheir attention in the covering letter!) Donors often do not read past the Executive Summary so makeyou summary count for you!

How do you know that your Executive Summary does this?An Executive Summary should include:

First sentence of every section in the proposal What you are trying to do in your project Brief history The 'essence' of the proposal The request for money (ie: how much) 'Snap shot' of the project Why it's important

Something about your organisation

How to Involve Your Donor

Inform them Take them into the 'field' Meet them where they are located (i.e.: hand deliver reports when possible) Ask for help and ideas (and, of course, money!) Tell them how their funds are being used


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Share successes and challenges

How to Write a Bad Proposal

Send your first draft

Proposal does not meet donors criteria or 'funding scheme' Proposal does not reflect the mission of your organisation Too long; too short Miss the deadline Too general, not specific Too detailed Executive Summary not clear Donor format not followed Unrealistic budget

10 Steps to Writing a Successful Proposal

Step 1:Clarify Who You are, What You Want to Be, Why Is ThatImportant, What Do You Want To Do, & What Will It Cost

Step 2: State your measures of success(explained in a later section)

Step 3:Get to know your donor (The people here know their donor very well.)..look at any donor relationship as a potential

partnership

Step 4:Decide what should be included in the proposal and draw upan outline, work plan, and budget for it

Step 5: Write a strong Executive SummaryStep 6: Clearly describe the activities that you want fundedStep 7: Tell a good story (beginning, middle, end)Step 8: Review, review and refine (consensus)Step 9: Get donor attention in the cover letter Step10:

Plan ahead for reports

Non Profit Organization Accounting

Its aim may not be profit-making, yet it cannot avoid account keeping. It must maintain proper accounts of its receipts, payments, incomes and expenses, because those who have donated money to such institutionmust know that their money is being used properly and fruitfully. So, profit or no profit accounting is a must.Its sole object is to do good to the society or members through welfare activities. Such institutions are clubs,societies, schools, colleges, hospitals and libraries etc.

Certainly, proper accounting is essential for non-trading institutions. These concerns maintain, generally, acash book and later they prepare a summary of cash transactions appearing in the cash book. Thissummary takes the form of an account known as receipts and payments account.


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Such concerns also prepare 'income and expenditure account' (which is more or less on the lines of profitand loss account) and the Balance Sheet.

The day-to-day accounting consists of maintaining.

(i) Cash book for recording receipts and payments, and(ii) Ledger for classification of transactions under proper heads.Receipts and payments account

I It is a summary of cash book for a given period, but the Receipts and Payments account shows the totalsof cash transactions under different heads. All the receipts, be cheque or cash are entered on the debit(receipts) side (as in cash book) whereas all the payments (both by cheque or cash) are shown on thecredit (payments) side. Following features of the receipts and payments account will help to identify itsnature clearly :

l. It is a summary of cash book, like a cash book, receipts are shown on the debit side andpayments on the credit side.2. Cash and bank items are merged in one column. That means receipts in cash as-well-as by , cheque areentered in one column on debit and payments in cash as-well-as by cheque are entered in one column oncredit side. Contra entries between cash and bank get eliminated.3. It is not a part of double entry book-keeping. It is just a summary of cash book which is a , part of doubleentry system.4. Just like cash book, it starts with the opening balance of cash and bank and closes with the closingbalance of cash and bank.5. Both revenue and capital receipts and payments are recorded in this account. For example, ...Anorganization that is exclusively set up to carryon with the object of carrying out social service or promo &organization of social activities, is a non-trading enterprise. payment for rent and payment for building andmachinery both are recorded on its payments side. Similarly, receipts on account of subscription andmachinery are shown on the receipts side.6. Usually, it shows a debit balance which represents cash in hand and at bank. However, in case of bankoverdraft, which is larger than cash in hand, the account will show a credit balance.7. Receipts and payments account fails to disclose gain or loss made by the concern during the period

because (a) it is prepared on actual receipt basis i.e. it records all receipts-irrespective of the period towhich it relates (previous year, current year or future), (b) it also ignores the nature of the receipts andpayments (whether capital or revenue). I8. Accounting concept of gain or loss is based on "accrual concept" which by its very nature "receipts andpayments account" is not capable of considering. Therefore, fails to disclose gain or loss (earned or suffered by the concern) during the period. For example, this account ignores: !(i) Decrease or increase i.e. depreciation or appreciation in the value of assets;(ii) Increase or decrease in the value of stock;(iii) Provision for expenses incurred but payments not made-outstanding expenses.(iv) Accounting for payment in advance for the services to be utilized in the next accounting period-prepaidexpenses.It also fails to distinguish between:(v) Capital and revenue payments-whether expenditure or purchase of an asset, and

(vi) Business charge and appropriation- whether business expenditure or drawings.Limitations of receipts and payments account

Receipts and payments account suffers from following limitations :

(a) It does not show expenses and incomes on accrual basis.(b) It does not show whether the club or society is able to meet its day-to-day expenses out of its incomes.(c) It does not show expenses on account of depreciation of assets.


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(d) It does not explain the details about many expenses and incomes. In order to explain such questions,treasurer of the club prepares 'Income and expenditure account' and balance sheet.

Income and expenditure account

This account is prepared by non-trading concerns who want to know if during the financial year their incomehas been more than their expenditure i.e. profit or vice versa ( i.e. loss). Since the object of these concernsis not primarily to' earn profit, therefore, they feel shy in giving it the name of profit and loss account.Because the word 'profit' is a taboo which any society 'looks down upon'. Of course, it discloses whether theconcerned institution earned or lost.It is equivalent to and serves the purpose of 'profit and loss account'.It is prepared on "accrual basis" (not on receipt basis) meaning thereby that all incomes are to be includedwhich have been earned in the relevant period (whether actually received or not). Similarly, it includes allexpenses incurred in the relevant period (whether actually paid or not). This account serves exactly thepurpose which 'profit and loss account' serves in a trading concern. On the pattern of 'profit and lossaccount' income is shown on the credit side and expenditure on the debit side. It also distinguishes between'capital & revenue' items i.e. it does not take into consideration capital items {both receipts and payments).It follows double entry principles faithfully.

Balance Sheet

The balance sheet of a non-trading concern is on usual lines. Liabilities on left hand side and assets onright hand side. In trading concerns, excess of assets over liabilities is called 'capital'. Here, in non-tradingconcerns, excess of assets over liabilities is called 'capital fund'. The capital fund is built up out of surplusfrom income and expenditure account.

Distinction between "receipts and payments account" and "Income and expenditure account" :

Receipts and Payments Account

1. It is a real account.2. It need not be accompanied by a balance sheet.3. It is like a cash book.

4. Closing balance is carried forward to the next period.5. Debit side is for receipts and credit side is for payments.6. Closing balance represents cash in hand and at bank.7. It includes both capital and revenue items.8. It usually shows a debit balance.9. It ignores outstanding items.10. It ignores credit sales and purchases.11. It includes prepaid items.12. It begins with a balance.13. It includes items relating to past, present or future periods.14. It is not a part of double entry system.15. It ignores non-cash items like depreciation, bad debts etc.

Income and Expenditure Account1. It is a nominal account.2. Must be accompanied by a balance sheet.3. It is like a profit & loss account.4. Closing balance is merged into capital fund.5. Debit side is for expenses and credit side for incomes.6. Closing balance represents either surplus or deficiency.7. It includes only revenue items.8. It may show a debit or credit balance.


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9. It records outstanding items.10. It records credit sales and purchases.n. It excludes prepaid items.12. It does not begin with a balance.13. It includes items relating to current period only.14. It is a part of double entry system.15. It records non-cash items like depreciation, bad debts etc.

Peculiar items of non-trading concern's

Generally, in the exercises, the instructions are given as to the treatment of special items. Such instructionsare based on the rules of the concern. These should be followed while solving the question. In cases, whereno specific instructions are given, the following guidelines may be considered:

1. LegacyIt is the amount received by the concern as per the 'will' of the 'donor'. It appearson the receipts side of receipts and payments account. It should not be considered as income but should betreated as capital receipt i.e. credited to capital fund account.2. SubscriptionsThe members of the associations, as per rules, are, generally, required to makeannual subscription to enable it to serve the purpose for which it was created. It appears on the receiptsside of the receipts and payments account and is, usually, credited to income. Care must be exercised totake credit for only those subscriptions which are relevant.

3. Life membership feesGenerally, the members are required to make the payment in a lump sum only once which enables them tobecome the members for whole of the life. Life members are not required to pay the annual membershipfees. As 'life membership fees' is a substitute for 'annual membership fees', therefore, it is desirable that lifemembership fees should be credited to a separate fund and fair proportion be credited to income insubsequent years. In theexamination question, if there is no instruction as to what proportion be treated as income then whole of itshould be treated as capital.4. Entrance fees

This is also an item to be found on the receipts side of receipts and payments account. There arearguments that it should be treated as capital receipt because entrance fees is to be paid by every member only once (i.e. when enrolled as memer, hence it is nonrecurring in nature. But another argument is thatsince members to be enrolled every year and receipt of entrance fees is a regular item, therefore, it should-be credited to income. In the absence of the instructions anyone of the above treatment may be followedbut students should append a note justifying their treatment.

5. Sale of newspapers, periodicals, etc. As the old newspapers, magazines, and periodicals etc. are to be disposed of every year, the receipts onaccount of such sale should be treated as income, and therefore, to be credited to income and expenditureaccount.6. Sale of sports material.Sale of sports material (used) is also a regular feature of the clubs. Sale proceeds should be treated as

income, and therefore, to be credited to income and expenditure account.7. HonorariumPersons may be invited to deliver lectures or artists may be invited to give their performance by a club (for its members). Any money, paid to invitees, is termed as honorarium and not salary. Such honorariumrepresents expenditure and will be debited to income and expenditure account.

8. Special fund


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Legacies and donations may be received for specified purposes. As discussed above, these should becredited to special fund all expenses related to such fund are shown by way of deduction from therespective fund and not as expenditure in income and expenditure account.

9. Sale of old assetIt is a non-recurring item. It cannot be taken to income and expenditure account. It leads to reduction inasset. Therefore, it is shown by way of deduction from the concerned asset. It is important to note that it isthe "book value" that is to be deducted from asset. Profit or loss in such a case is taken to income andexpenditure account. Where the book value of asset is nil, the entire proceeds of sale be treated as income.

10. Specific DonationsThese are received for specific purpose. For example: Donation for building; Donation for prizes; Donationfor pavilion etc. These are capital receipts and shown on liabilities side. It is worthy to note that suchdonations should not be treated as income because if they are taken to income and expenditure account, itwill increase income. The increased income may be utilized for any other purpose. Thus, the purpose of donation will not be served. Such donations appear on the liability side because they create a long termobligation (liability) on the institution. For example a donor may wish that prizes may be awarded year after year out of the income earned on his donations. Such a donation account can't be closed within a year bytransferring to income and expenditure account.11. General donationsThese donations are not for any specific purpose and being a recurring income they are to be treated asincome and are shown on the income side of income and expenditure account.

12. Endowment fundIt represents donation for a specific purpose. Here, the object of the donor is to provide a source of permanent income to the institution. Thus, it is shown in the liability side of balance sheet. Any incomeearned during the year in such fund is added to it and any expenditure incurred during the year is deductedfrom it.

13. Proceeds of concerts, lectures and dramas or cultural shows A concert is a program of musical entertainment. Concerts and lectures of eminent personalities arearranged in aid of charitable Accounts of Non-Trading institutions. Amount in the income side of institutions.

Amount collected from such shows by sale of tickets is an income of institution and shown in the income

side of income and expenditure account.

14. Govt. grants. These grants are of two types :(i) Maintenance grants; and(ii) Development grants.

The maintenance grants are for meeting recurring expenses. These are treated as income and shown in theincome side of income and expenditure account. The development grant is for acquiring assets. Adevelopment grant is a liability.15. Accumulated (Capital) Fund

All entities, profit seeking on non-profit seeking requiremoney for carrying out their activities. In business organization such money is called capital while in case of non-profit organizations it is known by various names such as Capital fund or Accumulated fund.

It represents the surplus of assets over outside liabilities of the organization. It is usually made up by specialdonations; legacies; capitalization of admission fee ; life membership fee etc. It is increased (or decreased)by any surplus (or deficit) on the Income and Expenditure account. Some of the lesser known names givento this item are General fund or Surplus account.

Steps to prepare income and expenditure account

In the absence of the trial balance, the income and expenditure account will be prepared on the basis of thereceipts and payments account. The steps are as follows:


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1. Ignore opening and dosing cash and bank balances appearing in receipts and payments account.2. Eliminate all items of capital receipts and payments.3. Ascertain income of the relevant year by deducting from the total receipts the income received onaccount of previous and future years and by adding the income accrued due in the year but not receivedand income received in the previous year but relating to this year.4. Ascertain expenditure of the relevant period by deducting expenditure both relating to preceding periodand succeeding period from the total payments and by adding the expenditure outstanding at the end andexpenditure prepaid in the beginning.5. Make adjustments, as per additional information, such as depreciation, bad debts etc., if any.6. The income and expenditure account, when balanced, will disclose surplus (if the credit side is bigger) or deficit (if the debit side is bigger). If surplus i.e. excess on income over expenditure add it to the capital or accumulated fund. However, if deficit i.e., excess of expenditure over income deduct it from the capital or accumulated fund.

Distinction between receipt and income

"Receipt" means total cash received during the current year. But "income" means total income earned for the current year.

The points of distinction between the two are stated below :-

Receipt

1. Any cash received in regarded as receipt.2. It is not confined to any accounting year. In other words, it may include cash received for any year-past,present or future.3. It may be of both capital and revenue nature.4. In case of receipt, cash increases equal to amount of receipt.5. An item can't be called "receipt" unless equivalent amount of cash received.6. It is recorded on debit side of cash book.7. It is not included in final accounts. In other words, it is not considered in determining the result of concern.Income

1. Any cash received mayor may not be regarded as income. Cash received for current year is regardedonly as income.2. It is confined to current accounting year only.3. It is of revenue nature only.4. In case of income cash may not increase equal to the amount of income.5. An item may be "income", even though cash has not been received.6. It is credited to income and expenditure account.7. It must be considered in final accounts.

Distinction between payment and expenditure

Payment means total cash paid during the current year. But expenditure means total expenses incurred for

the current year only.

The points of distinction between the two, are as follows :-Payments

1. Any cash paid in regarded as payments.2. It is not confined to any accounting year, i.e. it may include cash paid for any year-past, present or future.3. It may be of both capital and revenue nature.4. In case of payment, cash decreases equal to amount of payment.5. An item can't be called "payment" unless equivalent amount of cash is paid.


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6. It is recorded on credit side of cash book, i.e. credited to cash account.7. It is not included in final accounts. In other words, it is not considered in determining the result of concern.

Expenditure

I. Any cash paid mayor may not be regarded as expenditure.2. It is confined to current accounting year only.3. It is of revenue nature only.4. Cash mayor may not decrease equal to the amount of expenditure.5. An item may be "expenditure" even though cash has not been paid.6. It is debited to income and expenditure account.7. It must be considered in final accounts.

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