bean count·er – noun
a person, typically an accountant or bureaucrat, perceived as placing excessive emphasis on controlling expenditure and budgets.
Whether you are writing about it or doing it, bean counting is dull but incredibly important! How much emphasis on controlling expenditures and budgets is too much? It all depends on the financial health and stability of the organization you are working for. So, although there is no single, correct answer to this question, an organization that places too little emphasis on financial management, does so at its own peril.
Board members, Executive Directors and department managers must understand the agency’s budget and financial health in order to make good decisions. When spending your agency’s scarce resources, you need to understand how much money will be left following the expenditure, what the ongoing commitments of the agency are, how much money is available and what the next best use of the funds could accomplish. To be fiscally responsible organizations must, at a minimum:
1. Set and approve a realistic budget;
2. Review financial statements at least quarterly;
3. Identify and understand significant variances from budget;
4. Understand the balance sheet and income statement accounts, and
5. Predict yearend financial results.
Budgeting would be enhanced by the availability of a crystal ball. Failing this, an agency must use past projections, known changes in programming, costs and revenues and general trends (such as inflation rates) to predict the coming year’s budget. Agencies must also understand any conditions associated with revenues, such as funds directed to specific projects; or requiring matching funds. Yearend could be disastrous if money that is already spent had to be returned because a project was not delivered.
Often, non-profits start their budget process with far more expenses than revenue. Then, they decide where to cut. Agencies should strive to cut an extra few percent to allow for unanticipated expenses or to put a few dollars aside for a future crisis. Agencies should work towards having a reserve account equal to at least 3 months operating costs. (Some literature suggests as much as 6 – 12 months.)
Years ago, boards would spend almost all their time reviewing financial statements. Fortunately, the tide has turned, and boards understand that they need to be as accountable for service delivery as they are for finances. However, the full board should review the agency’s financial statements at least quarterly, or more frequently if there are significant deviations from the budget, serious financial concerns or large fluctuations in revenues or expenses.
Often an agency can become overly focused on the income statement (statement of profit and loss) and neglect the balance sheet. However, both are critically important to creating a full understanding of the agency’s financial position.
The income statement should help readers to understand the current and projected future financial situation including seasonal variations on revenues and expenses; the year end financial position and what has caused the agency to forecast variances. Each agency’s financial statements will look slightly different, however to make reliable year end forecasts an agency should have a variety of comparisons. The following is a sample template that an agency might choose to adopt.
The balance sheet should help the reader to understand the overall financial health of an agency. Balance sheet readers should understand what each account represents. Here are a few things that are important to watch on the balance sheet:
- Changes to balance sheet accounts. For example, a sharp increase in accounts receivable should be explored and may be a reason for concern.
- Amount of immediately accessible money (typically in a chequing or current account). Are there sufficient funds in accessible accounts to meet immediate expenditures and cover occasional unanticipated expenses?
- Deferred revenue and/or unearned income. What funds does the agency have in the bank that require future service delivery? Are there enough funds to deliver programs that meet these future obligations?
- Liabilities. What debt does the organization have? Is there a cost to service the debt? Is there a repayment plan?
Your agency should be continuously updating your yearend forecast throughout the fiscal year. At the year progresses the forecast should become more accurate. You may receive an unexpected large donation or funding for a new project. Or you may have unexpectedly poor results from a fundraiser. As these events occur, it is important to update your projections about your yearend financial position and explain why your prediction has changed. Tackle financial projections by considering whether the current month and/or year to date revenues and expenses will be representative of the rest of the year. For example:
1. Do they vary by month or season? Some variances might be anticipated based on weather (for example heating costs); timing of fundraising events and appeals or timing of program delivery.
2. Were there temporary or permanent changes such as the number or compensation of staff; change to a grant amount; or a work stoppage?
3. Was there a significant one-time change? This might include something like a major repair bill or an unanticipated significant donation.
Why is this important? If your agency does experience a significant change in yearend position, it is important to be proactive about it. Your board must decide whether any corrective action; either spending more or cutting costs is necessary to achieve the desired yearend results. Too much net income may be as harmful as too little, from a donor or member relations perspective.
There are many reasons to invest time and energy in bean counting. You will have a better understanding of your agency and how it spends money. You will be more knowledgeable when talking to donors and other funders. Understanding your costs will assist you in deciding whether to accept new funding that may not completely cover the program it is offered for. If done well, it will also reduce chaos and stress.
A final message to charities is that the T-3010 you file each year is easily searchable by prospective donors, partners, volunteers and employees. Do your yearend financial results show your agency in the best possible light? So, while counting beans may be tedious, this accountability ultimately ensures the sustainability of a cause that you believe in.