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Effective financial management is a critical foundation for all organisations, communities and nations. In this topic, we look at the lingo you’ll come across when budgeting, record keeping and reporting. We also explore the importance of setting up clear policies and procedures, and who is responsible for managing your finances.
While reading this topic, think about the following questions and how they relate to your organisation, community or nation:
Effective financial management is a critical foundation for managing your resources wisely. It can promote economic development and self-determination for your organisation, community or nation.
Financial management impacts all operational areas of an organisation, community or nation – from legal obligations to paying bills and staff. Effective financial management can help to generate positive outcomes – for your community and members.
“A thriving Indigenous business sector can also lead to reduced reliance on external sources of funding, including government funding. For example, the top 5 Indigenous corporations received 83 per cent of their revenue from self generated income.” – Westpac, Enabling Prosperity: Success Factors for Indigenous Economic Development.1Linda Kurti, Sara Hudson, Ryan McKenzie, Karen Milward and Princess Ventura, Enabling prosperity: success factors in Indigenous economic development, report prepared for Westpac (Westpac Group and Urbis, 2014), [link]
It’s helpful to think about financial management as a whole system, or a story. Effective financial management can help your organisation, community or nation to:
The following checklist can help check whether your group has the policies, rules and procedures to effectively manage your finances (PDF, 133KB).
These check-ups are intended for self-directed assessment. They can be used by leaders, board directors, or group members who want to evaluate the governance and leadership of their organisation, community or nation. You can do the check-up on your own or as a group and then compare results.
If you’re new to financial management, there can be a lot of new words to get your head around. Here are some of the key terms you may come across.
What your group owns and uses to operate. They appear on your balance sheet.
Current assets have a lifespan of one year or less. For example, accounts receivable and inventory. This means they can be easily converted into cash.
Non-current assets have a lifespan of more than one year. For example, machinery or buildings. This means they are not as easily turned into cash. These assets can also be intangible assets, such as copyright.
The process of examining or investigating financial information to make sure it’s accurate and complies with any relevant rules and regulations.
The statement of your group’s assets, liabilities, and owner’s equity at any point in time. It shows the total assets and how they are financed. It summarises the financial balance – what you have and what you owe.
It’s also known as the ‘statement of financial position’.
Outlines the income sources your group plans to receive against the expenses you expect to incur.
The money your group has available to pay for day-to-day operations and fund future growth.
A structured list of an organisation’s financial accounts used to categorise and record financial transactions. It lists by category and line item all of the financial transactions that an organisation conducted during a specific accounting period.
Any funds that your group has borrowed and must repay.
The authority to approve expenditure or enter into financial commitments on behalf of your group.
Clear policies should outline who has the delegation and the terms. For example, delegation for transactions and/or commitments up to a certain amount.
The payment of your group’s earnings (or profit) to your shareholders or owners.
The amount of money your group spends during a reporting period. For example, on rent, wages and utilities.
A person or group that acts on behalf of another person (or organisation, community or nation). The fiduciary must prioritise the interest of the beneficiary over their own.
The 12-month period used for financial and tax reporting. It runs from 1 July to 30 June.
Financial budgets and reports are usually completed for the financial year, rather than the calendar year (January to December).
Highlights the incomings and outgoings of funds into your group.
It shows the revenue minus expenses, which gives the profit (or loss) for the reporting period. Not-for-profit organisations usually call this surplus or deficit.
It’s also known as the ‘statement of financial performance’.
The amount of money your group takes in during a reporting period.
This may be from more than one source. For example, sale of goods or services, donations, government grants.
What your group owes to others. These appear on your balance sheet.
Current liabilities are due to be paid within one year. For example, accounts payable or short-term debt.
Non-current (or long-term) liabilities are financial obligations that are due after one year from the date of the balance sheet. For example, longer term loans.
The initial amount of money invested by your group’s owners. This includes any retained earnings that have been reinvested from the owners’ profits.
The amount of money (or earnings) that your group has left over after paying all costs, including any dividends.
Individuals or legal entities that own at least one share in a public or private corporation.
The ability of your group to meet its long-term debts and financial obligations.
Insolvency is the inability of your group to pay its debts when they are due.
The difference between the amount budgeted or planned and the actual amount. This can apply to both income and expenses.
Aboriginal and Torres Strait Islander culture promotes a ‘collective’ or ‘sharing’ economy. For many Aboriginal and Torres Strait Islander groups, business success is often defined by the benefits to the community. This is different from a western ‘capitalist’ economy that focuses on private ownership and profit.
Aboriginal and Torres Strait Islander peoples, organisations, communities and nations must operate in and navigate both economic environments. This can be challenging. It’s important to recognise these 2 environments and balance your group’s regulatory requirements with cultural expectations.
Effective financial management is crucial for groups to achieve desired benefits for their community.2Linda Kurti, Sara Hudson, Ryan McKenzie, Karen Milward and Princess Ventura, Enabling prosperity: success factors in Indigenous economic development, report prepared for Westpac (Westpac Group and Urbis, 2014), [link]
“Often the success of an Indigenous business is not only defined by the profit gained from the business, but also by its ability to preserve or affirm the culture of the community, clan or family group. There are many examples of successful Indigenous organisations that have embedded cultural values into the values and governance structures underpinning their business.” – Westpac, Enabling Prosperity: Success Factors for Indigenous Economic Development.3Linda Kurti, Sara Hudson, Ryan McKenzie, Karen Milward and Princess Ventura, Enabling prosperity: success factors in Indigenous economic development, report prepared for Westpac (Westpac Group and Urbis, 2014), [link]
It’s helpful to think about financial management as a whole system, or a story.
According to the Office of the Registrar of Indigenous Corporations (ORIC), effective financial management involves the following components.
A budget outlines all the income your organisation, community or nation expects to receive and the expenses you expect to have. A budget is usually done for a financial year. This shows you what you can afford to do. For example, if you have money leftover, you can allocate this to other priorities.
When you budget, consider any changes to your income or funding streams, as well as any potential risks and opportunities.
It’s important that your board and the CEO review your budget and regularly check income and expenditure. Planning for the future means that you have a clearer idea of the funds needed for your group to govern effectively.
Setting clear policies and procedures in your organisation, community or nation helps to minimise financial risk and make roles and responsibilities clear.
For financial management, your policies and procedures should clearly state:
ORIC recommends that directors receive regular financial reports and approve any expense that is:
Make sure that your financial policies and procedures are up-to-date and transparent. To learn more about creating and implementing policies and procedures, see Policies and procedures.
Reporting is an important part of your organisation, community or nation’s governance compliance. Your records must meet monitoring and reporting requirements. All transactions – money coming in and going out – must be recorded.
If you receive funding, you also need to know and follow the reporting responsibilities of your funding bodies.
Financial reporting clearly tells the story about the money in your group – including:
Good financial reporting helps your board to:
Most groups have both internal and external reporting duties and responsibilities.
Internal reporting monitors performance and provides evidence that your organisation is not trading while insolvent. Reports can be for the board, management and external funding agencies.
External reporting is when these reports are made available to the public, members and communities. External reporting obligations vary and depend on:
To meet your reporting requirements, your group should use these key financial statements.
Balance sheet
A balance sheet – also called a statement of financial position – tells you what you have and what you owe.
A balance sheet lists all the assets and/or resources owned by your group and all the liabilities and/or obligations your group owes to others. This is reported at a specific point in time.
The formula for a balance sheet is Assets = Liabilities + Shareholders (Owners) Equity.
See Financial lingo for definitions of key terms on a balance sheet.
Find an example of a balance sheet (PDF, 563KB).
Income statement
An income statement – also known as a statement of financial performance or profit and loss statement – tells you how you’re going.
Find an example of an income statement (PDF, 536KB).
An income statement highlights the incoming and outgoing funds into your group. It shows the revenue minus expenses, which gives the profit (or loss) for the reporting period. Not-for-profit organisations often call this surplus or deficit.
It’s important to compare the expenditure against the budget for the reporting period. Make note of any differences and why they occurred.
The amount of money you take in during a reporting period
The amount of money you spend during a reporting period
The direct cost of producing whatever product or service you sell
Total revenue less COGS
An expense a business has through its normal business operations
Gross profit less operating expenses
Operating income less non-operating expenses
Income before taxes less taxes
Division of net income by the total number of outstanding shares
The extent to which assets – for example, equipment – have lost value over time
The practice of spreading the cost of an intangible asset over its useful life
Earnings before interest, depreciation, taxes, and amortisation
Cash flow statement
A cash flow statement – also known as a statement of cash – tells you how your money is moving.
A cash flow statement shows all of the money coming in and out of your group and highlights your cash management. It is divided into:
This breakdown makes it easy to see which areas make or use the most cash.
Find an example of a cash flow statement (PDF, 536KB).
Understanding what is expected is a good place to start. For helpful information about what records you should keep, see:
Many groups hire external professionals to assist with reporting – for example, an accountant.
You can use also use computer software – for example, Xero, MYOB – to help with:
If your group is a corporation registered with ORIC under the Corporations (Aboriginal and Torres Strait Islander) Act 2006, ORIC provides guidance, including:
For more useful information about reporting requirements, see:
If you are a director in your group, you can test your financial reporting knowledge using ASIC’s free financial reporting quiz for directors. It’s also a good idea to provide financial training for new staff members and directors.
Effective financial management involves many different components that form your overall ‘money story’. Use this check-up to evaluate whether understand your money story and are managing your finances effectively (PDF, 133KB).
These check-ups are intended for self-directed assessment. They can be used by leaders, board directors, or group members who want to evaluate the governance and leadership of their organisation, community or nation. You can do the check-up on your own or as a group and then compare results.
For effective financial management in your organisation, community or nation, make sure:
For more information about who does what in your group, see Your key players.
The board is responsible for managing your funds, resources and assets. In this way, the board acts as a trustee for its members. This means the board has the authority to make decisions about your assets, finances and resources.
A trustee must have the highest standard of care for the beneficiaries during their duties. This creates a relationship that is ‘fiduciary’ in nature – a relationship of trust.
It’s the board’s job to:
Your board is also responsible for monitoring your group’s financial performance. This includes regularly reviewing and verifying financial reports and making sure they are accurate.
Some groups set up a finance sub-committee to assist with financial management and to provide information and guidance to the board. You can also get outside help with financial and business planning, if needed. This might include getting an independent auditor to audit your accounts annually.
A strong board should:
The board and the CEO need to work together as a team to manage finances and make informed decisions. It’s the CEO’s job to make sure the board understands the ‘money business’ of your group. This means making financial information easy to understand for your board members.
For some groups this can be straightforward. For example, where the board is financially literate, and managers are open and communicative.
For others this can present a major challenge. For example, where the board has people with varying financial literacy, or the CEO makes independent decisions without following the established processes.
The board and CEO should have a clear process on how they work together to manage finances and meet their responsibilities.
Directors and managers have financial management and accountability legal duties.
Managers often manage day-to-day finances and decisions. A manager could be a finance manager, accounts manager or bookkeeper. However, the ultimate responsibility for finances sits with the directors. They are responsible for any wrongdoings or insolvency under the law.
Directors must review matters in detail and not delegate responsibility. This means they must be able to read and understand financial statements and reports. They cannot only rely on advice from managers.
There are 4 key financial duties for directors:
These duties align with the areas of effective financial management.
To comply with these duties, directors and managers in your group should:
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