ZHRC/HTI Financial Management Training

Session 3: Budgeting, Accounting and Financial Reporting

Learning Objectives

• • • • • • By the end of this session, participants will be able to: Define the terms: budgeting, accounting, financial planning and budgeting processes Describe the financial planning and budgeting processes Describe importance of financial management Explain good practices in budgeting List the key financial reports that monitor the organization’s financial affairs Explain the process for preparing financial reports

Financial Planning Process

Financial Planning

• • Both a strategic and operational process linked to the achievement of objectives Involves building both longer-term funding strategies and shorter-term budgets and forecasts

'If you don’t know where you are going, then you are sure to end up somewhere else.'

-- Mark Twain

The Planning Pyramid (1)

The Planning Pyramid (2)

• • Once plans are set, the organization draws up its budgets and cash flow forecasts to help implement the plans • Throughout the year, financial reports are produced to compare actual performance to the budget The review stage is very important as it highlights areas where the plans did not occur as expected • This learning process helps identify revisions needed to the plans

What is a Budget?

• It is an amount of money that an organization plans to raise and spend for a set purpose over a given period of time.

Importance of Budgeting (1)

• Planning • Budgeting gives an accurate idea of the project’s costs • Fundraising • A budget is a critical component of negotiations with development partners

Importance of Budgeting (2)

• Project Implementation • An accurate budget is needed to control the project • Monitoring and Evaluation • A budget is a tool for evaluating the success of a project

Who Needs and Uses a Budget? (1) 1.

2.

3.

Governing Body:

Needs budgets to formally approve an organization’s budget and monitor its progress.

Management Team:

Needs budgets to manage the progress of the organization and monitor the funding situation.

Project Managers:

Need budgets to oversee the implementation of their project activities.

Who Needs and Uses a Budget? (2) 4.

5.

6.

Fundraisers:

Need budgets to accompany funding applications.

Finance Staff:

Need budgets for cash flow management.

Development Partners:

Need budgets in order to see how an organization intends to spend its grants.

Budgeting Process

• The process should address the following questions: • • What are the objectives of the project?

What activities will be involved in achieving these objectives?

• What resources will be needed to perform these activities?

• • What will these resources cost?

Where will the funds come from?

• Is the planned result realistic?

Good Practice in Budgeting

• • • • •

Clarity

Budget is clear and accurate •

Timetable

Have a budget development timetable and start early •

Estimating Costs

Make a list of all the inputs required and specify the number and unit cost of each item •

Forgotten Costs

There is a tendency in non-profits to underestimate the true costs of running a project for fear of not receiving funding for a project

Group Work: Calculate Variance in a Budget Report

Accounting, Financial Reports and Making Sense of the Numbers

What is Accounting?

• The process of recording, classifying, summarizing, interpreting and reporting financial data to permit informed judgments and decisions by users of the information

Accounting Process (1) 1.

2.

3.

•

Recording

Transactions must be recorded in the books of account •

Classifying

Group transactions of one nature at one place. This is normally done in the general ledger under different accounts •

Summarizing

Transactions are summarized in financial reports

Accounting Process (2) 4.

5.

• •

Interpreting

Interpreting accounting information helps users make meaningful judgments about an organization Percentage analysis and footnotes are often used to help interpret the accounting information •

Reporting and Communicating

This is done through distribution of accounting reports and additional information such as tables, graphs, ratios and diagrams

Accounting Process (3)

1.

Recording 5.

Reporting 2. Classifying 4. Interpreting 3. Summarizing

Role of Accounting in ZHRCs/HTIs (1)

• To manage the approved organizational and financial framework to ensure: • Sound internal control and efficiency • Effective revenue mobilization and collection • Sound management of assets and liabilities • Provision of accurate, complete, timely, consistent and transparent financial statements • Provision of annual statutory accounts

Role of Accounting for ZHRC/HTIs (2)

• • • • Assist the ZHRC/HTI to formulate a realistic medium term financial plan and annual budget, consistent with: National priorities, policies and objectives Service delivery targets Resource base, expected revenue, and financial capacity • Provide prudent, professional and impartial financial advice

What Does Accounting Achieve? (1)

• • • Keep systematic records Protect property of the ZHRC/HTI Ascertain operational results and financial position of the ZHRCs/HTIs • Generate and disseminate information to relevant decision makers

What Does Accounting Achieve? (2)

• • • • • Compliance with legal requirements including: • The Constitution of the United Republic of Tanzania The Public Finance Act The Local Government Finance Act The Cost-sharing Manual Rules and regulations of the National Board of Accountants and Auditors (NBAA)

Financial Reports

• • One of the main reasons for keeping accounting records is to provide information about how the organization is being run After setting up accounting systems and budgets, the next step is to produce financial reports that monitor the organization’s financial affairs

What are Financial Statements?

• • Products of the financial accounting process They are a summary of all transactions for a specified period of time and show the financial position of the organization

Commonly Used Reports

• • There are several primary reports commonly used by organizations: • • • • The Trial Balance The Income and Expenditure Report The Budget Monitoring Report The Balance Sheet Together, these reports provide useful information about the status of an organization

The Trial Balance

• • An arithmetical check on the accounts maintained It is also the basis for the preparation of the annual financial statements • The Trial Balance is the final stage of the accounting process • It is the result of recording all the transactions that occur in an organization

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The Income and Expenditure Report

• • In the not-for-profit sector, this report is equivalent to the Profit and Loss Report or Income Statement used in the private sector It records in summary form all income and expenditures for the time period • Income items appear first in the list, followed by expenses • The difference between total income and total expenses, called the 'Outcome' or 'Surplus/(Deficit)', appears on the bottom line

Example of Income & Expenditure Account

Budget Monitoring Report

• Takes the budget for the reporting period and compares it to the actual expenditures for the same time period • • The difference between the budgeted and actual amount is called the variance The ‘burn rate’ is an important component of the budget monitoring report

Example of Budget Monitoring Report

The Balance Sheet

• • A list of all the assets and liabilities of an organization as of a particular date It provides a snapshot of the financial position of an organization at a point in time

Example of Balance Sheet

Management Reporting Flow Chart

Group Work: Preparation of Training Budget

Key Points (1)

• Financial planning takes into account the vision, mission, objectives, strategies, and activity plans of an organization • Budgeting is important at every stage of a project • Financial reports provide information about how an organization is being run

Key Points (2)

• The most commonly used reports by non profit organizations are: • Budget Monitoring Report • Income and Expenditure Report • Trial Balance and Balance Sheet