Unit 9: Financial Management
Welcome to the unit on financial management. In this unit, you will learn what financial controls are and how they relate to financial management. We will discuss the principles of financial management and what they are intended to avoid or achieve. You will learn more about the role and expectations of a manager when it comes to the tasks and responsibilities of financial management. You will be asked to apply some of the tools of financial management and accountability to your work. Additionally, you will learn about the principles and building blocks of financial management.
Learning Objectives
Upon completion of this unit, you will be able to:
- Explain the relationship between Financial Control and Financial Management;
- List seven principles of Financial Management;
- Apply principles of Financial Management to case analysis and problem-solving; and
- Describe the roles, responsibilities, and tools of Financial Management.
Practice
We encourage you to have a paper journal and pen with you to complete written activities and self-reflection assignments. Alternatively, you may find it useful to use Microsoft Word to complete written activities and self-reflection assignments.
Learning Activities
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Video: Importance of Financial Management (5 min)
To begin this unit on Financial Management, let’s watch a short video with Ms. Danae Hollowed (USA) on the importance of financial management.
Credit: University of Washington -
Financial Management Series (5 min)
The content in this unit consists of seven videos that will introduce you to the basic concepts of Financial Management. These lectures will cover:
- Basics of Financial Management
- Organizing Your Financial Management System
- Financial Planning
- Understanding Account and Accounting Principles and Procedures
- Financial Reports
- Safeguarding Your Assets and Internal Controls
- Managing Audit and Attestation
Acknowledgements
These modules were produced by I-TECH at the University of Washington in Seattle, USA, based on content from the Financial Management Essentials Handbook developed by Mango. Mango is an award-winning UK charity whose mission is to strengthen the financial management and accountability of Non-Governmental Organizations around the world by providing innovative, high-quality, in-person trainings, consultancy and recruitment services.These modules provide a small overview of the basic content, but not the full experience of attending one of Mango’s practical and participatory training courses, where the motto is “Taking the Fear out of Finance”. A library of Mango’s own publications, as well as information about their services and their Open Training program can be found at the Mango website. We encourage you to visit this resource of information on financial management and accountability.
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Video: Basics of Financial Management (26 min)
Begin your studies on financial management with a video on the Basics of Financial Management. This lecture discusses the relationship between financial management and the various components of financial control, budgeting, monitoring and management accounting. It also discusses the importance of financial management, how financial control relates to it, and the roles, responsibilities, and tools of financial management.
Instructions: Tap the video to play.
Credit: University of Washington -
Video: Organizing Your Financial Management System (21 min)
The second video in the financial management series focuses on the Financial Management System. This lecture teaches you about the importance of designing a financial system that is right for your organization. It also discusses the various branches of accounting and ways to organize accounts.
Instructions: Tap the video to play.
Credit: University of Washington -
Video: Financial Planning (33 min)
The third video will discuss the importance of Financial Planning. In this lecture, you will learn about the financial planning process and how it links with financial management. You will also be introduced to the different types of budgets and when to use them, and you will learn about different budgeting approaches and how to use a budget worksheet.
Instructions: Tap the video to play.
Credit: University of Washington -
Video: Understanding Account and Accounting Principles and Procedures (34 min)
The fourth video in this financial management series will introduce you to the importance of keeping accounts and understanding accounts: An Introduction to Accounting Concepts and Jargon. In this lecture, you will learn different methods used to keep track of financial transactions and how accounting records should be kept.
Instructions: Tap the video to play.
Credit: University of Washington -
Video: Financial Reports (40 min)
The fifth video focuses on the Financial Report and how to interpret financial statements using trend and ratio analysis. This lecture also teaches you how to compile and the financial report the information in management account.
Instructions: Tap the video to play.
Credit: University of Washington -
Video: Safeguarding Your Assets and Internal Controls (60 min)
The next self-paced module teaches you about Safeguarding Your Assets and Internal Controls. This lecture will teach you about the importance of introducing internal controls. You will also learn about the importance of cash control and reconciliation, as well as ways to manage and control fixed assets.
Instructions: Tap the video to play.
Credit: University of Washington -
Video: Managing Audit and Attestation (22 min)
The last video in this financial management series discusses Managing Audit and Attestation. Here you will learn what an audit is and why it is important to your organization. You will also learn about the different types of audit, be introduced to the key elements of the audit report, and understand how to prepare for and manage the external audit.
Instructions: Tap the video to play.
Credit: University of Washington -
Case Study: Financial Management (45 min)
Instructions: Think about the information that was shared with you on financial management so far to complete a short case study. Read the case scenario below, then respond to four questions about the case scenario. Please have your journal available to write your responses to the essay questions.
Case Study: Let’s consider a scenario that will help us illustrate the challenges and importance of robust Financial Management. This scenario takes place in the country office of an international NGO with a staff of approximately sixty people and a typical organizational structure: the staff includes a country director, senior program managers and their staff, and a finance team of six people. As part of its regular financial oversight, the headquarters office of the NGO conducts routine reviews of each country office’s finance systems.
Ellen, a senior finance manager, visits the country office to carry out a review. Initially, everything seems fine with the finance system. The program and management staff express no concerns other than a few complaints about timeliness.
But as Ellen reviews the systems in more detail, she notes patterns that cause her concern—things such as poor filing of documents, disagreements among the finance team members, and delays in completing some basic finance functions, such as monthly reconciliations. Also, no one can produce a copy of the finance manual when asked, and some of the systems appear to be poorly maintained.
During a routine spot-check for documentation, Ellen requests to see the backup documentation required to reconcile cash advances.
A cash advance is used when an organization needs to provide cash to an employee to pay bills in the field that can only be paid with cash. When Ellen asks to see the backup documentation, the finance team is unable to provide it, saying it must be filed improperly. Ellen then asks to see the backup records for several other cash advances, and, again, the team is unable to produce the required documents.
Ellen discusses her concerns about the missing documentation with the Finance Director, and she is told that the Finance Assistant, whose job it is to process and file such documents, is not doing his job well. When Ellen pursues this issue further, she finds out that he is the relative of a senior manager in the office, so the Finance Director feels there is nothing she can do about his poor performance.
Ellen brings her concerns to the Country Director, as well as to the Director of Finance at Headquarters. Together, they agree that the failure to have appropriate documentation for cash advances is a significant concern and agree to bring in an external audit firm for a review.
The external audit firm sends a team to conduct a review of the organization’s books and to interview the staff of the country office. They examine invoices, documentation, and the timing within which certain processes were completed. They check these against the organization’s financial policies.
One policy, for example, states that cash advances should be reconciled within three days of the completion of the activity for which the cash was intended. The purpose of this policy is to maintain financial controls by requiring that information be gathered in a timely manner—soon after the activity, when documentation is most readily available.
The investigators find multiple policy violations in the country office during their investigation. While these are not acts of fraud in and of themselves, they are a bad sign about the health of the Financial Management of the organization. Poor adherence to policy and procedures can create an enabling environment for fraud and can also mask the occurrence of fraud, making it more difficult to detect.
The firm not only identifies poor record keeping practices, but also confirms that cash is missing based on the absence of backup documentation for expenses.
When confronted, several employees— finance assistants, program assistants, and a program lead—eventually admit that there is a common practice of keeping part of the cash advances for personal use. They confirm that they played a part in or benefited from the fraud. It is also clear, based upon these conversations and evidence, that the finance assistants were active participants in the fraud and that the Finance Manager had either actively participated in the fraud or was grossly negligent in her oversight. This created an environment where fraud could take place.
With careful investigation, the auditors were able to identify the fraudulent transactions and link them to individuals who received cash advances. The missing funds totaled US$15,000.
After the audit, the individuals responsible for each missing cash advance paid back the funds they took. Several members of the staff, including the Finance Manager and the other program and finance staff who participated in the fraud, were removed from their positions.
1.Of the four building blocks of Financial Control (Accounting Records, Financial Planning, Financial Monitoring, and Internal Control), which ones were lacking in this example? How were they lacking? Write a response in your journal, then tap the Compare Answer button to read feedback.
Did you think about the following? In this case, Internal Controls and Financial Monitoring were not being adequately practiced in the country office—otherwise, the problem would have been revealed immediately. Internal Control was lacking because the organization’s policy on timely reconciliation of cash advances was not being adhered to. While this alone isn’t fraud, it creates an environment where fraud can more easily take place. Internal Controls, as we learned before, rely on a system of checks and balances. In this case, the checks and balances did not work. There was a low level of trust among the team, in part due to perceptions of nepotism associated with one member of the finance team being related to a senior manager.
2.Of the four building blocks of Financial Control (Accounting Records, Financial Planning, Financial Monitoring, and Internal Control), which ones were in evidence and helpful in resolving this issue? How were they helpful? Write a response in your journal, then tap the Compare Answer button to read feedback.
Did you think about the following? In this case, there was one building block that was strongly in evidence. Although the record keeping was considered inadequate overall, records were being kept of the actual dispensing of cash. These records did show who had received cash, so investigators could trace the money back to particular staff members who had received advances. Also, because a policy was in place to reconcile advances and keep backup documentation (even if the policy manual itself could not be located), the absence of documentation, without a good explanation, was considered an indicator of fraud. In the end, the organization’s Accounting Records, the first building block of Financial Control, both allowed the fraud to happen and allowed the investigators to catch those who took the money. Besides the loss of money, the family relationship between two members of the staff clearly set up a situation where employees felt they could not trust one another, could not communicate openly, and could not question the practices of individuals or of the organization. Individuals lost their integrity and reputation, and the organization risked losing its good reputation.
3.When auditors reviewed the historical accounting data, it turned out that fraudulent transactions had been going on for nearly a year. One of their findings was that this went on for such a long time without anyone in the organization asking questions or calling attention to it. Why? Write a response in your journal, then tap the Compare Answer button to read feedback.
Did you think about the following? This comes down to the underlying issues of communication and professionalism. The organization had formalized operating principles that were intended to guide all employees to act with integrity. These operating principles, however, were not much in evidence in this office. They were not posted or shared with employees at orientation or referenced by the organization’s leaders. In addition, barriers to communication and an overall lack of trust among the staff contributed to the length of time before the fraud was discovered. Lax controls created an environment where no one was really watching what was happening. Using the seven principles of Financial Management, which we explored earlier, we can see what was missing and what allowed this situation to continue for so long. There was a pervasive lack of Accountability, Transparency, Integrity, Stewardship, and Accounting Standards.
4.In this case study, how does the issue of perceived nepotism come into play in relation to the goals of Financial Control and Financial Management? What impact do you imagine it had on this organization besides the loss of money? Write a response in your journal, then tap the Compare Answer button to read feedback.
Did you think about the following? The extended familial relationship between one of the staff members and one of the senior managers created an environment that challenged the system of checks and balances. For internal controls to work, people have to know that everyone is expected to play by the same rules and that each person can be questioned on the performance of his or her duties and held accountable for his or her handling of resources. If staff members are afraid to raise a question because they believe someone “can’t be touched,” they are unlikely to raise issues of concern. In some relationships, one family member might not protect another if he or she does something illegal or immoral. However, the perception that a person might be protected can create a fragile system of checks and balances and allow fraud to occur.
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Case Study: Financial Controls (45 min)
Instructions: Think about the information that was shared with you on financial management so far to complete a short case study. Read the case scenario below, then respond to four questions about the case scenario. Please have your journal available to write your responses to the essay questions.
The first case study talked about an instance of outright fraud and the two building blocks of Financial Control whose absence made fraud possible: Financial Monitoring and Internal Control. The second case study focuses on a different type of problem in Financial Management. The events described in this case study happen despite the best of intentions.
In Case Study 2, we visit a different country office of the same international NGO we met in Case Study 1. This office receives a grant directly from a donor agency in the amount of 15 million US dollars. The project team starts work based upon an approved workplan and budget. They quickly find that there are activities they did not plan into the workplan and budget, but which clearly enhance the project. The Ministry of Health also requests that these additional activities be added. The project manager agrees and soon additional unplanned activities are also incorporated into the workplan—but the original project budget is not adjusted. In the meantime, the team feels that they are doing excellent work, above and beyond what was expected of them.
In the third quarter, however, after invoices have come back to the organization for the various costs of activities (both planned and unplanned), the organization discovers that it is overspent by one million US dollars, or approximately 7% of their original budget.
1.Explain how this situation happened, referencing the Plan, Do, Review cycle. In your journal, write your response to the questions, then tap the Compare Answer button to read feedback.
Tip! Think back to the Plan, Do, Review cycle we learned about earlier in this unit, this will assist you in your response.
Did you think about the following? The country office developed a grant proposal and project workplan based on specific objectives. They then built a budget based on the workplan. Therefore, they did complete the PLAN part of the cycle. However, they overdid the DO part of the cycle by adding activities (and expenses) to the plan. Finally, the team and organization were negligent in monitoring and reviewing expenditures against the budget. The REVIEW part of the cycle was critically absent. One might argue that the original workplan was inadequate because it neglected to include the additional activities and expenses that were important to the project—important enough that the program staff felt the need to incorporate them into an already full workload. However, it is important to realize that, while they may be doing good work, the team is breaking an agreement with their funding agency by spending money on unapproved activities. If those elements were really critical to the project, they should have been incorporated in the PLAN cycle. This is why it is crucial to take the time and effort to focus on specific objectives and diligently create a detailed workplan and budget from the beginning of a project.
2.Presented with these exciting “additional” opportunities, what could the program manager and budget manager have done instead of simply adding these new activities and expenses to their work? Write a response in your journal, then tap the Compare Answer button to read feedback.
Did you think about the following? They could have done a variety of things that would not have impacted the agreed-upon workplan and budget. For example, they could have explored ways to incorporate the activities in a future time period—which also provides a good example of how the Plan, Do, Review cycle works. The team could have taken the information they learned from this year’s workplan and budget while DOING and REVIEWING, and incorporated it into PLANNING for future funding opportunities and budgets.
4.What are the ramifications of this mismanagement of funds? Write a response in your journal, then tap the Compare Answer button to read feedback.
Did you think about the following? While this scenario resulted from good intentions and a willingness to work hard, the consequences are potentially serious for individuals and for the organization. Funds spent on unapproved activities might need to be paid back to the donor organization. Mismanagement of this magnitude leads to a loss of credibility for the organization in the eyes of donors, partners, and stakeholders. As we discussed in the beginning of the module, one of the responsibilities of the organization is to be a good steward. In an environment where organizations are competing for scarce resources, mismanaged funds can damage credibility and be a serious disadvantage in obtaining future funding. Ultimately, with a loss of credibility, reputation, and respect, the organization may very well find that it is unable to sustain itself financially.
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Case Studies Debrief (5 min)
The scenarios in our two case studies are cautionary tales. The causes and consequences of financial mismanagement, whether it happens intentionally or not, are serious. Conversely, managers who are accountable for transparency and achievement of program objectives can gain a reputation for themselves and their organizations as capable, trustworthy and professional. Organizations can improve their reputation and their long-term sustainability by becoming known for excellence in Financial Management. How do they do that? They practice the seven principles; they consciously and consistently Plan, Do, and Review their workplans and budgets; and they ensure that their organization has financial control through the four building blocks: Accounting Records, Financial Planning, Financial Monitoring, and Internal Controls.
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Quiz: Unit Knowledge Check (15 min)
Assess your knowledge about the concepts you learned on financial management by answering five questions.
Instructions: Tap the correct answer, then tap the Feedback button to reveal the correct answers and additional information.
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Optional: Group Discussion (15 min)
If you are taking this course with a partner or in a group setting, have a conversation about your leadership and management experience by discussing the following questions:
- How could you improve the financial management at your organization or in your project?
- What is your role in terms of financial management and financial control?
- What financial management challenges does your organization face and how might you work to face them through better planning, monitoring and reviewing of financial management data?
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Self-Reflection: Learning Action Plan (15 min)
Putting your learning into action is essential to knowledge transfer, applying the knowledge you gained in this unit, and retaining that information in the future.
Take a moment to reflect on what you’ve learned in this unit. After reflecting, in your journal, write:
- Four things you learned in the unit.
- Three things you will implement:
- Today;
- Six months from now; and
- One year from now.
- Two things that changed your perspective.
- One thing you will ask for more help with.
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Reading: Conclusion (5 min)
In this unit, you learned the basics of financial management. You covered the relationship between financial control and financial management and learned about the seven key principles of financial management, applying them to a case study. You also learned to think about the financial review process using “Plan, Do, Review”. Finally, you learned about the various roles, responsibilities, and tools that are needed to ensure strong financial planning and management.