Financial Health: Modularizing Financial Tasks in Small Organizations

Posted by Matthew Thomas

matthew-thomas-2The Challenge - Staffing

Small businesses, nonprofits, and religious organizations often face similar challenges in maintaining separation of powers in financial procedure. Often, smaller enterprise systems may only have one or two people managing the financial operations. Enterprises of this size typically prioritize staffing elsewhere. 

Error Needles in the Accounting Haystack

While risky from an oversight standpoint, small enterprises have limits as to how much they can spend, in time and money, on financial management. The small number of people available limits how much they can divide the role. Setting aside fraud risk for the moment, the small number of people involved lends itself to the risk of errors in recording and reporting. Even the most careful bookkeeper or accountant can make mistakes - and then, in small organizations, they have to have the kinds of procedure and process in order to be able to find their own mistakes and correct them. And as they will tell you, it is often harder to find their own mistakes than it is to find others', as they sift through the stacks of numbers produced by the regular accounting reports. Nevertheless, in small systems, this is often the way things must be.

Staffing Options

Some enterprises work around this by hiring out an accounting firm to do their books, and that can work well. It helps keep compliance with the laws for reporting and taxes, and builds in error checking and correcting into the system. Other enterprises, seeking more internal control (and often, some reduction in cost), will hire in an embedded contract CFO, finance director, or bookkeeper, depending on the level of functionality required. These are the services I often provide through my consulting practice, particularly in organizations seeking to outsource at least a portion of their financial management - either in a long-term or transitional/transformational situation. Still others maintain full internal managment of their financial health and functionality, but do so with relatively few people. 

The Why and What of Modularization

Modularization_helps_catch_and_correct_errorsIn all three basic cases, modularization of tasks can help particularly with the error checking and correcting that would naturally come otherwise from having more people involved. Modularizing tasks for financial health involves establishing procedures that are designed to stand alone, as though different people were doing them in each module, even though, in the cases of these enterprises, the same person is often executing multiple modules. For example, one person may be reconciling the enterprise's bank accounts to the accounting system, and also checking transaction-level reports for errors on a daily, weekly, or monthly basis. Modularization argues that those two tasks stay distinct, as though different people were doing the tasks. That way, the procedure design allows for catching errors missed in one procedure through the completion of the other procedure. If the two procedures are worked simultaneously, or otherwise conflated or interwoven, the likelihood of finding errors is significantly lower. 

Retail Example

A retail manager is responsible for reconciling Point of Sale receipts from the cash registers to deposits made to the bank and card transaction deposits made by the merchant servicer to the bank account. The manager is also responsible for accounting accurately for inventory, and overseeing regular bill payment. Making certain these tasks are modularized, so that the franchise owner can review them independently, will improve the accuracy of the tasks themselves and the information they report. 

Religious Organization Example

A church has two volunteers managing its finances. One volunteer and her team manage weekly contributions; the other manages bill payment, payroll, bank reconciliations, and governance reporting. (This is a pretty standard breakdown for many small churches.) The two volunteers must reconcile the deposits against the contributions on a weekly basis. The volunteer responsible for all the non-contribution side of the books must keep all of the tasks modularized to catch errors in bill payment, bank reconciliations and report creation, so that he doesn't introduce systemic errors into the system and propogate them forward - particularly since they only obtain a CPA's compilation or review every few years. 

Process, not just a compilation of best practices.

Much of the modularization of tasks makes sense on an enterprise-by-enterprise basis, and must be fine-tuned to the particular division of labor, task, and oversight used by that enterprise. While there are some "best practices", for small organizations, many times the staffing availability dictates making do with the same person carrying out multiple modules of financial management. This is why process design is often so essential to developing how the modules work in any given system. Modularization is a tool in the process arsenal to help design self-correcting systems where staffing is minimal and the risk of fraud is low.

 


 

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Topics: Matthew Thomas, financial management, finance, Financial Health,

Organizational Governance: Set Budget Goals, Priorities & Outcomes

Posted by Matthew Thomas

Getting out of the messes of typical budget procedures and protocols for sound organizational management and governance will take some doing. Organizations are notorious for doing things how they have always been done or have been seen to be done in other organizations, and budgets are often subject to some pretty typical politicking.

Instead of fighting over numbers, budgets can become a helpful tool in leading an organization to meet its desired goals, objectives and outcomes.

If the governance arm of the organization (the board of directors, and in some organizations, the membership) can begin the budget conversation before it sees a budget presentation, it can help shape what an approvable budget is, and reduce the drama significantly. That, coupled with adequate delegation to staff and/or volunteers can dramatically improve organizational performance.

Start with what outcomes your organization wants to produce: what will your community look like? Families? Individuals? The country? The world?

Then, set priorities for how much of your organization’s money is spent on each of the outcomes. Along the way, develop values for how your organization will operate in pursuit of those outcomes. Define the compensation for the senior staff person.

Determine where the no-go territory is: for instance, that expenditures not exceed revenues, or that key programs not be cut without a six-month notice.

Finally, define a list of budget boundaries based on what you have developed so far, in “not” language. Delegate this to staff who will develop the full budget based on the criteria. Commit the governing group to measuring the finished product only by whether the budget reasonably fulfilled the criteria. If the criteria need to be refined, refine them and allow the budget to be re-worked without finding fault.

Doing this will help keep your organization thinking to the future financially and move it out of the usual and customary disengagement mixed with micromanagement.

Design Group International consultant Matthew M. Thomas can assist your organization in setting up healthy budgeting. Click the link below to contact Design Group International and get the conversation started!

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Topics: Matthew Thomas, Design Group International, Organizational Leadership, budget, budgets, approval, approvals, finance, finances

Organizational Leadership: Why Approve A Budget At All?

Posted by Matthew Thomas

It may sound like an obvious question with an obvious answer – but in many organizations it is not. Many times, organizational boards or memberships approve budgets because they believe they have to, they always have, and they believe they can’t operate without them. Sometimes budget approvals are written into organizational bylaws.

Nevertheless, the process often becomes an odd combination of disengagement and overzealous micromanagement. What can be done?

A budget is a financial plan. Money flows in, money flows out. Like the personal finance expert Dave Ramsey says, a budget “gives your money a name and tells it where to go.”

Clearly, strong organizations have solid financial plans that account for revenues and expenses over a predefined period of time. Thus, setting a budget is an important tool in managing an organization.

However, approvals of budgets as they are often done fix numbers in place for at least a year, when in many cases reality changes more quickly, thus reducing organizations’ agility.

When governing financial plans, organizations need to pay more attention to their goals, priorities and outcomes and whether their solid financial plans measure up against those goals, priorities and outcomes rather than diving into the depths of the numerical data.

In our next post, we will begin to look at how that may be done.

Design Group International consultant Matthew M. Thomas can assist your organization in setting up healthy budgeting. Click the link below to contact Design Group International and get the conversation started!

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Topics: Matthew Thomas, Design Group International, Organizational Leadership, budget, budgets, approval, approvals, finance, finances

Organizational Leadership: A Common Budget Approval Scene

Posted by Matthew Thomas

A lot of us have been there – sitting in a meeting (board or membership meeting) that requires a budget approval, and something happens like this:

“Here is the budget that so-and-so worked on. Any questions?”

[silence, more or less everyone busy buried in the report that they may or may not have read to begin with]

[group member, who finds the silence awkward] “Why is this number $____?”

[A brief answer.]

“Ok.”

Then, a group member who has a pet project or program begins to question the lack of funding for her project. As the minutes often read, “Vigorous discussion ensues.”

Eventually, the budget passes, more or less as presented, in every minor detail.

We who are budget-y types often set ourselves up for this scenario: reams of numbers, comparisons to last year’s budget and actual, projections based on percentages of last year’s growth or loss, and so on.

Even summary budgets (and really, what budget isn’t a summary unless you really inventory every paper clip and every dust-mite’s worth of toner!) can run into these same problems, since they just make the numbers bigger or smaller in chunks:

  • Overall group disengagement
  • Group members wanting to feel engaged and wanting to sound astute so commenting about trivia after wading about in the rows and columns of figures
  • Squeaky wheel / axe grinder politics
  • Micromanagement of actual expenditures (but of course only after the fact when the report is produced in most settings, or the perpetual approval of even the most mundane, usual and customary expenditures in others)

In most cases, dividing your revenues and expenses into small handfuls of categories simplifies explanation (it’s easier to count and track 5 revenue categories than 120 in a group setting), but doesn’t actually get at the real issue of budget approval: what are we approving of, and why?

In our next post, we will begin to address alternatives to this budget scene. No, it doesn’t have to be this way!

Ready to be done with this kind of budget approval process? Design Group International has consultants available to walk you and your organization through a new way of governing your finances. Click the link below to get the conversation started!

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Topics: Matthew Thomas, Design Group International, Organizational Leadership, budget, budgets, approval, approvals, finance, finances

Organizational Design: Simplifying Finances

Posted by Matthew Thomas

As organizations grow, their finances naturally become more complex. Particularly in churches and non-profits, financial complexity increases drastically when people begin to earmark funds. Earmarks can be helpful when raising funds for specific causes and projects. However, many organizations hand out earmarks and designations like candy, and this increases their accounting complexity drastically.

Before making designations, consider the use of the funds: for a specific project, earmarks work well. For things that are part of the usual and general operations of the organization, consider broader uses of funds, so that there is less complexity and greater flexibility in accomplishing the core mission purpose of your organization. Use your most restrictive funds first, leaving you with more freedom down the road.

Design Group International Consultants can assist you and your organization in bringing simplicity to your financial structure. Click on the button below to contact us to see how we might work together!

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Topics: Matthew Thomas, Design Group International, financial management, organizational design, Simplicity, finance, finances