5 Keys to Sound Financial Management

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Every organization, in order to remain profitable and in compliance with applicable laws, needs a sound and transparent financial management system. After all, finances are at the core of every enterprise, from purchasing materials and supplies to paying staff, and ultimately, delivering value to stakeholders. If you are responsible for developing a financial management plan, here are five key principles for success.

Careful Budgeting

Image via Flickr by Lucas Hayes

The budget is the overall financial framework that serves as the performance benchmark for all financial decisions. A realistic budget ensures that an organization can fund its ongoing commitments, meet financial objectives, and control its spending. It enables you to measure each department’s performance and identify potential problems before they result in catastrophe. It relies on accurate forecasting of sales and direct and fixed costs.

While larger organizations generally do annual budget reviews and planning, smaller organizations and startups typically need to conduct budget reviews more frequently to identify trends and variances in the company’s revenues and expenses.

Rigorous Internal Controls

Internal controls ensure that the organization is in compliance with laws and regulations and protects assets against theft and misappropriation. In general, segregation of financial duties to provide a set of checks and balances, proper authorization of expenditures, physical control of hard assets, and maintenance of records and documents supporting financial activities are the foundation of an adequate control environment.

Sound financial management also requires regular reconciliation and review to ensure that activities reported in the organization’s accounting records are cross-checked against the supporting documents.

Regular Reporting

There are strict regulations on financial reporting for publicly traded companies, but all organizations should follow a system of regular internal reporting to ensure it is meeting its financial goals and objectives. At a minimum, organizations should review the financial statement, with special attention to the income statement and balance sheet on a monthly basis and complement these reports with department and organization-specific reporting as needed.

An Internal Audit Process

Unlike external audits, which evaluate the accuracy of the financial documents and assess for problems in financial reporting, an internal audit carried out by an experienced business accountant goes beyond numbers and looks at processes and controls to assess risks and identify areas for improvement. Internal audits are essential to sound financial management; they determine risks to the organization’s profitability and overall financial health and suggest ways to mitigate them.

A Policy of Transparency

While transparent accounting policies are required for publicly traded companies, an internal policy of transparency goes beyond official regulations. Transparent financial records are accessible and easy to read and understand, contain no gimmicks or hidden entries, and fully disclose all relevant transactions and information. Creating a culture of transparency throughout the accounting and finance departments is the foundation of sound financial management.

Few things are more important to management and boards of directors than the organization’s financial policies, activities, and statements. Developing principles of careful budgeting, reporting, and auditing, combined with internal controls best practices and overall transparency ensures a healthy and robust system of financial management.