How to understand financial management

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How to understand financial management

The introduction of the NDIS model has seen a change in the market dynamics within the disability sector. This requires boards to review how they operate to ensure they can continue to deliver their mission and remain viable. It also means a move from service at all cost to service at best cost.

The focus of financial management is to generate a profit so that you can pay your bills, can purchase working capital, replace any necessary assets and fund innovation.

Organisations management and governance bodies must understand this aspect of the financial process.

As it is the responsibility and prerogative of organisations to manage their finances as they choose, each organisation needs to decide whether to use the Tool fully or in part. Some may use other costing methods while some sections of the Tool may be irrelevant to the service model of others. Organisations are encouraged to obtain external advice if necessary, in reaching that decision.

Capture the right internal financial information

Sound financial management practices will provide the necessary information to satisfy you and key stakeholders that your organisation is financially stable. It will also help you to identify the indicators that allow these assessments to be made.

Often less is more...

  • Decide on a set of metrics that are relevant to the financial health of your organisation
  • Develop measures and targets aligned with these metrics and report on any variations outside of an agreed level.

The development of these metrics will vary depending on your organisation, as will the size and scale of the reporting systems. Many accounting software packages provide the ability to customise reporting to ensure you manage the relevant key measures.

Benchmark your performance against the sector and your peers

The use of benchmarking against peers of a similar size and makeup is useful in identifying performance improvement opportunities.

Industry benchmarking tools are provided by several organisations. Data, along with the sector report, can provide you with an annual yardstick of performance. Click here to see Able Insight - Benchmarking for the disability sector.

These tools can often be used offline to calculate ratios at any time during the year or to measure improvements made in your service model and changes to client numbers.

Where possible, use the ratios you currently use in your own internal performance reporting and understand how published benchmark metrics are developed to ensure consistency. 

Develop a regular budget and review cycle

Having invested time in developing accurate costings, (How to undertsand and calculate costs), the next step is to develop a robust budget and forecasting process to measure your organisation against itself.

Forecasting is not a set and forget activity. Ensure you implement regular review cycles to address under and over performance and identify plans to fix this, where appropriate.

The budget should provide ‘guard rails’ to help you achieve your organisation's goals. It should not restrict your decision making nor should it drive poor decisions just so you can hit your budget.  

Manage your cash flow

Capped service fees and set payments mean you need an effective cash flow management process to operate successfully under the NDIS.

Your budget, income statement and balance sheet will provide valuable management information. However, these won’t tell you if you have enough cash to pay for an unexpected cost, a new service program or a newly-identified opportunity.

You will probably go through ups and downs in cash flow as the timing of when money is received often does not match when payments are due. Anticipating cash flow issues earlier will make it easier to address them.

Develop and maintain cash flow projections across a rolling twelve-month period. Here is a link to a cash flow template from Propel nonprofits.

  • Start with an accurate cash balance and base projections on your budget assumptions. Capture exact timings based on historical data from receipts and payments, don’t just divide by 12
  • Be clear on the timings of any grant funding and ensure realistic estimates for any unidentified grant funding
  • Review your payroll schedule timings. Some months may include additional payrolls due to the number of weeks and timings
  • Incorporate any lump sum payments, such as payments for insurance, printing, payroll taxes, etc.

Plan the use of cash based on these projections.

Resources

Propel Nonprofits - Cash Flow Management:

https://www.propelnonprofits.org/resources/managing-cash-flow/

Probono Australia - How to Survive the NDIS Cash Crunch:

https://probonoaustralia.com.au/news/2018/04/survive-ndis-cash-crunch/