Poor financial management has seen the downfall of many non-profit and commercial organisations over the years; the reasons are many and varied, ranging from outright fraud to basic incompetence. It is the responsibility of the Board to ensure that it has the capacity and capability to understand and monitor the organisation’s performance and thereby fulfil this most important aspect of corporate governance.
The keys to effective financial governance include:
Whilst there are many situations and practices that may cause a financial demise, the following conditions are likely to threaten financial viability:
Good financial governance practices can mitigate many of the risks and adverse outcomes that can emanate from these conditions.
However, a key problem for many board members is that they simply do not have the knowledge or experience to manage this aspect of the business. Whilst a board member cannot totally abrogate their responsibility in this matter, ensuring the board has at least one experienced and knowledgeable person in the area of financial management will at least provide someone who should understand in detail the reports that are presented and be capable of asking probing questions in relation to the above mentioned matters.
Furthermore, detailed below are a few basic questions that can be asked by any board member, the answers to which will provide either confidence or alarm!
Remember, “Trust is an emotion, not a control system”; you don’t know what you don’t know, but that’s not an acceptable excuse for failure to manage the finances of the business.
In summary, a set of accounts is a snapshot of the organisation’s performance at a point in time. It can be easily manipulated by either intent or error and it is not necessarily a good predicator of future outcomes. Vigilance and attention to financial management will underpin good governance practices and it will probably keep you out of jail as well – it is that important.