January – February 2020

Financial Delegation and Spending Limits

Most of the organisations that we are working with, that have a paid manager or coordinator, allow that person to make purchases and some financial decisions without having to check with the board or committee first. This is called a FDA, or Financial Delegation Authority.

When we enquire about such authorities during audit, we find more often than not that key people in the organisation either do not know, or do not monitor, the limits within such FDAs. They are almost never written down, and can range from $100 to $5,000 for even quite small groups. Sometimes such arrangements are informal, i.e. the manager is asked to consult with the board when she thinks it’s necessary.

By default, only the officers of an organisation, i.e. the named or elected committee or board, can make decisions about expenditure. The can delegate this authority, but they cannot delegate any legal responsibilities attached to it.

The responsibilities of boards and committees are referred to as ‘fiduciary duties’. The most notable one is the responsibility to keep the organisation financially solvent. Technically, office holders can be prosecuted for not taking reasonable care when voting for decisions that end up causing insolvency. That care is very difficult to exercise if the board does not retain any practical level of control over expenditure at all.

It is also often not clear what spending ceilings relate to: individual expenditure, or a monthly amount. Sometimes we are told a manager has freedom to spend ‘within the budget’, but then no budget variance reports are produced for committee meetings, or, if they are produced, no questions are being asked when variances occur.

If FDA is a bit up in the air in your organisation, how about making this an agenda item for the next meeting and clarify:

• What amounts, or expenditure types, exactly are you delegating to the manager, and which ones you definitely want to retain.
• How compliance with the limits are monitored.

 

More Liabilities Than Money in the Bank?

The difference between current assets and current liabilities is known as “working capital” in business, but we prefer to call it “available funds” in a not-for-profit situation. It shows how much of the money in your bank accounts, plus anything you are owed in the near future, is not already committed to paying bills or spending your funding.

If this figure is negative, you are not necessarily insolvent, but you are in trouble. You are effectively borrowing from new income sources to meet obligations under older ones  “borrowing” money from newly received funding to patch up unspent funding from a previous one, for example, or you may have access to a bank overdraft or other credit line. You may have collected other money in advance for which you still have to deliver services or found other ways to keep the bank balance ticking over. An organisation can run on negative available funds, but is extremely vulnerable to unforeseen events, such as receiving less funding, registrations or other income than expected.

Members of the governance of an incorporated society or a trust also have legal obligations with regards to solvency – they can be held individually responsible if they made decisions that foreseeably left creditors go unpaid.

If you find yourself in a situation with low or negative available funds you need to take action. Firstly, monitoring your cash flow is paramount. For this you will need to cast a cash flow budget that shows, month by month, how much money you expect to be in the bank at the start and at the end of the month, and what income and costs you expect in-between. This budget must be updated as soon as real figures become available. This will give early warning of periods where cash may run critically low.

It is also important that more than one person takes control of the situation. This is not something that should be left just to the manager or treasurer, it requires 2-4 people to monitor and discuss the situation regularly.

To get back into the black, you will need to run cash surpluses and therefore increase your revenue or cut costs. Getting more grant funding may not help the situation, as grant funding must all be spent and you can therefore not build reserves from it. Increasing grant income can only help if the extra money pays for costs you have previously paid for from non-grant sources, such as user fees, and those income sources also still remain. But in general, increasing revenue has to happen from activities that allow you to make a surplus, or be from unconditional donations. For this it is important that you know which of your activities are costing you most relative to the income they generate.

Without appropriate action, the likelihood of insolvency is high.