This checklist provides advice on how to ensure effective financial control.
A number of elements must be in place for effective financial management of a company or project to take place. Effective financial control is defined as keeping costs to an agreed level, ensuring that a project is developed within budget. Critically, all managers should take responsibility for financial management and should not assume that this falls within the remit of the accounts team alone. Strategic or long-term planning is also a critical building block for effective financial control. This planning can help you to decide where your financial priorities lie and how much of your total budget can be allocated to different areas of the company or project.
Good financial and accounting systems are paramount: it is essential that management has current, accurate, and relevant financial data to ensure sound decision-making. In addition, this information must be presented in a useful form that addresses the needs of individual managers. Internal controls should be robust and should be rigorously overseen. This could apply, for example, to the handling of cash by employees. Devolving the management of budgets can bring advantages in terms of flexibility, but there must be a clear reporting structure, so that, for example, it is easy to identify who is responsible for making spending decisions.
Income-driven budgeting, whereby expected income is determined and expense levels are set within this constraint, is a key way of ensuring that there is effective financial control of a project. Some organizations estimate their expected income by increasing or reducing the previous year’s income by a set percentage. However, a more prudent method is to start from zero and build the income forecast from the bottom up.
Effective financial management is a critical determinant of the failure or success of a project or company.
Effective financial control ensures that the company or project is run as efficiently as possible, ensuring that its full potential is realized.
There are no disadvantages.
Draw up a strategic or long-term plan to enable you to determine where the financial priorities of a company or project lie.
See that all managers know that they are responsible for ensuring effective financial management and that it is not simply the responsibility of the accounts team.
Dos and Don’ts
Invest in accounting and management information systems.
Draw up robust internal controls to cover issues such as cash handling.
Make sure that there is a clear reporting structure and that all members of staff know who is responsible for setting a particular budget and who can authorize spending.
Don’t ignore your accountant. Accountants have a unique understanding of the key drivers of revenues and costs in a business and can provide invaluable assistance in reviewing financial performance throughout the year. In addition, your accountant can model results for you based on different assumptions and can help you to get a much clearer picture of the risks that might need to be managed.