LEADERSHIP & MANAGEMENT IN HEALTH

Financial Management Part 1

Lecturer: Dr. Ann Downer, EdD

Financial management skills are critical because every organization has to make decisions on
how to use limited resources in the most efficient way possible. These skills enable us to be
more accountable to our funders and governing bodies—they give us the knowledge we need
to be good stewards of the resources we’ve been entrusted with. And they can help us be more
successful in highly competitive funding environments, too.

In practice, sound financial management is about taking action to protect the financial health
of the organization rather than leaving things to chance. It involves planning, organizing,
controlling, and monitoring an organization’s financial resources in order to achieve its
objectives.

There are a few realities to keep in mind with financial management. First, resources are usually
scarce, so we have to be able to manage them well. Second, both internal and external risks to
finances are very real. We must know how to limit these risks. Third, financial management is a
major job responsibility of leaders—it’s usually a prerequisite, in fact, so you need to know how
to do it. And fourth, financial management involves making sound decisions in your
organization’s best interest, and this takes practice. So, if you never learned much about
financial management in preparation for the work you do, this is your chance.

Sound financial management is a cyclical process. The first stage in the financial management
cycle is planning. When an organization or project first starts, objectives are set and activities
are planned. At this point, you prepare a financial plan to determine where the funds will come
from and what the costs will be for these activities.

After you have the funds, activities are implemented to achieve the objectives set out in the
planning stage.

When you get to the review stage of the cycle, you compare your project or organization’s
actual situation with the original plans. For this part of the cycle, managers use financial and
program data to see whether the organization is on target to achieve objectives on time and on
budget. What they find during this stage begins the cycle again—to plan.

In this way, you can see that financial management is a cycle.

I want to talk about financial control because it’s at the heart of sound financial management.
Financial control involves establishing and using systems and procedures to make sure an
organization’s financial resources are being properly handled. In an organization that lacks
financial control, it is very likely that financial resources will eventually be mismanaged in such
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a way as to jeopardize the organization’s mission—or even its actual existence. Poor financial
controls introduce risks such as theft, fraud, or abuse; or funds not being spent in accordance
with the donor’s requirements.

The organization’s structure determines who is legally responsible for financial management.
Often there is a governing body as well as a chief executive officer or director who oversees the
various levels of management—those people who are responsible for day-to-day operations.

Whatever the structure of the organization, authority and accountability generally reside at the
top and are delegated down to managers and line staff. The governing body delegates authority
to the leader, who must assure there are controls and monitoring tools in place for financial
management.

The figure you see on your screen right now demonstrates how the authority for day-to-day
financial management is delegated down through the management structure. And notice how,
at the same time, accountability moves back up through the structure as people report on
progress and compliance.

Let’s discuss some key principles for developing and maintaining proper financial management
systems and controls. There’s an organization named Mango—it’s a charity registered in the UK
that focuses on financial management training. Mango suggests seven principles of financial
management to consider when building financial systems and individual skills:
1. consistency,
2. accountability,
3. transparency,
4. viability,
5. integrity,
6. stewardship, and
7. accounting standards.

You can us the mnemonic “CAT VISA” to help you remember these principles. Let’s talk about
each of them.

The first principle is consistency, which refers to the use of regular and reliable processes and
procedures to monitor financial information. This promotes efficiency in operations and
supports transparency, especially in financial reporting. Of course, systems sometimes need to
be refined to better serve a changing organization. However, when there’s inconsistency in an
organization’s financial management, it can be a sign that the system is being manipulated.

Accountability is the second financial management principle. An individual, group, or

organization is accountable when it is able to explain how resources or authority (given by a
third party) have been used. Accountability is the moral or legal duty placed on an individual,
group, or organization to explain how funds, equipment, or authority (given by a third party)
have been used. When we are accountable, we are responsible for explaining how the funds,
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equipment, or authority given to our program or organization by a third party have been used.
While the governing body is ultimately accountable for the actions of the organization, all of us
are accountable to our directors, managers, and supervisors for our work and for the way
resources are handled.

The third principle is transparency, which requires an organization to make information about
plans, activities, and outcomes available to stakeholders. This includes complete, accurate,
and timely financial reports that are available not only to the stakeholders, but also to
beneficiaries and donors. If an organization is not transparent, then it may give the impression
of having something to hide.

Viability is the fourth principle. It is defined as an organization’s ability to balance

expenditures with available funds. This measure of financial security and continuity is part of
what gives stakeholders confidence that an organization will deliver on its objectives and plans.

The fifth principle of financial management that Mango reminds us of is integrity, which is
defined as leading by example by following policies and procedures and declaring any
personal interests that might conflict with official duties. Integrity isn’t just something we
speak of at the individual level. We can also speak of organizational integrity when, for
example, we talk of the accuracy and completeness of financial records.

The sixth principle is stewardship, which requires us to recognize that our organization has
been entrusted with financial resources that must be safeguarded and used for the intended
purpose. Good stewardship is practiced by planning, assessing risks, and setting up systems
and controls.

Finally, there is the principle of using accounting standards, which means maintaining
internationally accepted accounting standards, principles, and systems for keeping financial
records and documentation. In addition, this system should be organized, clear, and accessible:
any accountant, from anywhere in the world, should be able to understand the organization’s
system for keeping financial records.

So, to review the financial management principles that a sound finance system includes:
1. consistency,
2. accountability,
3. transparency,
4. viability,
5. integrity,
6. stewardship, and
7. accounting standards.

These are the principles that allow organizations to meet their objectives and maintain their
viability. In this lecture we discussed what you want to build to reflect these principles. In Part
2, we’ll discuss how to build strong financial management systems.
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