Mark Taylor, Partner Audit, BDO and Brian Tucker, Brian Tucker Accounting discuss the board's role in financial management and how dashboards can be useful in monitoring finances.
Report on Breakfast Briefing: Tuesday 18 October, 2011
Host: BDO, Level 17, 300 Queen St, Brisbane
Presenters: Mark Taylor, Partner Audit, BDO
Brian Tucker, Brian Tucker Accounting
Facilitator: David Fishel (Positive Solutions and BoardConnect)
The Breakfast Briefing was attended by 17 people from 14 organisations.
Summary of major points covered
- Boards need at least one financially literate board member
- Other board members need to develop their own understanding and not rely totally on Treasurer, Finance Officer &/or auditor
- Value of a financial strategic plan, allied with the operational strategic plan
- Cash-flow forecasts
- Use of dashboards to summarise financial information: “traffic lights”, graphs, ratios
Mark Taylor opened the discussion by setting out the minimum that board members need to know:
– What does the business/organisation do?
– What are the risks to the organisation?
– Where is the organisation’s revenue coming from and where is it being expended?
– What are the risks to the stakeholders, including to government funders?
– In recognising revenue, are directors receiving forward cash flow information?
“There are no wrong questions – only those that are not asked”.
Mark quoted the recent Centro case where directors signed off on the financial statements without understanding the implications of what was not recorded in them. (There were borrowings misclassified between current and non-current, and significant events that had occurred after year-end that directors knew about, but which were not reflected in the financial statements and none of the directors questioned it.)
Minimum information to be presented to board members:
– Balance sheet
– Income/expenditure statement (Profit & Loss)
– Cash flow forecast
– Management accounts and some ratios, for example:
– This month compared with last month
– This month compared with the same month last year
– This year to date compared with last year to date, measured against budget
– Income/expenditure reports for individual activities (Jobs) against budget
– Explanations for any variances, which may generate further questions.
This information can be presented in a number of different ways, depending on what makes most sense to board members. For example, some people understand figures better when presented in a visual form (e.g. graphs, charts).
Brian Tucker, whose experience includes being Treasurer for eight arts organisations and auditor for over 100 other non-profit organisations, described a case of an Indigenous Arts Centre (annual turn-over $450-500k) whose board members were not very experienced, where the Balance Sheet indicated a loss of $400,000, a debt of $400,000 and $400,000 in financial expenses, yet none of the board members questioned it.
- Check the Profit/Loss statement: is the bottom line positive or negative? Whichever it is, ask why. If the result looks ‘wonky’, ASK!
- Need benchmarks against which to compare progress: how is the organisation travelling compared with the budget or with the figures for the same period last year? Ask for an explanation of any differences.
- Make a forensic examination of financial statements: has the bookkeeper made any mistakes? Accuracy is very important, especially when reporting to funding agencies. Board members should grill the person presenting the financial statements (Treasurer, finance officer, bookkeeper) to be sure that information is accurate.
- Allocate all expenses against job budgets: if there is any discrepancy, why? Is it a matter of timing? (Are all expenses in? Has all income been received?)
- Check the assets on the Balance Sheet: what is the cash surplus? What is the ratio of cash to obligations? (How long could the organisation keep on operating if funding ceased tomorrow?)
- Check the relationship between the Profit & Loss statement and the Balance Sheet
David Fishel opened the discussion by stressing the importance of the right information and posed the question: in organisations of different sizes, what is the process for ensuring that the information is correct? For instance, a small organisation probably won’t have resources such as a Finance Officer or a Finance Sub-committee.
Mark returned to the example of Centro, where the directors said they had asked the Finance Officer and the Auditor for information; however, the judge ruled that they had a responsibility to understand the information provided, not just to accept it.
Not all board members need to be accountants, but it helps to have at least one on the board.
Brian commented that board members can’t avoid responsibility by relying on the Treasurer, Finance Officer or book keeper: they must recognise that, individually and collectively, they have responsibility for monitoring the financial health of the organisation.
The Treasurer has a more specific responsibility – it is his/her business to make sure other board members know and understand the financial situation of the organisation.
Board members need to get the financial statements at least one week before a board meeting, so they have time to examine and question them. They need to see if anything looks ‘wonky’. Forewarning is essential because there is no time in board meetings.
Question: Is it recommended that boards should have someone who can understand the finances at least to some extent?
David’s response: It is unwise not to have someone on the board who is very financially literate. The other side of the issue is the danger of too much reliance on that one person. It is the Chair’s responsibility to make sure that financial expertise is shared around the board: for example, the finance person may run a workshop for the rest of the board to ensure they all understand the basics.
Question: Should the auditors include a statement to say that they believe the board members understand the financial statements they are signing off on?
Mark’s response: An auditor might have to qualify the auditor’s report if it is obvious that the board is prepared to sign off when statements are clearly wrong.
David: likes to see covering comments with the financial statements, indicating what the statements are saying and what board members should notice.
A representative of one of the larger organisations, which has a number of different cost areas, reported on its process: if there is a major variance between the monthly result and the budget, the Finance Officer interrogates the head of that department to ensure that there is no mistake. Finance Officer then reports to the GM, who has to be comfortable that he/she can answer any queries at the board meeting. The Finance sub-committee receives all the financial detail – every line from every department. This is then summarised for the Board meeting. There can be timing issues with this process, because of the short time between generation of end-of-month reports and the board meeting.
A representative of another larger organisation: the Finance Officer writes the reports for the Finance sub-committee, reporting on the Profit/Loss against budget. As a performance-focused organisation, there is also a Profit/Loss statement for each performance – whether it is good or bad against budget and why? He reports on the Profit/Loss statement, Balance sheet, projected cash flow, performance reports for previous shows, status of ticket sales for upcoming shows. Final report for the board is 2-3 pages long, does not have minute detail, but is supported by spreadsheets with more accurate detail.
A representative of a smaller organisation: started with no financial expertise on the board and did not even have a whole-of-organisation budget. There are now two people on the board who have financial expertise which has made a huge difference to the standard of reports. This year for the first time they have a proper budget and they received financial reports that include Profit/Loss statement, Balance Sheet and budget comparison. There is no narrative at this stage, but that is being planned. Reports are prepared by the book keeper, with the Executive Officer and General Manager in consultation with the Treasurer. The second financial person also runs his own budget sheets at home so can interrogate the financial statements in detail.
Question posed to Brian from one of his audit clients: who is supposed to present the financial reports - the Treasurer or the Administrator?
Response from three larger organisations: Financial reports presented by the Chair of the Finance Sub-committee, supported by the Executive Officer. One reported that as many eyes as possible looked at the financial statements – it was often very helpful that non-accountants asked questions from a different perspective.
Response from Brian: the report has to be presented by the Treasurer, who almost needs to do a mini-audit to ensure that figures are accurate. His experience is that the statements presented at an organisation’s AGM are nearly always radically different from those sent to the auditor (indication of a good Finance Officer is when the only Journal Entry needed is for Depreciation). The smaller the organisation, the greater the responsibility carried by the Treasurer for accurate financial information.
One small to medium organisation reported that, under a new Treasurer, the organisation has developed a financial strategic plan that reflects every line in the operational strategic plan and progress is monitored at each board meeting. It creates extra work for the administrator but provides very helpful information.
Question: What is the right way to present reports?
David’s response: He likes a summary front page with detail and commentary behind.
Other response: Reports straight from MYOB are not necessarily the best way to present information. It is useful to have a column beside the figures in which to enter the explanatory notes, rather than have them on a separate sheet.
Question: Has anyone used visual representations in the form of Dashboards?
- “Traffic lights” system: better than budget = green; on budget – yellow; worse than budget = red.
- Pie charts to indicate sources of funding and areas of expenditure.
- Movement in the figures can be more revealing than the straight figures themselves – it can give any indication of areas for concern.
- “Traffic light” bars sometimes used for non-financial indicators (e.g. how many shows presented, compared with plan)
Question: Use of ratios to indicate financial health?
Brian’s response: Ratios are very useful, particularly those that reflect the relationship between receivables and income, and between payables and expenses, which can indicate how long it’s taking to get money in, and how long to pay your suppliers.
- Working Capital : Budget (cash assets less liabilities as % of budget). Different organisations will have different margins.
- Also Cash Reserves for if funding were to be cut off tomorrow, how long could the organisation keep operating? (expressed in weeks and calculated as Cash less Grants in advance divided by average weekly expenditure. Greater than 10 weeks is considered healthy: Australia Council recommends 20 weeks).
- Liquidity ratio – current assets divided by current liabilities – provides an indication of whether there are enough assets to pay for liabilities in the short-term (next 12 months)
- Creditors or Debtors ratios – provides information on how long it takes to collect debtors and to pay creditors
- Profit margins on individual show/performances – more detailed analysis by event rather than analysing the overall performance of the organisation
- Gross profit ratio – shows the profit margin over direct product costs before taking into account administrative expenses
David: There is a need to customise ratios for festivals which are notoriously volatile. Results can’t be predicted until very late in the cycle. Festivals have to make forward calculations based on secured income, income under negotiation and unsecured income.
Brian discussed the lack of benchmarks in the arts sector, as there is little information-sharing. In his work with Indigenous Arts Centres, he is able to provide each one with a comparison of their results with the national average for the past five years.
One of the larger organisations reported that it is regularly asked to compare its results with national benchmarks, but there is not enough information. Benchmarking information would be really useful.
Question: How many organisations receive cash-flow forecasts?
Response: About half. Cash flow forecast is often produced for grant applications but not updated as circumstances and/or results change. Administrators are generally good at interrogating and explaining discrepancies from the previous quarter, but when results are not as planned, they don’t always examine the implications for the forward plan. This is something that can be dealt with by the Finance sub-committee.
Mark: regarding information that is presented to board meetings:
- Board members need to understand the consequences of not understanding the financial statements in terms of damage to organisational and personal reputation; and reputation with funding bodies;
- Danger of fraud – BDO does a biennial survey with public reports available. Board members need to be aware of what movements in the statements might indicate the existence of fraud.
Brian: has seen fraud perpetrated, most recently for more than $200,000, where an administrator was drawing travel expenses for board members for non-existent board meetings (as part of induction, she was shown the 2-code authorisation process, and the second code-holder did not then change her password). No-one on the board questioned the drop in cash flow.
Around the table, participants were asked to articulate what ideas they had taken from the briefing:
- The idea of visual representation of financial information in graphic form / graphic representation of risk exposure
- The “traffic light” system
- The succinct commentary / narrative / column for notes or explanations of variance right beside relevant figures
- Cash flow projections: forward indicators are crucial
- Introducing reports on forward ticket sales
- High-level dashboard showing key indicators
- Treasurer/financially literate board member educating fellow board members
- Financial strategic plan linked with operational strategic plan
- Examining movement in financial statements
- Financially literate board members asking questions in terms that other board members can understand – even perhaps alerting other board members beforehand about the questions that will be asked so they can study the financial report in the light of those queries
- That everyone is in it together, all board members are responsible for everything.
Click on the image for some examples of financial dashboards
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