Topic 4: Updating the financial policy and a new reserve policy

We have mainly discussed how to manage indirect and direct costs and how to diversify your funding. Another major task is to develop a new financial policy and set a new reserve policy for our organisation that sets you on the path towards sustainable financial health .

Let’s explore why it’s crucial for non-profit professionals to update their financial policy and create a new reserve policy.

But why is this so important?

  1. Adaptation to Changing Environment: The funding landscape is dynamic, with evolving regulations, economic conditions, and donor expectations. Updating your financial policies regularly ensures alignment with current best practices and compliance with legal requirements. For example, the value-for-money policy is something that might frequently be updated.
  2. Enhanced Financial Management: A well-defined financial policy provides clarity and guidance for staff and board members on financial decision-making, budgeting, and reporting. It promotes transparency, accountability, and responsible stewardship of resources. Note that often you need to provide this to future donors too.
  3. Risk Mitigation: Establishing a reserve policy helps you prepare for unexpected financial challenges, such as economic downturns, funding cuts, or emergencies. It builds financial resilience and reduces the organisation’s vulnerability to financial shocks.  Remember, it’s not a question of if, just when things become (at least temporarily) more difficult.
  4. Sustainability and Long-Term Planning: We said so before but it is with repeating: Setting a clear reserve policy supports the organisation’s sustainability by ensuring it has sufficient funds to maintain operations, invest in growth opportunities, and weather financial uncertainties. It enables strategic planning and long-term decision-making with confidence.
  5. 5. Donor Confidence and Trust: Transparent financial policies, including a reserve policy, demonstrate sound financial management practices to donors, funders, and stakeholders. It instils confidence in the organisation’s ability to effectively manage and steward donor funds.

What is a financial policy?

A financial policy is a set of guidelines, principles, and procedures that govern an organisation’s financial management practices. It outlines the standards, rules, and responsibilities related to financial planning, budgeting, accounting, reporting, and control processes. A financial policy serves as a framework for decision-making and ensures consistency, transparency, and accountability in financial operations. It helps establish clear expectations and guidelines for staff, board members, and other stakeholders involved in financial management, ensuring that resources are managed effectively, ethically, and in accordance with legal and regulatory requirements.

What is a reserve policy?

A reserve policy, on the other hand, is a specific component of the financial policy that addresses the management of financial reserves or reserves funds within an organisation. A reserve policy establishes guidelines for the creation, maintenance, use, and replenishment of financial reserves, which are funds set aside for specific purposes or contingencies. The reserve policy defines the purpose of reserves, determines the appropriate level or size of reserves, specifies the criteria for using reserves, and outlines the process for replenishing reserves over time. It helps organisations manage financial risks, build financial resilience, and ensure the availability of funds for emergencies, opportunities, or strategic investments. A reserve policy provides clarity and guidance on reserve management decisions, promoting prudent financial stewardship and long-term sustainability.

Steps to Update your Financial Policy and Create a Reserve Policy

So how do we do it? This overlaps with previous session but here is a step by step guide:

Where do we start now? Taking your first steps to a healthier NGO.

Let’s visualise all the learning from this section in an example.

Suppose you are running that environmental NGO we mentioned earlier, and you conduct a financial assessment. You identify the need to update your financial policy and create a reserve policy to enhance financial management and sustainability. After thorough analysis, you determine that your current reserve fund is inadequate for potential emergencies and unexpected expenses. Your aim is set to cover at least six months of expenses.

You engage your board of directors, finance committee, and staff in the policy development process. You research best practices for financial management in the non-profit sector and consult with financial experts to gather insights.

Based on your assessment and research, you draft a financial and reserve policy that outlines principles for budgeting, accounting, internal controls, and financial reporting. You also establish a reserve policy that defines the purpose, size, and use of your organisation’s reserve fund.

For the reserve policy, you determine that you need to establish a reserve fund equivalent to six months’ worth of operating expenses. With your annual operating expenses totaling $300,000, you calculate that your reserve fund target should be $150,000.

You set clear guidelines for accessing and using reserve funds, specifying circumstances such as economic downturns or unforeseen expenses. You document procedures and responsibilities for implementing and monitoring the policies, ensuring accountability and compliance.

You go ahead and organise training sessions, ensuring that all stakeholders understand their roles and responsibilities regarding financial management and reserve use. You establish mechanisms for ongoing monitoring and evaluation of the policies, with regular reviews conducted by the finance committee and board of directors.

Transparent communication with donors, funders, and stakeholders about the updated financial policy and reserve policy builds trust and confidence in your organisation’s financial management practices. So you also create a public version of this policy, most likely in form or a summarised statement

In conclusion, updating your financial policy and creating a reserve policy are essential steps for you as a non-profit professional to enhance financial management, mitigate risks, and ensure the long-term sustainability of your organisation. By setting specific targets and building consensus among stakeholders, you can strengthen your organisation’s financial resilience and fulfil its mission more effectively.

Activity

As we near the culmination of this module on financial management for NGOs, it’s time to put theory into practice and embark on the creation of a tangible financial strategy for your organisation. In this final section, you’ll have the opportunity to synthesise all the knowledge and insights gained throughout the module into a comprehensive and actionable plan.

By weaving together elements of budgeting, revenue generation, expense management, risk assessment, and strategic planning, you’ll craft a financial roadmap that aligns with your organisation’s mission, values, and long-term objectives. This exercise will not only solidify your understanding of financial management principles but also empower you to drive positive change and sustainability within your NGO.

Conclusion

Congratulations to you on Completing your training!

We are thrilled that you have successfully completed our training journey! What an incredible milestone to achieve together!

Throughout this exciting adventure, we have shown unwavering dedication, perseverance, and a hunger for learning. Our collective commitment to expanding our knowledge and skills in Financial health and resilience is truly inspiring, and we couldn’t be prouder of your achievements.

As we reflect on our journey together, let’s remember that learning is an ongoing process, and every step we take brings us closer to our goals. You hard work and determination has paid off, and you now stand on the brink of exciting new opportunities.

With a financially healthy NGO, the sky’s the limit! We firmly believe that only with a financially healthy NGO can we create a better future. Our passion, enthusiasm, and willingness to embrace new challenges are the driving forces behind creating that better world.

As we look ahead to the future, let’s celebrate our achievements and continue to push the boundaries of what’s possible. The skills and knowledge we have gained during this training will serve as invaluable assets in our personal and professional growth.

Together, we are unstoppable! Let’s keep striving for excellence and making a positive impact in our community and beyond.

Congratulations once again! Here’s to our continued success and a bright future ahead! And remember: Do good. BETTER!