In sport, we often talk about physical literacy as “the mastering of fundamental movement skills and fundamental sport skills that permit a child to read their environment and make appropriate decisions, allowing them to move confidently and with control in a wide range of physical activity situations”.
Financial literacy can be similarly defined as: “mastering a basic understanding of financial systems, terminology, and reporting to enable an individual to read the financial health of an organization and make appropriate decisions that protect the assets and contribute to the achievement of goals and objectives.”
For National Sport Organizations, community sport clubs, and all sizes of organizations in between, it is vital that key staff, volunteers and Board members are able to manage the organization’s finances and understand its financial statements.
Managing the financial affairs of an organization is more than just data entry. It is the comprehensive process for tracking and reporting the financial activity of the organization, which includes:
(1) Keeping appropriate and required books and records in a format and location that is acceptable to the Canada Revenue Agency (“CRA”)
- The CRA requires a variety of supporting documentation as part of your organization’s financial records. This documentation includes usual items such as deposit slips, cancelled cheques, bank statements, supplier invoices, sales invoices, membership lists, and government remittance reports, to name a few. If your organization is incorporated, the documentation can also include governing documents, bylaws, and the minutes from meetings of the Board and meetings of the members.
- Documents can be in paper format or an electronic format provided they are in an electronically readable format. “Electronically readable” means the information is supported by a system capable of producing an accessible and useable copy. “Accessible” means that CRA officials can access it through their systems and “useable” means that is compatible with CRA systems and software.
- Another consideration is the growing use of cloud computing. The CRA requires that books and records be kept “in Canada”. This becomes a grey area when, in many instances, the physical location of the cloud server is not actually in Canada. The CRA is not entirely clear on this issue yet so care should be taken to determine where the cloud is physically based if it is being used to store accounting data and documents.
(2) Selecting and maintaining a suitable accounting software system
- There is a vast number of accounting software programs. When deciding which system is right for your organization, you should consider the following:
1. Are you going to use it on a Mac or PC? Not all software is compatible with a Mac
2. Are you storing the data on a local hard drive or the cloud? Being able to access cloud data requires an internet connection so if you expect to do most of your accounting work at a location that does not have internet, this type of software may not be right for you.
3. How many people will need to be able to access the software? Not all systems support multiple users.
4. How easy is the software to use if you have limited accounting experience?
5. Can the reporting be customized to your specific reporting requirements?
6. Accounting software can be free or can cost thousands of dollars. In addition, many software applications offer annual maintenance updates to remain current with changes to the tax code, etc. Ensure that your organization budgets not only for the upfront cost but also for any annual upgrades.
(3) Determining the most appropriate method of tracking revenues and expenses
- There are several accounting methods that can be used to track revenue and expenses. The two primary methods are cash accounting and accrual accounting. You should work with your accountant to determine which method is the best for your organization.
(4) Establishing a regular system of recording, reporting, and reviewing the financial information
- Having a regular reporting schedule for financial information is important to ensure that reports are received by the Board and by senior staff in a timely manner. This reporting schedule will enable decisions to be made efficiently and effectively while communicating any issues in sufficient time to mitigate any potential risk to the organization. The lack of regular reporting not only hinders the decision-making process but is also a main cause of financial mismanagement. Another blog post I wrote about audit preparation may provide further information on this.
(5) Developing an annual budget
- Annual budgets provide a benchmark against which financial performance can be measured. Without a budget, it is difficult determine if the organization is effectively managing its revenue and expenses and if there are particular areas that are cause for concern and attention.
(6) Creating and enforcing financial management policies and procedures
- Financial policies and procedures include such things as cash management, expense claim procedures, bank authorities, and financial decision making. Creating and enforcing these measures provides checks and balances to mitigate possible mismanagement. Without enforcement, there is limited benefit to even having policies and the organization would be exposed to potential fraud.
(7) Understanding the financial statements and key ratios
- It is vitally important to provide training to staff, volunteers, and Board members so that they understand the financial reports and financial health of the organization.
While not everyone affiliated with the organization needs to know its financial affairs, it is important that there is a formalized and understood process for tracking revenue and expenses, there are clear roles and responsibilities for those involved in the accounting cycle with appropriate oversight, and all key staff, volunteers and board members can read and understand the financial reports.
Frequently, I hear comments at Board meetings such as “I don’t understand financial statements”, “I rely on the Finance Committee and staff to tell me what I need to know about the finances”, and “We have an auditor so we are good”. A Director of an organization has a fiduciary responsibility to the members to ensure that the organization is being managed in a fiscally responsible manner. This responsibility cannot be delegated – which means that the Director could be held personally liable if something goes wrong. With the legal threshold of “what a reasonable person would do”, the onus is on each Director to ensure that they understand what the financial reports are telling them.
Providing staff, volunteers and Board members with financial literacy training is a simple and cost effective way to ensure the responsible financial management of the organization. How often do you read a news article about a sport organization that has fallen prey to poor financial management resulting in bankruptcy or fraud? Here are three recent examples: $725,000 lost, $315,000 misappropriated, and $468,000 stolen.
Ensuring your key people have the financial literacy necessary to manage the finances of your organization is not only good governance practice but an effective risk management strategy.
If your organization needs assistance in managing its finances or is interested in receiving financial literacy training, please contact me: Kathy Hare – keh@sportlaw.ca