“The ‘financial framework’ is the term for the policies, procedures, regulations and standing orders we use to make sure we’re taking proper care of public money.” – Powys County Council
Similar to a business, it is imperative to establish a robust financial framework for an NGO. A financial framework provides an organised system that guides and supports the financial operations and structure of the organisation. It includes internal financial control mechanisms to prevent financial mismanagement such as misuse or theft of funds and assets, non-compliance of an organisation or government policies and regulations, and inaccurate financial reporting. NGOs also face several problems, including inadequate resources, lack of capacity building, lack of performance measurement instruments, and inefficient management. Setting up a proper financial framework will help resolve some, if not all, of them.
One of the primary purposes of a robust financial framework is accountability. Up until recently, NGOs were often given a leeway when it came to financial reporting due to their work’s noble nature and lack of resources. Incomplete and inadequate financial reporting was either overlooked or blamed on their non-profit nature by accounting professionals or the public. However, with emerging scandals over the years in relation to NGOs, the public, the press, and authorities have scrutinised NGOs’ activities. For instance, in October 2020, the director of Social Welfare of India was arrested by the Anti-Corruption Bureau (Srinagar, India) on charges of corruption, fraud and embezzlement of public money under the Swach Bharat Abhiyaan. With their trust having been shaken, they now demand accountability from NGOs as well.
In the light of several scandals, NGOs, who depend mainly on donations (both public and corporate) and grants, face backlash in terms of generalised mistrust towards the non-profit industry and dwindling funding since it is a daunting prospect for the affiliated donors that their contributions are misused instead of fulfilling their original purpose of doing good.
In this vein, a robust financial framework can be used to provide accountability to stakeholders. Strict financial policies, procedures and regulations allow for transparency and reassure that the stakeholders’ money is being taken proper care of.
Non-profit organisations, in general, benefit from tax exemption. They are exempt from paying income tax and other taxes on certain conditions, including using funds exclusively for their philanthropic goals. Nevertheless, NPOs often carry out profit-making activities to raise funds, raising the obligation to pay off tax liabilities. In such cases, the organisation must charge and remit tax sales. Failure to abide by the conditions mentioned above may lead to its tax-exempt status being revoked. A robust financial framework ensures proper knowledge of tax laws and procedures, and its adherence prevents such an occurrence.
Furthermore, non-profit organisations are as susceptible to frauds, such as theft of money and embezzlement, as for-profit organisations. Establishing a robust financial framework includes putting in place specific regulations and procedures that limit the authority to transfer funds or assets to a few select trusted people. A financial framework consolidates the organisation’s financial security. It ensures proper control and monitoring of the organisation’s funds and assets, and in case of fraud, it helps trace back the perpetrator and recover losses.
Additionally, an NGO’s financial framework helps check whether its financial status aligns with its financial objectives. Since the organisation is non-profit, profitability and other accounting ratios cannot be used as instruments to measure its performance. Hence, if its financial status matches its financial objectives, it may indicate a financially stable performance. Carman (2007) observed that NGOs’ most utilised performance indicators are efficiency, effectiveness, fundraising, costs, audits, and beneficiaries’ satisfaction. Most of these indicators depend on the effectiveness of the organisation’s financial framework. Likewise, a practical financial framework allows managers to take strategic decisions and plan for the long term based on accurate financial information.
The environment in which NGOs operate is becoming more dynamic and competitive by the day. Establishing a robust financial framework is a critical step towards ensuring their long-term survival and sustainability. It also plays a crucial role in fulfilling organisations’ duties of being accountable, transparent, and honest in their operations. To put it simply, an NGO without a solid financial framework cannot be expected to survive or thrive in the present society.
Vijeshna Ramkalawon, YUVA Intern and BSc (Hons) Finance Student at the University of Mauritius