Recent blog posts have discussed the financial report, their purpose and how they should be prepared.  The critical issue that now arises is being able to understand the financial reports and the implications for the organisation.

For example, it is not unusual that a finance report compares the actual and budgeted income and the expenditure that gives rise to the variations.  As a treasurer or member of the committee of management you need to understand what these variations mean and how they will impact on the operations of the organisation. The “Merry Men” of your committtee will need to make formal decisions based on this information.  This is why every finance report should be accompanied by a written report which provides a commentary on or explanation of the numbers.

Whether it is a small or large variation you must understand how and why it has occurred.

Some organisations use a benchmark where, if the variation is less than 10%, it is regarded as immaterial and there is no review.  This can be a huge mistake because if you don’t know what caused the variation, how would you know if there was a potential problem somewhere?

Look at this example.  A minor variation may occur when additional expenditure is incurred but which was not included in the budget, while an amount which was budgeted for has yet to be expended.  If the amounts are similar, it would be easy to just look at the numbers and assume you were on budget.  In reality, you are not and that could lead to your organisation overspending in future months.

Furthermore, if your organisation receives grants that specify how the funds must be spent you may now need to review your cash flow statement and find or manage funds to cover the unbudgeted expenditure.

Without a written finance report which explains the figures, your management committee is operating in the dark and that could have serious consequences down the track.

If you still need convincing about the value of the written finance report, let me remind you that whether you are the treasurer or a member on the management committee, you have the same accountability and legal responsibility.  If it goes broke, the buck stops with you.

The written report formally documents the key issues on financial performance and allows each member of the management committee to raise questions, seek clarification and make informed decisions on the financial operations of the organisation.