By CPA Joe Sammy Anunda
The Transformative Impact of Finance Development Projects in Humanitarian Organizations/Not for Profit Sector
The theory of change serves as a guiding framework that outlines the causal pathway through which development organizations envision achieving their mission and creating meaningful impact.
In the dynamic landscape of the not-for-profit (NFP) sector, finance development (FD) projects support organizations to improve their financial management capacities so that they can implement their humanitarian mandate effectively. In this way, FD emerges as a catalyst for positive change, offering a pathway towards enhanced sustainability and impact.
The project is designed to achieve four (4) main outcomes as outlined below:
- Improved Financial Management which is grounded in due diligence/needs assessment:
The first step of an FD project is proper planning, which is based on the needs (as opposed to wants) of the organization. By conducting thorough due diligence and needs assessments, organizations gain invaluable insights into their “As Is” state. Comprehending the current financial landscape provides a baseline for improvement through the identification of existing strengths and weaknesses in their financial management systems. This will in turn allow for targeted interventions that address specific areas requiring enhancement and improvement. By gaining a nuanced understanding of the “As Is” state, the organization can tailor its finance development initiatives to address precise needs, ensuring a more effective and efficient use of resources. At the core of finance development projects lies a commitment to elevating financial management practices.
Upon completion of the due diligence process, the organization is equipped with useful information that guides the formulation of a detailed plan of action. The organization may graphically present the plan in a financial vision board. This plan outlines specific steps, activities, and initiatives to rectify identified deficiencies, optimize operational processes, and enhance overall organizational performance. The plan of action will cover all 4 expected broader outcomes and act as a roadmap for financial and organizational improvement. It not only addresses immediate concerns (mainly operational) but also lays the groundwork for strategic success (including institutional and financial sustainability), ensuring that the organization can navigate challenges, capitalize on opportunities, and continually evolve in alignment with its mission and strategic objectives.
- Improved Accountability, Transparency, and Governance:
FD projects are instrumental in fortifying the pillars of accountability, transparency, and governance within not for profit organizations. Through the implementation of robust financial systems and policies, the FD project establishes a culture of responsibility. Stakeholders, including donors and beneficiaries, gain confidence in the organization’s operations, knowing that funds are allocated with precision and integrity. Transparency fosters trust, a cornerstone for sustained partnerships and organizational growth. According to the International Committee of the Red Cross and the International Federation of the Red Cross, trust is the foundation of principled humanitarian action and is also the total capital of any humanitarian organization.
The enhancement of accountability, transparency, and governance within an organization under FD is multifaceted and requires a comprehensive approach. One pivotal aspect involves the development and implementation of a robust internal control framework. This framework will establish systematic processes and checks to ensure that financial transactions, reporting, and operational activities adhere to prescribed standards. This helps to mitigate risks but also fosters accountability by promoting accuracy, reliability, and compliance with regulatory requirements. Simultaneously, the establishment of anti-fraud and risk management frameworks further fortifies the organization’s defenses against potential threats, reinforcing its commitment to ethical conduct and responsible stewardship of resources.
In tandem with these measures, the performance of both internal and external audits becomes instrumental in evaluating and validating the effectiveness of the organization’s internal control systems. Internal audits provide an ongoing, systematic assessment of internal processes, identifying areas for improvement and ensuring compliance with established policies. External audits bring an independent perspective, offering stakeholders assurance regarding the accuracy and fairness of financial reporting. Additionally, the establishment of an Audit Risk and Ethics Committee that incorporates independent professionals at the board level ensures a high standard of oversight, bringing together expertise to evaluate audit findings, assess risks, and reinforce ethical conduct. This committee plays a vital role in shaping the governance landscape of the organization, fostering a culture of accountability and transparency from the top down.
- Improved Efficiency and Effectiveness of Internal Control:
The pursuit of improved efficiency and effectiveness in internal control is a fundamental objective within the finance development project. This initiative encompasses a holistic approach, starting with a comprehensive revision of policy manuals related to finance and grants management. By revisiting and updating these manuals, the organization establishes clear and standardized guidelines, aligning them with industry best practices and ensuring compliance with evolving regulatory requirements. The revised manuals serve as essential tools for staff, offering a structured framework for financial processes and grant management, thereby reducing ambiguity and enhancing overall control.
Process maps play a pivotal role in this endeavor, providing visual representations of workflow procedures and interactions. Through the development and refinement of detailed process maps, the NGO gains a nuanced understanding of its internal control mechanisms. This visual representation aids in identifying redundancies, bottlenecks, or areas of potential improvement within financial and grant management processes. It serves as a roadmap for streamlining operations, enhancing efficiency, and promoting a more effective allocation of resources.
To empower staff with the necessary skills and knowledge, training initiatives are integral to the finance development project. Training programs tailored to the revised policies and updated processes ensure that the workforce is equipped with the latest information and competencies. This proactive investment in staff development not only enhances their individual capabilities but also contributes to a culture of continuous improvement within the organization, fostering adaptability and responsiveness to the evolving needs of the organization and its stakeholders.
- Increased Reliability and Relevance of Financial Reporting and Finance Department Structure:
A key objective of the project is to elevate the reliability and relevance of financial reporting, a goal achieved through among others the adoption of correct accounting reporting software, marking a significant step towards digital transformation. The implementation of modern accounting software enhances the accuracy and efficiency of financial data management, enabling real-time reporting, data analytics, and streamlined compliance. The digital upgrade reduces the risk of errors and ensures that financial reports are more reliable, timely, and reflective of the organization’s financial status.
Simultaneously, the finance development project assesses and refines the finance department structure, offering a choice between project-based and function-based structures. In addition to overall efficiency, the decision depends on aligning the organizational structure with the specific needs and goals of the organization. A project-based structure may be suitable for organizations with diverse initiatives, ensuring dedicated financial management for each project. On the other hand, a function-based structure centralizes financial functions, promoting consistency and efficiency across the organization. The chosen structure aims to optimize resource allocation, enhance communication, and improve overall financial governance.
Emphasis is also placed on the calculation of core costs, a pivotal aspect in financial reporting for not for profit organizations. By understanding and accurately determining core costs, which encompass essential organizational functions not directly tied to specific projects being implemented, the NGO can provide a clearer picture of its financial health. This enhances the relevance of financial reporting by ensuring that stakeholders have a comprehensive understanding of the true costs associated with delivering the organization’s mission. Through this meticulous calculation, the finance department in an informed manner allocates each donor a fair share of their indirect costs hence fostering transparency and accountability.
Finance development projects in the not-for-profit sector act as transformative forces, shaping organizations into pillars of efficiency, transparency, and impact. By targeting outcomes such as improved financial management, accountability, internal control, and reporting, these projects fortify the sector’s foundations.
The writer works for the International Committee of the Red Cross Delegation in Kyiv, Ukraine as Finance Development Delegate for Ukraine and Poland. He previously worked for Baker Tilly Kenya and as a consultant with EY.