MANAGING THE FINANCES OF THE ENTERPRISE

What is finance? People seem to either love or hate finance, but the fact is
that finance provides the means to deliver the ambitions of those who run
social enterprises. While it may seem dry and something for the
professionals to deal with, finance is the means by which the social
objectives are reached, so no organisation is too small or too simple not to
require finance in some shape or form. Finance, whether as cash or nonmonetary input e.g. volunteer time, needs to be calculated, counted and
understood as part of the successful delivery of the social enterprise.
Businesses often fail because of lack of financial management and financial
planning, for example lack of cash flow forecasting may mean that the
organisation does not have the means to pay outgoings because there is a
gap between when money has to be paid out and when it will be received.
Finance and business planning The starting point with finances is to make
financial assessment and forecasting, part of business planning, so that costs
are identified once it is clear what is going to be done and when. This
provides a starting point for predicting expenditure including costs of
borrowing and also for predicting income generation from trading and
whatever other sources are available. Forward planning of finances is
essential, as it is very difficult to identify and secure alternative sources of
funding within a short period of time e.g. where a contract is not renewed as
expected.
Financial management involves
Budgeting
Conducting financial reviews
Managing cash flow
Predicting income and expenditure including sales
Budgeting involves setting out your income and expenditure over a fixed
period of time. Performance against budget should be reviewed at regular
intervals to check and manage any variations against predicted spend. Look
at the projected sales/income for the budget period and do not overestimate,
as this may cause problems in the future. Make sure that true costs of sales
are included i.e. all costs. Bear in mind that some costs will be fixed i.e. they
will not vary with amount of sales.
Examples of budget headings
Fixed costs or overheads can include
Cost of premises e.g. rent, rates, service charges
Staff costs e.g. wages, benefits, National Insurance
Variable costs, or direct cost of sales could include materials involved in
delivery e.g. art materials for workshops.
Managing budgets
Once you know your costs and what income is coming in, you are in a
position to assess how much money you are making. You can review your
costs and check to see that you are not spending unnecessarily. Additionally
by logging when money will be received and when it has to be paid out you

can check whether you are likely to experience problems with cash flow.
Thinking ahead in this way will give you time to do something to resolve any
problems. Keep your budget under review and make adjustments if needed,
but try to keep within budget if possible. Maintaining a rolling budget for 12
months ahead can be helpful.
Tips and suggestions
Be realistic as possible when setting your budget.
Keep an eye on the relationship between increasing the amount of sales
and your variable costs. You might need to review your pricing structure as a
result.
Involve the right people in budgeting and review including those involved
in delivery so that all buy in to the financial management process.
Review budgets regularly compare actual income and expenditure with
budgeted figures and understand any variation from budget.
Reviewing your financial position
Every organization should review its finances at appropriate intervals, even
small informal ones. For example for a typical small business there should be
regular bank reconciliations which can provide an opportunity to review
finances. Consider also:
Cash flow do you have sufficient flow of funds at the right time to be
able to meet outgoing expenditure
Working capital this is your current assets less current liabilities it is a
measure of whether you have sufficient assets to pay off your debts and
operational expenditure.
Your Cost base keep your costs under regular review and make sure your
costs are covered in your sale price.
Borrowing levels - Do you have any loans or overdrafts? Could you get
finance which is cheaper?
Future plans - Does your organizations have any plans to grow or has other
needs because of change in business direction? If so will additional working
capital be required?
Tools for financial management
Keeping records
The level of record keeping will vary from business to business but should
include all receipts and expenditure, details of goods purchased, goods or
services sold. These should be accurate and updated regularly. Failure to
keep proper records can cost an organisation in additional time in catching
up and/or penalties if non-compliance with tax or regulatory requirements.
Management accounts
Some social enterprises produce management accounts to use within the
business in making timely and meaningful management decisions.
Management accounts are a tool for improving internal performance and
therefore fulfil a different role from financial accounts which are produced for

scrutiny by investors and Companies House. Management accounts are

usually produced monthly or quarterly and analyse performance and do
forward projections of sales, cash flow and profit forecasts along with
comparison of performance against initial budgets and earlier forecasts.
Types of analysis will vary depending on the nature of each social enterprise
but can include
Information about the sales process, pricing distribution, debtors
Purchasing process, stock records, creditors, etc.
Register of fixed assets
Employee records
Tips and suggestions
Keep accurate records and review your finances regularly
Dont leave it all to an external person
Dont over-estimate
Remember the value of in-kind contribution
SOURCES AND USES OF FUNDS
Definition - What does Sources and Uses mean?
Sources and uses provides a summary of where the capital used to fund an
acquisition will come from (the sources), what this capital will purchase (the
uses). The sources and the uses must equal each other, and they must total
the total purchase price plus transaction costs.
Typical sources of capital include:

Bank debt;

Vendor financing (VTB or earn out);

Mezzanine debt;

Earnouts; and/or

Equity.

Typical uses of capital include:

Capital assets;

Working capital;

Goodwill; and/or

Transaction costs.

Transactions are exchanges of economic resources between consenting

parties. The value of the resources being exchanged need not be equal so
long as both parties consent to the exchange with neither coercion nor
deception. Each transaction can be considered a source or use, where a
source is an increase in the organization's resources and a use is the
organization spending resources to accomplish its aims. Source and use refer

to the same concepts in both managerial accounting and accounting as a

whole.
Source

Source is a term used to refer to the receipt of an economic resource in a

transaction. For example, if a business earns $800 through selling its
products to its customers, that sale can be considered a source of
revenue. But if the same business collects the $800 in cash at the time of
the sale, that sale also can be considered a source of cash or cash
equivalents. Context is important in figuring out what source refers to in a
specific usage.

Use

Use is a term used to refer to the spending of an economic resource in a

transaction. Spending resources on expenses needed to produce the
business's products and to keep the business's operations running are the
most common instances of uses but by no means the only ones. For
example, if a business spends $800 to cover debts incurred last month,
that isn't considered an expense but a use of cash.

Source/Use Report
A source/use report is a nonprofit financial statement similar to income
statements in that it is used to list revenue and expenses to calculate the net
balance. In source/use reports, sources are revenue and uses are expenses.
Source/use reports are helpful to management of nonprofit organizations
because their creation can help pinpoint the causes behind increases and
decreases in the organization's resources.
Sources and Uses of Funds Statement
Another financial statement that uses source and use as terms is the sources
and uses of funds statement. More often, this financial statement is called
the cash flow statement. It lists and details all changes in a business's cash
and cash equivalents in a single time period. Receipts or increases in cash
can be considered sources of cash while spending or decreases of cash can
be considered uses of cash. Sources and uses of funds statements tend to be
produced more for external use but remain useful to management in much
the same manner as source/use reports, except the items being pinpointed
are the causes behind the changes in the organization's cash rather than its
financial holdings.
RULES OF SOUND FINANCING
Ten Principles of Sound Financial Management
1. Planning Policy. The planning system in the County will continue as a
dynamic process, which is synchronized with the capital improvement
program, capital budget and operating budget. The Countys land use plans
shall not be allowed to become static. There will continue to be periodic

reviews of the plans at least every five years. Small area plans shall not be
modified without consideration of contiguous plans. The Capital
Improvement Program will be structured to implement plans for new and
expanded capital facilities as contained in the Countys Comprehensive Plan
and other facility plans. The Capital Improvement Program will also include
support for periodic reinvestment in aging capital and technology
infrastructure sufficient to ensure no loss of service and continued safety of
operation.
2. Annual Budget Plans. Annual budgets shall continue to show fiscal
restraint. Annual budgets will be balanced between projected total funds
available and total disbursements including established reserves.
a. A managed reserve shall be maintained in the General Fund at a level
sufficient to provide for temporary financing of critical unforeseen
disbursements of a catastrophic emergency nature. The reserve will be
maintained at a level of not less than two percent of total Combined
General Fund disbursements in any given fiscal year.
b. A Revenue Stabilization Fund (RSF) shall be maintained in addition to
the managed reserve at a level sufficient to permit orderly adjustment to
changes resulting from curtailment of revenue. The ultimate target level
for the RSF will be three percent of total General Fund Disbursements in
any given fiscal year. After an initial deposit, this level may be achieved
by incremental additions over many years. Use of the RSF should only
occur in times of severe economic stress. Accordingly, a withdrawal from
the RSF will not be made unless the projected revenues reflect a decrease
of more than 1.5 percent from the current year estimate and any such
withdrawal may not exceed one half of the RSF fund balance in that year.
c. Budgetary adjustments which propose to use available general funds
identified at quarterly reviews should be minimized to address only
critical issues. The use of non-recurring funds should only be directed to
capital expenditures to the extent possible.
d. The budget shall include funds for cyclic and scheduled replacement or
rehabilitation of equipment and other property in order to minimize
disruption of budgetary planning from irregularly scheduled monetary
demands.
3. Cash Balances. It is imperative that positive cash balances exist in the
General Fund at the end of each fiscal year. If an operating deficit appears to
be forthcoming in the current fiscal year wherein total disbursements will
exceed the total funds available, the Board will take appropriate action to
balance revenues and expenditures as necessary so as to end each fiscal
year with a positive cash balance.
4. Debt Ratios. The Countys debt ratios shall be maintained at the
following levels:
a. Net debt as a percentage of estimated market value shall be less than
3 percent.

b. Debt service expenditures as a percentage of General Fund

disbursements shall not exceed 10 percent. The County will continue to
emphasize pay-as-you-go capital financing. Financing capital projects
from current revenues is indicative of the Countys intent to use
purposeful restraint in incurring long-term debt.
c. For planning purposes annual bond sales shall be structured such that
the Countys debt burden shall not exceed the 3 and 10 percent limits. To
that end sales of General Obligation Bonds and general obligation
supported debt will be managed so as not to exceed a target of $275
million per year, or $1.375 billion over five years, with a technical limit of
$300 million in any given year. Excluded from this cap are refunding
bonds, revenue bonds or other non-General Fund supported debt.
d. For purposes of this principle, debt of the General Fund incurred
subject to annual appropriation shall be treated on a par with general
obligation debt and included in the calculation of debt ratio limits.
Excluded from the cap are leases secured by equipment, operating
leases, and capital leases with no net impact to the General Fund.
e. Use of variable rate debt is authorized in order to increase the
Countys financial flexibility, provide opportunities for interest rate
savings, and help the County manage its balance sheet through better
matching of assets and liabilities. Debt policies shall stipulate that
variable rate debt is appropriate to use when it achieves a specific
objective consistent with the Countys overall financial strategies;
however, the County must determine if the use of any such debt is
appropriate and warranted given the potential benefit, risks, and
objectives of the County. The County will not use variable rate debt solely
for the purpose of earning arbitrage pending the disbursement of bond
proceeds.
f. For purposes of this principle, payments for equipment or other
business property, except real estate, purchased through long-term leasepurchase payment plans secured by the equipment will be considered to
be operating expenses of the County. Annual General Fund payments for
such leases shall not exceed 3 percent of the annual General Fund
disbursements, net of the School transfer. Annual equipment leasepurchase payments by the Schools and other governmental entities of the
County should not exceed 3 percent of their respective disbursements.
5. Cash Management. The Countys cash management policies shall
reflect a primary focus of ensuring the safety of public assets while
maintaining needed liquidity and achieving a favorable return on
investment. These policies have been certified by external professional
review as fully conforming to the recognized best practices in the industry.
As an essential element of a sound and professional financial management
process, the policies and practices of this system shall receive the continued
support of all County agencies and component units.
6. Internal Controls. A comprehensive system of financial internal controls
shall be maintained in order to protect the Countys assets and sustain the
integrity of the Countys financial systems. Managers at all levels shall be

responsible for implementing sound controls and for regularly monitoring and
measuring their effectiveness.
7. Performance Measurement. To ensure Fairfax County remains a high
performing organization all efforts shall be made to improve the productivity
of the Countys programs and its employees through performance
measurement. The County is committed to continuous improvement of
productivity and service through analysis and measurement of actual
performance objectives and customer feedback.
8. Reducing Duplication. A continuing effort shall be made to reduce
duplicative functions within the County government and its autonomous and
semi-autonomous agencies, particularly those that receive appropriations
from the General Fund. To that end, business process redesign and
reorganization will be encouraged whenever increased efficiency or
effectiveness can be demonstrated.
9. Underlying Debt and Moral Obligations. The proliferation of debt
related to but not directly supported by the Countys General Fund shall be
closely monitored and controlled to the extent possible, including revenue
bonds of agencies supported by the General Fund, the use of the Countys
moral obligation and underlying debt.
a. A moral obligation exists when the Board of Supervisors has made a
commitment to support the debt of another jurisdiction to prevent a
potential default, and the County is not otherwise responsible or obligated
to pay the annual debt service. The Countys moral obligation will be
authorized only under the most controlled circumstances and secured by
extremely tight covenants to protect the credit of the County. The
Countys moral obligation shall only be used to enhance the credit
worthiness of an agency of the County or regional partnership for an
essential project, and only after the most stringent safeguards have been
employed to reduce the risk and protect the financial integrity of the
County.
b. Underlying debt includes tax supported debt issued by towns or
districts in the County, which debt is not an obligation of the County, but
nevertheless adds to the debt burden of the taxpayers within those
jurisdictions in the County. The issuance of underlying debt, insofar as it is
under the control of the Board of Supervisors, will be carefully analyzed
for fiscal soundness, the additional burden placed on taxpayers and the
potential risk to the General Fund for any explicit or implicit moral
obligation.
10. Diversified Economy. Fairfax County must continue to diversify its
economic base by encouraging commercial and, in particular, industrial
employment and associated revenues. Such business and industry must be
in accord with the plans and ordinances of the County.
Sound financial management is the careful tracking and prudent
management of your companys financial resources and cash-flow. Without
sound financial management, information can be wrong or absent, decisionmaking is flawed, and minor issues can become serious problems that put
the business itself at risk.

For the purposes of this Guidance Document, "sound financial management"

means the aggregate set of practices and procedures which allow for the
accurate, transparent, and effective handling of all government monies and
government contracts. A system of sound financial management should be
characterised by the existence and proper functioning of the following
attributes :
A coherent set of accounting procedures and standards which reveal that
public monies were spent in accordance with dueauthority, that all
transactions were recorded accurately, and that a complete audit trail
exists to facilitate a post expenditure review.
Transparent national budget mechanisms (involving parliamentary control
and full public disclosure of spending plans) for the allocation of monies to
various expenditure programmes.
An effective system of state audit and parliamentary scrutiny of all
expenditure programmes.
An efficient and equitable revenue (tax) raising mechanism which is
effective in the sense of causing minimum economic disruption or dislocation to tax-payers.
A set of performance indicators associated with all expenditure
programmes, so that the economy with which programmes are managed,
and their effectiveness in meeting declared targets can be measured.
A decision making and approval system which limits the span of influence
exercised by any individual official over a particular spending programme.