Key Financial Terms
Absolutely whether an organization is a non-governmental organization (NGO) or not understanding financial term is very key in your daily operation as an organizations.
Understanding key financial terms is essential for effective financial management within organizations.
Financial Terms in Accounting Language:
Account: A record of monetary transactions stored either in physical books or electronic files. As an organization it is very vital to have your data save in a softcopy for future reference purpose and also for ease access
Account Code: A unique identifier assigned to each financial transaction for tracking and reporting purposes. Tracking most be part of your financial transaction
Advance: A payment or loan provided before receiving goods or services in return. Organization give advances to staff for field activities when implementing program to helps ensure that they have the necessary financial resource their duties effectively while maintaining accountability and transparency in the use of organization funds.
Accounting Period: A defined timeframe for recording and reporting financial activities, such as a month, quarter, or year. Organization play a critical role in ensuring the financial stability and success of your organization. To achieve this, it is paramount to set clear and achievable goals that align with the organization’s objectives and drive financial performance. One useful framework for goal setting is SMART – Specific, Measurable, Achievable, Relevant, and Time-bound.
Accrual: Recognizing expenses incurred during an accounting period, even if invoices haven’t been received yet.
Accumulated Funds: Money or assets accumulated over time from unspent income, often referred to as reserves.
Asset: Something owned by the organization that holds value, like cash, equipment, or loans.
Audit: Organization must have record of where auditor has carried an auditing of their financial record this give donors the confidence that fund is justifiable used, so having an Auditor who independently review of the organization accounting records to ensure accuracy and compliance by an independent person (auditor).
Audit Trail: Every financial transaction should be backed up by a ‘supporting document’, e.g. a receipt, invoice or sign sheet (eg for many travel reimbursements). This is the evidence that a specific transaction has taken place. The ability to trace transactions through an organization’s accounting systems for accountability purpose is a challenge for growing and local organizations is the poor ability to trace accurate transaction keep record of their documentation once a staff left they have a limited ability to get back some of their data and that is why a donor cannot give them fund . As small NGO Organization should have a policy that spelt out numbers of year that a documents can be retain before disposing it.
Authorization: Approval process for transactionss, typically by designated budget holders.
Bank Reconciliation: Matching cashbook entries with bank statements to identify any discrepancies.
Budget: A projected plan of income and expenses for a specific purpose over a defined period.
Budget Holder: An individual who holds the authority and is responsible for managing a budget for a particular activity, project and organization.
Burn Rate: The rate at which funds from a grant or budget are being utilized or used so far expressed as a percentage. When donors give fund as an organization your expected to spend according to the stipulated term and have your burning rate moving accurately according to their expectations but when is low that means the organization have a poor ability to utilized the fund giving of which become a challenge
Capital Expenditure: Spending on high-value assets like equipment or property, expected to benefit the organization over multiple accounting periods.
Cashbook: A record of cash
An accounting register which records receipts and payments transactions passing through a bank or cash account. This is also known as a bank book or a cash analysis book. It can be held in a physical book format or in a computer file.
Cash Reconciliation: Comparing physical cash counts with recorded balances to ensure accuracy.
Cashflow: The net difference between cash received and cash spent within a specific period.
Cashflow Forecast: An estimate of future cash receipts and payments over a specified timeframe.
Chart of Accounts: As an organization you should know that accounting works by assigning codes to each transaction in the cashbook. The chart of accounts is a structured list of account codes used in an organization’s accounting system. it lists of all the accounts codes and cost Centre codes that are used in an organization’s accounting system, description of each. Core costs Central support costs shared by many other projects. Known as operating overheads.
Cost Centre: This is a code use to assign transaction to a specific donor or project. A division or department within an organization responsible for incurring costs or generating income which is the accounting unit of the organization.
Depreciation: The gradual decrease in value of fixed assets over a period time, recorded as an expense.
Direct Cost: Costs directly attributable to a specific activity, department, or project. These costs are clearly related to a particular activity and can be charged directly to the relevant cost centre for e.g, in a training project, the costs of room hire for a training event and the trainer’s fees.
Financial In-kind: Contributions to a project in the form of goods or services instead of cash.
Exceptions Report: A brief report highlighting significant discrepancies or areas of concern in management reports.
External Audit: A review of financial statements by an independent auditor to ensure accuracy and compliance with regulations.
Financial Accounting: Recording, classifying, and summarizing historical financial data to prepare financial statements.
Fixed Asset: A high-value asset owned by the organization for long-term use, such as buildings or equipment.
Fixed Assets Register: A detailed record of an organization’s fixed assets, including purchase details and depreciation and it is part of donor requirements during assessment which is very important for growing non- governmental to have and also this enable the office in charge to know where a particular asset is and under who custody.
Fraud: Intentional deception or dishonesty for personal gain, requiring robust internal controls to mitigate risks. NGOs should design or have a system of internal control to ensure the integrity of fund and assets of their organizations and this give donors confidence of the safety of their fund giving to organizations
Goods Received Note (GRN): A document acknowledging receipt of goods, signed by the recipient to confirm accuracy.
Imprest: A fixed cash float replenished to a predetermined level after expenditures.
Indirect Cost: Costs not directly attributable to a specific activity, department, or project, often shared among projects. For example, head office rent, the audit fee or overhead or central administration costs.
In-kind Donation: Contributions to a project in the form of goods or services rather than cash in-kind donations for instance vehicles or computer equipment. When you budget for a project using activity-based budgeting, you will include all the resources needed to run your project. If you know that some of these resources will be donated in kind once the project get starts, you can then include the value of the item as known income. You should only include in-kind donations in your budget, if the item is important to the progress and success of the project rule.
Organogram: A visual representation of an organization’s management and departmental structure.
Payment Voucher: An internal document providing details of authorized payments, supported by relevant documentation.
Petty Cash Book: A log of small cash transactions, typically used for minor expenses or for day to day organization expenses
Prepayments: Amounts paid in advance for expenses in a specific accounting period.
Procurement: The process of purchasing goods and services, including selection, ordering, and payment.
Reconciliation: The process of verifying and aligning different parts of an accounting system, such as balancing cashbook with bank statements.
Restricted Funds: Income or reserves with specific conditions on their use, often requiring reporting to donors.
Signatories: Authorized individuals empowered to sign documents on behalf of the organization, such as bank transactions or purchase orders. Usually an organization should have three persons a signatory to the organization for internal control purposes
Statutory Audit: An external audit mandated by law to ensure financial statements’ accuracy and compliance.
Statutory Deduction: Mandatory deductions from an employee’s pay, such as income tax. It is good to have a statutory deduction taxes deducted directly from gross earnings and paid by employees to the governing tax body of a given country. In most cases, the employer deducts the taxes and makes sure they are paid to authorities. For you’re to earn the confidence of your donor this should be part of your policy as an organization.
Supporting Document: Original documents providing evidence of financial transactions, such as receipts or invoices. Bear this in mind as an organization that every financial transaction should be backed up by a ‘supporting document’, e.g. a receipt, invoice or sign sheet this is the evidence that a specific transaction has taken place. So for your to have a proper documentation as an organization you have to have written in your policy timeframe of retiring supporting documents after an activates is carried out.