In many sports the score is the ultimate success factor. In administering a State Sporting Organisation, the financial books and records are akin to the scoreboard. In using this simple analogy, the rationale behind keeping good records becomes apparent.
Maintaining books and records requires rigour and discipline if they are able to provide meaningful insight. There are many instructional guides on how to maintain books and records, and we will explore some basic principles in ensuring they are maintained to maximise meaningful outputs.
Cash vs. accruals? Automatic entries vs. manual? Cloud vs. desktop? Spreadsheet vs. paper ledgers? What does this all really mean? In working back from objectives, the right system will provide the ability to drill down into performance and create the right outputs.
Financial statements should give an idea of where you’ve been (income statement), where you are at (balance sheet), and where you may go (cash flow).
When do you record a transaction? When it happens, or when the cash physically changes hands? These questions at their core define whether the cash or accrual method of accounting is applied.
Cash accounting is a method often adopted by smaller State Sporting Organisations, with a lower level of transactions. Cash accounting is tracked and maintained by way of processing transactions only when cash is received or paid.
Cash accounting can comes with some pitfalls, including:
- Not always knowing who owes you what;
- Not always knowing what you owe others;
- Limited visibility on cash flow requirements; and
- Inability to match income and expenses given the timing difference between cash earned vs. cash spent. This can often be problematic with accounting for grants.
Accrual accounting usually requires a greater time commitment than cash accounting, but delivers a more accurate position of the State Sporting Organisation at any point in time. This is a result of recording income and expenses as they take place rather than waiting for the physical cash transaction. Depending on the terms, this can have a significant time deviation in terms of understanding your State Sporting Organisations existing obligations, but equally, obligations of others to you. Accrual accounting allows the users of the information a far more accurate and complete view of performance at a given point in time.
Some key factors to consider when choosing a method are:
- The size of the State Sporting Organisation and level of transactions;
- The financial reporting requirements of your State Sporting Organisation;
- Complexity of transactions;
- Level of accounting experience within the finance function; and
- What accounting system is being used and its capabilities.
Selecting an accounting system can be as simple or as complicated as one chooses to make it. They can be designed explicitly for your State Sporting Organisation, often at a considerable cost, or they can be purchased off the shelf. An effective accounting system will keep score, whilst providing the necessary information required to track performance.
Ultimately the choice of which accounting system to use comes down to the users. This is often dictated by legacy, and in more recent instances by the preference of the financial officer or outsourced provider if applicable.
There are no right or wrong answers, but better practice would suggest a system should:
- Avoid being susceptible to loss of records, such as paper;
- Have automated features where possible to validate information and create efficiencies (automated bank feeds for instance);
- Have the ability to track who has processed transactions or made changes;
- Have all the functionalities you need (such as payroll); and
- Be available to those that need to use it (such as a cloud platform).
The “cloud” is a much used term, and accounting systems have certainly benefited from this shift in technology. The movement of many accounting ledgers to the cloud has opened up far more automation, whilst providing greater real time access to information. In addition, these systems have given the opportunity to provide;
- Continuous version updates and backups of information to ensure data is retained;
- Accessibility to real time information to better inform decision making;
- Collaboration via remote access, allowing for sharing of information between boards, advisors and the finance function;
- Inbuilt systems controls such as approvals;
- Integration with many third party tools; and
- Automated features to reduce manual input and free up resources to be better applied elsewhere.
Cloud based systems may not suit every State Sporting Organisation – however, they are becoming more and more prevalent due to their continual advancements, and ability to save time. These systems are proving to be cost effective, and integrate with many other platforms, such as banking and payroll.
What information are you basing your decisions on? As a board it’s your responsibility to ensure the decisions you make are in line with the strategic objectives of the State Sporting Organisation. Even more important, it’s imperative to ensure decisions are based on complete and accurate information. How do you know the reports you receive are complete and accurate?
In a traditional accounting sense, a board should be basing financial decisions on three core reports. An income statement, a balance sheet and a cash flow statement. However, it does not stop here. Non-financial performance indicators are also important to consider and when benchmarked against financial information can be beneficial in aiding decision making. Whether it be that more investment needs to be put into coaching accreditations, or whether participant numbers are out growing available facilities.
A board is always making decisions. Minutes are documented from meetings and can serve as a useful source of reference for a State Sporting Organisation to track what they’re trying to achieve and how successfully they have performed. So how does a board know that their financial decisions which are ratified at their periodic board meeting are actually put into practise and acted upon? Ultimately it comes down to the reporting outputs discussed above. By way of having a board approved budget and reviewed against actual performance the board can clearly see whether day to day operations are in line with the board’s strategy and whether management is implementing their decisions.
A balance sheet in essence is a snap shot of where the State Sporting Organisation is at any point in time. A balance sheet has three key components.
- Assets – what have we got?
- Liabilities – what do we owe?
- Equity – What’s historically left over?
An income statement is like a journal. It’s a record of where you as a State Sporting Organisation have been. It details the highs and lows and can be useful in identifying trends and cycles. An income statement is best reviewed when being compared to something whether it be budgets, forecasts, a prior month or even year.
You should expect to see revenues and expenditure, to present your overall surplus or deficit for the period. However, it is not uncommon to request an income statement with details on a given project, grant or event.
A cash flow statement is often the last report reviewed, if provided at all – perhaps an indication of a lack of understanding some users have of it. However, an effective cash flow can tell a very honest story. A cash flow statement is broken down into three key components ‐ operating, investing and financing activities.
The cash flow also provides a valuable link between the income statement and balance sheet. The income statement is the record of the State Sporting Organisation’s performance for the year. When compared against budget it can highlight the effectiveness of control over operational activities. The Balance Sheet discloses the financial health of the State Sporting Organisation at a point in time. The cash flow statement then looks to disclose where cash has been generated and how it is applied. This allows the State Sporting Organisation to monitor how it is funding its investing activities, the effectiveness of its financial management strategies, and its reliance on and ability to service debt.
With this information, the board should be able to see whether their strategic objectives are being met and whether there is either scope to increase spending or whether danger signs are present, and measures need to be put in place to reduce spending. Considering most State Sporting Organisations are non‐for‐profit, surplus cash flows may often be a positive sign that the board may be in a position to increase spending to help meet its objectives – but it could equally indicate you are not paying your obligations. A cash flow should be carefully monitored regularly.
Note: as with any legal and financial documents, this does not replace obtaining legal and financial advice on each sports specific requirements and it is recommended you do so.
The information provided in the framework and tool kit is for your information only. The authors and the NSW Office of Sport accept no responsibility for the accuracy of the information or your reliance upon it.