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In finance, the financial system is the system that allows the transfer of money between savers and borrowers. [1] It comprises a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.
Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely. [2]
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Purpose of Financial Systems
Financial systems help inform your organization’s planning and action plans. Financial systems also help you track and manage the resources required to successfully complete your work. These tips provide basic practices you will need to build financial sustainability in your organization. Demonstrating good stewardship of resources assists CSOs in efforts to be accountable to stakeholders and funders, and helps build confidence that your organization is a good place for funders to invest. Other reasons why developing financial systems are important include:
- Financial systems and capacity help the organization to make sound decisions based on cash flow and available resources
- Monitoring funds, or comparing actual income and expenses versus budgeted amounts, helps managers ensure that the necessary funds are in place to complete an activity
- Most governments require that registered, charitable organizations create accounts that track income and expenses
- Funders require reports that demonstrate that grants were used for intended purposes
- Establishing financial controls and clear accounting procedures help ensure that funds are used for intended purposes
- Transparency, clear planning and realistic projections contributes to the credibility of the organization.
Financial Controls and Monitoring
Financial controls and monitoring methods have a dual role in supporting internal needs and external requirements.There are five key aspects to financial controls and monitoring. These include:
- Accounting Records (or Accounts Receivable and Payable):
Establish a process that records every financial transaction by maintaining paper files, an electronic database, and copying all records in a virtual library. Your organization needs to be able to demonstrate what funds were received and how funds were spent. Accounting records should be consistent. Choose a method and regular schedule for tracking income and expenses that works for your organization. This is important in case the organization is audited or if a funder requests information for a specific item or transaction. A system should also be developed to track donations from individuals to keep donors updated of the organization’s progress or to solicit annual and repeat contributions. A separate accounting system should be developed for funding from foundations with the original proposal and budget, dates of receipt of funds, notes on allowable expenditures, and reporting requirements so that you can respond to funders’ requests for financial records or in case of audits.
- Financial Planning:
Financial planning converts your organization’s objectives into a budget. The budget serves as a critical planning guide for your staff and governing board. It is a public record for funders of how you intend to spend the funds received. Financial planning allows you to review your organization, examining successes and challenges in the past. Planning also enables you to make projections and set targets, informing trategies for future success.
- Financial Monitoring and Reporting:
Drawing from the information in the accounting records, your organization can create internal reports that help monitor progress by comparing budgets to actual expenses. Frequent reviews and monitoring allows the governing board and staff to measure your organization’s progress and helps inform decision-making about the organization’s or a project’s future. Internal reports, sometimes called management reports allow you to be forward thinking as you assess the financial status of the organization and what will be needed to realize your goals. Accounting records are also the source for creating external financial reports that demonstrate to funders and other stakeholders how funds have been spent. Funders may require financial reports at the completion of the project or periodically during the project’s implementation.
- Governing Board:
A governing board, whether comprised by a board of directors or leadership from the community, serves as stewards of an organization’s resources. Governing boards should participate in approving budgets, financial monitoring and reviews, and agree upon and ensure that internal controls are implemented. The board treasurer who has skills in accounting should be the lead person in working with the staff in ensuring financial accountability.
- Internal Controls:
Controls are organizational practices that help safeguard your assets and ensure that money is being handled properly. Controls help detect errors in accounting, prevent fraud or theft, and help support the people responsible for handling your organization’s finances.
Financial Services
The term financial services is the way to create for in other to have a multiple out come of a business by a body or bodies,a live at ease in the world economy could either be aset in the proper minds. Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.
See Also
References
- ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 551. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
- ^ Allen, Franklin; Douglas Gale (2001). Comparing Financial Systems. 55 Hayward Street, Cambridge, MA 02142-1493, USA: MIT press. pp. 520. ISBN 978-0262511254.
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