Guide to Financial Management


In big NGOs, the relationship between head office and field office can be similar to the relationship between a donor and an NGO. This section might be useful for head office managers.

Donors often play a crucial role in helping NGOs strengthen their financial management and use funds effectively, due to five factors:

  1. Power Holding the money puts donors in a powerful position. They influence how NGOs work and this brings important responsibilities.
  2. Good practice Donors can encourage NGOs to adopt good practice (eg as summed up in the two golden rules of NGO field work).
  3. Bureaucracy Donors need bureaucratic systems to handle their funds. But too much bureaucracy can get in the way of good practice.
  4. Organisations NGOs thrive when donors help them develop as organisations, rather than focusing on individual projects.
  5. Accountability NGOs need systems that help them account to all their different stakeholders, including donors and beneficiaries. So do donors.

1. Power

NGOs have a strong financial incentive to tell donors what they think they want to hear - including adapting their work to donors' priorities and inflating claims about what they achieve. This puts donors in a powerful position.

Donors can respond to this by basing their work on a realistic understanding of how NGOs work. In particular:

  • NGOs often receive funds from several different donors, which may each impose different conditions and make different demands.
  • Social change does not fit into neat projects with specific outcomes. It takes time to work with local communities; NGO work is normally affected by unpredictable local circumstances, which have a bigger influence than NGOs (see the What NGOs do section).
  • NGOs need to invest in their own development, so that they can develop their staff and services, handle increased amounts of funds and cover their core costs.

Donors can harm NGOs if they abuse their power, for instance by delaying funding decisions or cash payments, or by imposing inappropriate conditions.

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2. Good practice

Evidence shows that NGOs help people effectively when they follow the two golden rules of NGO field work.

  • NGOs have to maintain a respectful dialogue with the people they aim to help,
  • NGOs depend on their field staff and have to empower them to make good judgements.

These golden rules help NGO staff to work with the complicated realities of different people's lives. NGO staff need the flexibility to respond to changes in local circumstances - which always happen. So, to achieve good practice, NGOs have to design internal systems that work in tune with the golden rules. This can be tough: NGOs need donors' help.

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3. Bureaucracy

  • Donors and NGOs need bureaucratic systems to organise their work. All NGOs struggle to balance the need for centralised control with the need for decentralised decision-making.
  • Good systems form the backbone of an organisation, encouraging good practice. But bad systems soak up a lot of time and energy and can stop NGO staff from working effectively.
  • Many donors and NGOs rely on 'project-based' systems which are based on the assumption that activities and results can be predicted with certainty.
  • Unfortunately, evidence shows that these systems can push against the two golden rules of NGO field work (see the What NGOs do section).

Too much of the wrong sort of bureaucracy encourages field staff to focus on the needs of senior managers and donors - instead of the real needs of beneficiaries. This can be disastrous.

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4. Organisations

  • NGO managers have the responsibility of developing their staff and organisations, over at least a three to five year period. They need the freedom to develop systems and approaches that work for them.
  • Donors generally have most impact when they help managers consider the needs of their entire organisation, not just one project. It is very difficult for managers to work with only project-based funding. It may not be helpful for donors to impose standard approaches (e.g. standard financial systems).
  • For example, even if donors cannot provide unrestricted funding, they can help by relying on an organisation-wide audit, rather than requiring additional project-specific audits.

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5. Accountability

Donors have a crucial role to play in holding NGOs to account - recognising and encouraging good practice. Unaccountable organisations cannot be relied upon to deliver high quality work. Donors also have the responsibility of being accountable to their stakeholders.

However, the mechanisms used for accountability have to reinforce good practice. There is a strong debate in the NGO sector about whether current mechanisms do this. For example, project-based systems may prevent flexibility and divert NGOs' attention away from their beneficiaries - which makes it harder to help them effectively. Some exciting new models for accountability are emerging.

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The section of this Guide entitled 'Accountability' analyses the issues, discusses alternative approaches and highlights current initiatives.

Further reading on accountability and measuring performance - short notes on a few key books and papers.