2a. Financial Management Defined
Financial management is the process of using funds effectively, efficiently and transparently. It is accomplished through a combination of procedures, methods, rules of conduct and standards. Effective and efficient financial management systems have key characteristics in common.
The critical characteristics of good financial management include:
- Transparency and clear accountability at all levels of operation
- All parties are held accountable for making good financial decisions and following all rules and regulations.
- Expenditures are planned, then checked against the plan (e.g. an approved budget)
- Costs are reasonable, allowable and appropriately allocated to the correct source
- Funds do not sit idle and are protected from misuse
- Records are clearly understood by any accountant
- Reports generated are useful to program managers and agency leadership
HUD expects grantee and sub-recipient financial management systems to include the following key components: budgeting, internal controls, federal cost principles, accounting and record keeping, procurement, reporting and audits. Sound financial management requires that all of these components work properly and in connection to one another.
This Toolkit assumes that grantees have established secure fiduciary environments and do not require detailed information regarding initiating and maintaining fund and cost accounting systems. Grantees who need more detailed information and guidance regarding setting up and operating a financial management system can find those resources on the internet. The detailed instructions in this Toolkit will focus primarily on the ins-and-outs of these specific grant programs and HUD requirements.