Policies and procedures to get your nonprofit’s finances in order
What was the last direct conversation you had about finances, either with a partner, a colleague or an advisor? Part of successful financial management involves having direct conversations about finances and ensuring everyone is on the same page.
That is particularly true if you’re on a nonprofit board, where lack of communication and shared understanding around finances can have disastrous outcomes: board and staff turnover, low morale, budget failures — even legal repercussions.
No matter the size or mission of your nonprofit, you need clear financial policies and procedures. We’re going to walk through what these policies and procedures look like, what they provide and how you and your board can move forward in developing a healthy financial picture for your organization.
Terms to know about nonprofit finances
First, let’s break down what financial policies and procedures are and why your role as a fiduciary guides your actions at your organization.
Fiduciary responsibility describes the legal and ethical requirement that board members act in the interest of the organization rather than to their own benefit. Fully understanding the board member role as fiduciary is a necessary underpinning to all future board activity and should be a part of every member’s onboarding process.
What is a financial policy? A financial policy is a formal description of how your board handles issues like paying down debts, allotting cash reserves, who can handle money and how you deposit and withdraw funds. The goal of financial policies is to protect donor funds, promote financial stability and hold the board and executives accountable for financial expenditures and oversight.
What are financial procedures? While financial policies are the “what” of financial management, financial procedures are the “how”. Financial procedures are a collection of statements that describe how to handle funds. They include actions such as:
- Receiving and endorsing checks
- Documenting cash and preparing cash receipts
- Storing deposit and withdrawal slips
- Training staff and volunteers on following financial policies
- Authorizing people to open accounts, sign checks and more
- Borrowing funds and establishing lines of credit
- Detailing prohibited financial practices
- Handling online payments, petty cash and credit and debit cards
Why your nonprofit needs financial policies and procedures
Your nonprofit board may be tempted to overlook the need for formal financial policies and procedures, particularly if your organization is small or fairly inactive. That’s a risky choice for any nonprofit. The purpose of financial policies is to clarify the roles, responsibilities and authority that are necessary for making responsible financial decisions for your organization. Without the benefit of having financial policies, your nonprofit operates off assumptions by default. These assumptions can be a source of great conflict for your board.
Your board is responsible for tracking incoming and outgoing funds. Donor funds must be used for the good of your organization. Without the benefit of financial policies and procedures, your organization’s money could be lost, stolen or embezzled (which happens more than you’d like to think). Some donors place restrictions on how your nonprofit can use their funds. If you overlook the restriction, it could cause legal problems for your nonprofit. Also, you’ll stand to lose credibility with your donors.
With detailed financial policies and procedures in place, your nonprofit reduces risks associated with financial management. If there’s ever a question about a financial issue, your policies and procedures stand as a guide for how things should be done.
Prepare for the unexpected with our budget planning guide
Navigating the unpredictable is part of every nonprofit board’s journey. That’s why “Expecting the unexpected: A nonprofit’s guide to planning for non-budget items” is an indispensable resource for your organization. This guide equips your board with the tools and knowledge to effectively manage unforeseen expenses and maintain financial stability. Download our guide today and transform how your nonprofit anticipates and handles unexpected expenses.
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Sample nonprofit financial policies
Financial policies are useful as a guideline for accepting gifts, dividing duties, authorizing financial transactions, obtaining proper receipts and disbursing funds.
Your financial policies may be as broad or detailed as you think you need. It’s a good idea to review your financial policies (and all your policies) at least annually and revise them as you see fit. You can always revise your policies by a board vote if you run into a situation that prompts you to change the policy right away.
Who establishes your financial policies? Ultimately, your board is responsible for developing, implementing and overseeing financial policies. It’s common for boards to take up the task, but your board could just as easily delegate the task to a financial planning committee.
The individual or group that’s developing your financial policies should keep the following key components of financial policies in mind:
- Assigning authority for financial actions and decisions
- Delegation of authority for financial decisions and transactions to staff and volunteer leaders
- Procedures for conflicts of interest and insider transactions
- Procedures for authority to spend funds and write checks
- Procedures for managing payroll
- Assignment of authority to enter into contracts
- How financial records are to be documented
To get an idea of some examples of nonprofit financial policies that nonprofits have developed, check out these links for sample financial policies and procedures:
Sample nonprofit financial procedures
Accounting and reporting are central to nonprofit financial procedures. Your board may require, or at least make it a practice to hear a reporting of the organization’s financial position and statement of activities at every board meeting.
Financial procedures include statements for how to manage:
- Cash-flow statements
- Statement of activities
- Statement of financial position
- Reports of assets
Many nonprofits combine their financial policies and procedures into one manual, and that’s perfectly acceptable. The University of Southern Maine and Family Advocacy Network (via Nonprofit Financial Commons) provide some sound examples of nonprofit financial procedures. The Nonprofit Association of Oregon offers a financial management self-assessment tool to help boards get started.
Tips for the board for financial management
Keep these key tips in mind as you move forward:
- Prioritize preventing conflicts of interest. The National Council of Nonprofits calls the conflict of interest policy “perhaps the most important policy a nonprofit board can adopt.” Not only should this policy be in place, but the board should review it regularly. Build annual surveys of the board to document organizations or individuals with whom board members have existing relationships.
- Assign authority for financial actions responsibly. Every nonprofit should have checks and balances in place to keep any individual from operating without oversight.
- Set egos aside when developing financial procedures. “Trust but verify” is an old Russian proverb that seems particularly fitting for financial policy and procedure development. While no one wants to hear that they could be suspected of malfeasance, it’s necessary to protect against any vulnerability, and that means evaluating every role and function at the organization.
- Create usable tracking and reporting. No matter your funding type — and most nonprofits have multiple sources — there are requirements for financial tracking and reporting. Understand the differences between being accountable to donors and foundations and being accountable to the IRS.
- Develop an annual review and revision schedule. Effective financial policies and procedures are no “one and done” effort. Both external changes (to laws and regulations) and internal (donor sources and staffing) will influence the evolution of the nonprofit’s practices.
Establishing financial policies and procedures will be well worth the time spent. And after they are approved by the board, you can make adjustments as you need to.
How technology like BoardEffect can help
Developing and managing your financial policies and procedures is simplified with a board management solution like BoardEffect.
BoardEffect provides a secure solution for your board or financial services committee to do the preliminary work of creating initial policies and procedures. During this process, board and committee members can view samples of financial policies and procedures by sharing them within the accessible, searchable document library. Others can mark them up, annotate them and highlight them within the software,e before passing them along to others through automated workflows and tracking. Your board management software makes easy work of what would otherwise be a lengthy, tedious process.
Going forward, these financial policies and procedures and all your other documents will be within easy reach of your board members from myriad devices, on their schedules.
No matter where your board is in developing and following financial policies and procedures, BoardEffect can help with tools and features necessary for adhering to the best practices of nonprofit stewardship. Set up a demo to see BoardEffect in action today.
