Regardless of your nonprofit’s size and no matter what types of services it offers, it’s essential to adopt financial policies and procedures. There are many benefits for your nonprofit in having formal financial policies and procedures. More importantly, there are great risks in failing to establish them.
When it comes to cash flow, it’s usually feast or famine for many nonprofits. Even the most financially stable nonprofits can have periods of poor cash flow or experience occasional deficits. While nothing is certain in the world of nonprofits, having good financial policies and procedures helps to demonstrate that your nonprofit is handling your finances responsibly. That’s something that your donors are looking for when they choose to support your organization—or not.
If your nonprofit is lacking in the area of financial policies and procedures, it will help your board members to understand the definitions of financial policies and procedures and review sample financial policies and procedures to ensure your organization is financially healthy and sustainable for the long term.
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 very 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. Assumptions aren’t accurate or productive, and they 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. 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 the donor and other donors as well.
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.
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. Financial procedures outline how to handle financial practices for things like:
- 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, etc.
- Borrowing funds and establishing lines of credit
- Detailing prohibited financial practices
- Handling online payments, petty cash, credit cards, and debit cards
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.
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. These organizations provide some sound examples of nonprofit financial procedures:
Until you have your financial policies and procedures established, you have a bit of work in front of you. It will be well worth the time and effort you spend on this process. Once you document your financial policies and procedures and have them approved by the board, you can make adjustments as you need to.
Managing your financial policies and procedures is easy enough for your board when you use a board management system by BoardEffect. Here’s why. Your board portal offers a secure platform for your board or financial services committee to do the preliminary work of fleshing out your policies and procedures. Board and committee members can view samples of financial policies and procedures by sharing them within the security of the platform. Others can mark them up, annotate them, and highlight areas of importance before passing them along to others. Your board management makes easy work of what would otherwise be a lengthy, tedious process.
With access to unlimited cloud storage, your financial policies and procedures and all your other documents will always be within easy reach of your board members. Moreover, your board management system gives your nonprofit board all the tools it needs to facilitate all of your board activities and help you reach your goals and objectives in light of helping your community.