The Importance of Nonprofit Fiscal Procedures – How to Get Started
Imagine trying to find buried treasure, but you do not have a map where “x” marks the spot. You could wander aimlessly in circles trying to figure out where to start. This is what happens when nonprofits do not have strong fiscal procedures in place to support staff and board members. Such procedures act as a “treasure” map to managing the organization and takes the guesswork out of responsibilities. Perhaps the most important roles of the procedures are establishing the internal control framework for an organization and also ensuring compliance with legal, donor, and grant requirements. If every new employee and/or volunteer is trained using the procedures established, everyone has the same knowledge of the organization and can more easily step in to assume duties in cases of unexpected absences. Now that we know the importance of fiscal policies and procedures, let’s discuss how to get started.
The basic framework of the fiscal procedures should include accounting processes. When compiling the procedures, the organization should determine whether there are proper monitoring processes in place. The procedures should also address proper segregation of duties (segregation of custody of assets, ability to authorize use of assets, and recordkeeping). Having separate employees perform these three duties ensures proper oversight and helps to prevent fraud or theft by decreasing the ability of one person to hide a transaction. Some examples of accounting processes include: budgeting and reporting, revenue and accounts receivable, expense and accounts payable, and asset management. This list is not all inclusive, but includes the basic processes present in most organizations. Organizations who receive grant or contract revenue would have a more robust revenue and accounts receivable procedures and could also include compliance requirements.
This task may seem daunting and time consuming and it can be. One of the best approaches is to take the time to interview finance staff, the executive director, and Board members involved in fiscal procedures and document what is currently being performed. Once this is documented, go through your procedures to determine if your organization has proper segregation of duties or if there are any areas that are weak in oversight. Starting with what you already have is less exhausting than starting from scratch, both for the person creating the procedures and for those who will need to implement any new ones. Let’s walk through a sample for bank reconciliation procedures.
“The bank statement is reviewed by the executive director, who delivers it to the finance manager to prepare the bank reconciliation. The executive director reviews the bank reconciliations and approves.”
Here are some questions to consider regarding the bank reconciliation procedures as they are written above:
1) How is the bank statement delivered to the executive director? Is it downloaded online by the director him/herself? If it is mailed, is it delivered still sealed to the reviewer?
2) What exactly is the executive director reviewing when they look at the bank statement? Does the review include electronic transactions and cancelled checks?
3) How is this review documented? Does the executive director initial and date?
4) What does the executive director look at during the bank reconciliation review? Are they looking for stale checks or unusual journal entries?
This is also the perfect time to consider segregation of duties. If, in our example, the finance manager had rights to sign checks and there was no other review of the bank reconciliation, it would be time to implement oversight. As you can see, the procedures can get detailed but this is necessary to ensure internal controls are easy to follow, no matter if the executive director has been with the organization for years or for a matter of weeks.
Once the fiscal procedures have been drafted, each key employee and the board of directors should review. The board should approve the procedures. These procedures should be reviewed regularly and new procedures should be drafted and approved as the organization has new circumstances arise, such as a capital campaign or new grant sources.
If your organization has any specific questions regarding fiscal procedures, please contact one of our non-profit specialists.