I am starting this series of progressive articles to communicate financial management best practices for nonprofit organizations to all who may find them useful. This is a starting list compiled from our knowledge of practices in general use and from our years of practical experiences working with nonprofit organizations. It is my objective to add to the list periodically and maintain a master catalog of practices, related policies and useful information on the website as a resource to nonprofit managers.
1. The Board of Directors understands its financial oversight responsibilities.
2. The Board elects a Treasurer who oversees the organization’s finances and ensures that financial results are accurately reported to the directors monthly or quarterly.
3. The Board appoints an Audit Committee with a qualified chairperson and members that appoints and evaluates the independent auditor.
4. The CEO or Executive Director understands how to read and interpret financial reports for nonprofit organizations.
5. A qualified financial or business manager reports to the Executive Director and is responsible for establishing, maintaining, and performing financial policies and procedures of the organization.
6. Have in place a system of internal controls to safeguard assets and ensure data accuracy.
7. Have a financial policies and procedures manual.
8. Prepare an annual budget with Board participation and approval.
9. Prepare a multi-year financial plan that supports the organization’s strategic plan.
10. Maintain a chart of accounts that reflects the internal and external reporting needs of the organization (assets, liabilities, restricted and unrestricted net assets; and revenues and expenditures further classified by department, program, project, grant, etc.).
1. Recognize revenue streams on the accrual basis (when earned) to the extent practicable.
2. Distinguish cash and non-cash contributions (in-kind, volunteer time, bartered exchanges).
3. Track contributions by source and show as unrestricted or temporarily restricted.
4. Assign responsibility and have a system in place to render accurate and timely invoices or billing statements to members and other contributors.
5. Ensure that the responsibilities for receiving, depositing, and entering cash receipts are defined and that checks and balances are in place.
6. Accounts receivable are actively monitored for collection, adjustment and write-off; and are reconciled monthly to the general ledger.
Expenditures and Disbursements
1. Authorities, responsibilities, and approval levels for purchasing and contracting are defined.
2. Expenditures are recognized on the accrual basis (when product or service is received) to the extent practicable.
3. There is a system in place for timely processing of vendor invoices for approval and payment, and accounts payable are reconciled to the general ledger monthly.
4. There are guidelines for employee business travel and entertainment.
5. Authorities are responsibilities are defined for preparing, signing, voiding and mailing paper checks, and making electronic payments.
Specific Assets and Liabilities
1. Cash accounts are set up in the general ledger for each bank account, cash flow is managed to maximize operational efficiency, and bank accounts are reconciled to the general ledger monthly.
2. Cash reserves equal to 3-6 months operating needs are maintained.
3. Guidelines are established for investing excess funds.
4. Guidelines are established for capitalizing, recording, and safeguarding fixed assets, and accounting for depreciation monthly.
5. Guidelines exist for recognizing accrued liabilities and deferred revenue.
Financial and Tax Reporting
1. The standard financial statements consisting of a Statement of Financial Position (Balance Sheet), Statement of Activities (Incomes Statement), and a Statement of Cash Flows) are prepared monthly not later than 10 calendar days after period end.
2. A Statement of Revenues and Expenditures compared to previous year and compared to budget are prepared for the organization and by department or responsibility center.
3. A Statement of Functional Expenses is prepared showing year-to-date expenses classified as to program, administrative and fund raising.
4. The IRS Form 990 tax return for tax-exempt organizations is prepared and filed not later than three months following the end of the fiscal year.
1. The organization prepares an annual operating budget with participation of the department managers and review by the Board Finance Committee.
2. A separate annual budget is prepared for capital improvements.
3. The operating budget is used to monitor and control performance with rules in place for authorizing departures and revisions.
4. The Board of Directors Audit Committee hires and evaluates the independent auditor per adopted guidelines.