When it comes to financial stewardship, the board of directors plays an essential role in ensuring a nonprofit’s accountability, sustainability, and legal compliance. As fiduciaries, board members are responsible for setting the tone at the top which includes establishing and upholding policies that protect the organization’s mission and reputation.

One of the most effective tools for fulfilling that responsibility is a comprehensive set of financial policies. These policies clarify expectations, define key responsibilities, and provide a consistent framework for how decisions are made and documented. Said more simply, the policies explain the ‘why’ behind an action, providing the foundation for the financial procedures. Further, the procedures detail ‘how’ policy is implemented.

In this chapter of our Policies and Procedures series, I’ll outline topics that boards should consider for inclusion in their nonprofit’s financial policies along with key factors to keep in mind when drafting these policies.

Responsibilities

• Identify key responsibilities integral to effective segregation of duties for internal control
• Include what requires board approval or board review
• Identify who is responsible for ensuring policies are reviewed and updated as needed annually

Basis of accounting

• If GAAP (Generally Accepted Accounting Principles) financial statements are required for external users
• If there are other legal or compliance requirements
• What is the most cost effective method to meet external and internal user needs

Budgeting

• Who will participate in the budgeting process
• Timeline to facilitate approval by the board prior to the start of the budget year
• When are budget modifications appropriate and how will reporting be impacted

Cash receipts

• Based on the nature of the organization’s receipts, how does the board ensure all receipts are deposited and recorded in a timely manner
• What are the key duties that require separation

Cash disbursements

• What documentation and approval are required to authorize expenditures for payment
• What positions are authorized to issue payments
• If organization will have physical check stock

Credit cards and expense reimbursement

• Will the organization have credit cards
• Who authorizes the credit limit and authorized users
• What is the time limit and approval required for employee expense reimbursements
• What types of employee expenses can be reimbursed
• Should employee expenses require pre-authorization

Payroll

• How does the board ensure compliance with all employment laws and taxes
• What are the key duties that require separation to ensure payroll is accurate
• What is the optimal payroll period length
• What is the required rationale documentation for treating someone as an independent contractor versus employee

Journal entries

• Who is permitted to record journal entries
• What documentation or authorization is required to ensure journal entries are valid
• How frequently are entries posted
• Journal entries are applicable for what type of transactions

Independent reviews

• Who will complete documented independent review of bank reconciliations, monthly journal entries, payroll journal, and payment of payroll taxes
• What are the essential review items to be documented

Bank reconciliations

• Who is responsible for completing the reconciliation
• What is the due date for completing the reconciliation

Cost allocations

• Purpose(s) for allocating costs and the relevant regulations or rules
• What allocation methodologies are acceptable

Capitalization policy

• At what dollar amount is capitalizing versus expensing capital expenditures most cost effective for recordkeeping
• At what dollar amount is capitalizing versus expensing capital expenditures most effective for decision-making

Monthly closing process

• Will monthly financial statements be reviewed and approved by the board
• What is the appropriate timeline for having monthly reports available

Year-end closing process

• What is the appropriate timeline for having the fiscal year closed
• Is an audit or review required
• Who will prepare the annual IRS Form 990 and any related state forms

Computer authorizations

• Who will be responsible for authorizing and monitoring user access rights for all accounting software
• How frequently will the accounting software be backed up

Procedures

• What processes require detailed documented procedures and who is responsible to ensure the procedures are current

While it is easy for some to dismiss financial policies as simple formalities, they serve an important purpose, clarifying the roles, authority, and responsibilities for a nonprofit’s financial management and reporting. These tools help support transparency, consistency, and accountability across your organization by detailing the board’s expectations and providing the framework for your nonprofit’s procedures.

As your organization evolves, so should your policies. Make time for an annual review to ensure your financial policies remain aligned with your mission, operations, and funding environment. Regular updates also help reinforce your board’s fiduciary responsibilities and empower staff to follow sound procedures with confidence.

If your nonprofit needs support drafting or reviewing financial policies, our Nonprofit Advisory Services team is here to help. We work with organizations of all sizes to build custom policy manuals that reflect your values and support your goals. Visit our Nonprofit Training page to learn more about our Nonprofit Speakers Bureau board training and other educational opportunities.