Developing Financial Policies

Each month, Nonprofits Assistance Fund hosts the Financial Management Network.  These free, informal gatherings are opportunities for members of the nonprofit community to get together to discuss different financial topics and network with peers. Key takeaways from these discussions will be posted and form an archive to help promote healthy financial practices.

Notes from Developing Financial Policies (Feb 25, 2009)

Financial policies are always important, but this discussion is especially timely, with the new 990 and with new calls for transparency and accountability in this economic environment. Financial policies protect staff, reassure donors, and contribute to the overall financial health of your organization.

General Information

Developing a Policy for the First Time

  • Many universities have detailed policies online that include every policy point you can imagine
  • Contact your nonprofit peers to see their examples
  • As you develop a policy, send a draft to your auditor for review. He or she can help identify any holes.

Policies should be Proactive and Preemptive

  • When developing policies, focus on the organization and rules within the organization - not on individiuals
  • Policies help protect staff if money goes missing

Policies versus Procedures

  • Procedures and policies are often confused
    • Policies are statements on end results
    • Procedures are steps to achieve the policies
  • Make sure there are procedures in place to make the policies work

Internal Controls

  • Establish authority for financial tasks
    • Example:
      • You could require a second signature on checks over $500.
      • For checks less than $500, a second person could review the check images on bank statements.
  • Segregation of duties: more than one person should be involved in each financial transaction
    • Check signing, reconciliations, opening mail, etc.
    • Get non-financial staff involved
      • For example, our marketing person opens the mail
    • Board members can be involved
    • Make clear who is responsible (staff positions change)
    • Your auditor will look for segregation of duties
  • Remember to monitor outside purchases, reimbursements, and payroll
  • Establish an organizational culture of accountability
    • A second check signer is not effective if he or she signs off without looking carefully

Communicate Policies to Staff

  • Everyone needs to know that there are policies in place and that staff are supported
  • Responsibility should be on all staff
  • Policies may not seem relevant to some staff members, but it is better for them to have more info rather than less
    • Everyone should know policy, but may not need to know detailed procedures
    • Staff should know why certain procedures, such as the check request process, are in place
    • A fun scavenger hunt through the policy can make it more interesting
  • Establish an organizational culture of accountability, diligence, and not cutting corners

The Revised 990

The new IRS Form 990 asks if your organization has specific policies in place.

  • Remember that the 990 is an opportunity to show off the good work of your organization
  • The 990 justifies spending time to create policies
  • New Policy Requirements
    • Conflict of interest policy
    • Whistleblower policy
    • Written document retention and destruction policy

Specific Policies

Whistleblower policy

  • Should include a "no retaliation" clause stating that employees can report concerns-in good faith-without retaliation
  • Can send employees to an outside person to avoid problems between staff
  • In Touch, a free call-in line for nonprofits, will make an anonymous case number for each report

Record retention policy

  • The IRS requires that you keep certain documents, and lets you destroy others
    • Must keep original application for 501(c)(3) status
  • Digital records are an emerging issue
    • Some nonprofits may not have the resources to pay for servers to keep records
    • Can passively save all email, or make employees archive their own emails

Management and operational policies

  • These policies allow decisions to be made one time, rather than over and over.  This should facilitate situational decision-making.

Gift acceptance policies

  • Determine what gifts are appropriate for your organization
  • Include policies for gifts of real estate and stock
  • Include policies for donor-restricted gifts

Cash reserve policies

  • Policies should cover size and purpose of reserves, authority to use reserves, and how to replace reserves
  • Many organizations are struggling in this economy and are using cash from their reserves
  • A reserve can be a source of internal borrowing, allowing you to avoid the costs and fees of borrowing from a financial institution. As with an outside loan or line of credit, you should determine how you are going to pay the funds back into the reserve.

Investment and endowment policies

It is especially important to have stock and investment policies in this economy, when investment decisions may be questioned.
  • The 2006 Uniform Prudent Management of Institutional Funds Act (UPMIFA)  provides standards for managing and investing funds
  • Endowments are permanently restricted funds
    • Can spend it out, resulting in an "underwater endowment," but you must track amount of corpus
    • Make sure board understands the purpose of the endowment, so they can provide strategic guidance and long-range thinking
    • In difficult times, some people within an organization may want to use endowment funds to pay for operating expenses.
    •  Establish an organizational culture where decisions are weighed fully.
    • Take organizational loss from unrestricted funds if possible

Interested in Learning More?

View our Resource Collection or check out the Discussion Archive for notes from other Financial Management Networks.

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