For the past several weeks, we have been discussing governance and ethical behavior within nonprofit organizations. Thus far, we have discussed legal standards and effective governance. This week, we will be discussing financial oversight.
While many nonprofit leaders do not relish the idea of developing financial statements, they are a must! So that the organization may meets its legal requirements, complete financial statements are necessary. They are also necessary for the board of directors so that they can provide oversight of the finances and make strategic decisions based on the information contained within. It is recommended by accountants that all organizations use Generally Accepted Accounting Principles (GAAP) in the management of their finances.
Nonprofits should also plan to have an external auditor (i.e., accountant) audit the finances of the organization on an annual basis. Smaller organizations may not need a full audit, but instead should have a financial review. The purpose of both an audit and financial review is to ensure that the financial resources of the organization are being used appropriately.
Another function of the board of directors is to develop policies and procedures related to finances. Such policies may include who has permission to make spending decisions and at what threshold as well as how funds will be invested. Written policies should dictate the day-to-day management of receiving money and spending it.
Occasionally, a board member may come to the organization seeking a loan for personal reasons. This is never a good practice and should be avoided. While not illegal in all states, many states do have laws against this practice.
Every organization should have a board-approved annual budget. It is important to have the Executive Director be included in the development of the budget as he/she will be responsible for implementation of programs and services; however, it is ultimately the responsibility of the board to ensure the organization has the resources it needs to fulfill its mission and to approve the budget.
Does your organization have written financial policies? Now may be the time to develop them. We can help you get started. Feel free to contact us.
Next week, our focus will be on Fundraising Best Practices.