When we work with an organization, we stress the importance of good governance and operating ethically. This is of the utmost importance as organizations work to build trust with their communities and their stakeholders. One area where nonprofits and ministries sometimes struggle is in the area of financial oversight.
While many nonprofit leaders do not relish the idea of developing financial documents, they are a must! So that the organization may meet its legal requirements, complete financials 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.
There are three primary documents that are essential for financial oversight—
- Budget – A budget is a forward-looking document that projects how the organization will spend its financial resources in the upcoming year. The budget also provides an overview of how funds will be obtained (donations, grants, special events, etc). The budget is a planning document, it is important to recognize and understand that as a planning document, everything may not go as planned and changes may be necessary.
- Financial Statements – Financial documents that are prepared on a regular basis to give an up-to-date picture of the financial situation of the organization. It is a best practice to provide financial statements to the board of directors monthly—even if the board meets on a less regular basis.
- Audit – An annual audit is a backward look at the financial activity of the organization and is conducted by an independent CPA.
It is recommended by accountants that all organizations use Generally Accepted Accounting Principles (GAAP) in the management of their finances. 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.
An additional 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.