What financial policies should a nonprofit have in place?

stack of policies inside file folders on desk

By: Whitney Hodge

Published: January 13, 2022

Financial Policies are an extremely important part of any business, and not-for-profits are no different. Arguably, the rules are even more important!

So, with so many details regarding the type of payments received and exactly who the individuals are responsible for receiving, counting, and depositing the money, you need to ensure that your organization is doing everything correctly. 

The common areas where we understand organizations require help on their policies are:

That is why we have put together this guide which we have made as easy to understand as possible.

Let’s get into it!

In-kind donations

This term refers to transactions that don’t involve cash gifts, such as goods, services, time, or expertise. You would expect to receive these types of donations from companies, organizations, and individuals.

Examples of this type of “gift-in-kind” donation include:

  • Food to a local food bank.
  • Social worker assistance and expertise.
  • Volunteers at an animal shelter.
  • Discounted or free use of spaces for work purposes.
  • Tangible items like computer hardware/software, office supplies, medical supplies.
  • Intangible items like copyrights, securities, or patents. 

According to Generally Accounted Accounting Principles (GAAP), all contributions—including in-kind—must be recorded as revenue upon receipt. The same goes for goods and services for the same purpose of enhancing your non-financial assets. 

This is because the donations are valuable to your organization’s mission, and services can replace those which would usually be paid for.

Any donation you receive needs to be properly documented. We would recommend putting in a standardized procedure of recording all details of the gift received, including how the value was determined, using some type of form.

If the gift is valued below $14,000, it will be considered by the IRS as un-taxable.

It is important you evaluate how receiving these goods and services will impact your organization. If the inherent financial responsibility associated does not match up with the value you get from it, it is best to say no to the donation.

Cash disbursements

Cash is an area where there can be a high risk of error and fraud when it comes to non-profits. 

There are a large number of controls required for cash disbursements and each control needs to be evaluated regularly to detect and remove the risk of error or fraud.

Bank statements and other correspondences from the bank must be reviewed by an individual in your organization that is not involved in the activity reported on the bank statements. That means ideally from a different department.

You need to ensure that bank accounts are reconciled promptly each month and it is best practice to review your banking arrangement annually with the board officer or committee responsible for the financial oversight of your organization.

With regards to cash receipts, your deposits must be made daily. 

Any checks received by your organization need to be immediately endorsed as “for deposit only account number XXXXXX. The checks need to be logged and sent with a copy of the checked log for processing. This allows for all check logs to be verified by your bank records.

Whenever possible we would advise using a lockbox service with your bank. This service simplifies the collection and processing of accounts receivable by having the customer payments to the organization mailed directly to a location accessible by the bank.

Cash disbursements are handled in a similar manner to bank statements. That means the stock is secured and controlled by persons in your organization who are involved in different roles to those relating to the money received. 

The cash disbursements must be approved by operational staff and control the signing of checks manually after reviewing the supporting documentation. Electronic signatures can only be accessed by authorized persons. 

Signature cards also need to be updated if an individual leaves the organization, and voided checks need to be destroyed. 

Each month, all outstanding checks need to be reviewed with appropriate action taken, and this also applies to electronic payments.

Gift acceptance policy

Gift acceptance can be a tricky business in managing the expectations of donors, treating them with due respect, and maintaining standards for your organization. With board and staff members being involved potentially, a solid policy can also provide guidance which is particularly important for those who are either asking for or are on the receiving end of contributions. 

Let’s take a look at some of the most important reasons for adopting a gift acceptance policy:

  • You want to ensure that all gifts you are receiving are in line with your organization’s values. The policy can provide clarity on exactly why you may or may not accept a gift.
  • Some gifts can be more difficult to manage than others, and in the case of use, disposal or maintenance, you want to inform potential donors of your policy clearly. Examples would include receiving outdated computer equipment that would need to be disposed of, or likewise computer equipment that far exceeds the capabilities of individuals working in your organization.
  • Some gifts can require legal obligations that a nonprofit is unable to match, such as the gifts of property or motor vehicles that can lead to additional tax obligations or licensing issues. 

You might want to familiarize yourself with the IRS Form 990 which asks whether a nonprofit has a gift acceptance policy, to which you must respond “yes” in order to complete the Schedule M. You must also report any non-cash contributions/in-kind gifts.

By putting in place a written policy that is approved and adopted by the board, you will allow for a smoother and more efficient process of gift acceptance by ensuring volunteers and staff are consistent in their handling of unanticipated situations. 

It can also help to make potentially awkward front-line situations with strange gift donations less personal to avoid any potential backlash. For this reason, you should strongly consider adding the policy to your nonprofit’s website to help manage donor expectations.

Reimbursement of Travel Expenses for Board Members

While there are no laws that explicitly prohibit a charity from providing compensation to board members for their board service, the majority of public charities do not compensate board members. 

Reasonable and necessary expenses incurred for activities relating to their nonprofit board work are more likely to be reimbursed. These activities can include travel expenses for attending meetings such as the cost of parking. Board members may instead choose to deduct mileage from their personal income taxes as a volunteer-related expense. 

Any reimbursement that is made should be in line with the nonprofit’s policies for staff on travel and meeting expenditures.

If you do not currently have a policy in place or are looking at revising yours, the IRS has issued a white paper on Governance Related Topics for 501(c)(3) organizations that discuss executive compensation. It also refers to compensation for officers and key employees.

Equally, if you are looking for policy guidance that is more specific to the requirements of your nonprofit organization, we are here to help.

Review of the Executive Director’s Compensation

The role of establishing the salary and benefits for the Executive Director of a nonprofit organization falls on the board of directors. It is their responsibility to establish “reasonable and not excessive” compensation—that appeases the IRS requirements—while being attractive enough to attract highly talented and qualified candidates for the position.

This three-part process is known as the “rebuttable presumption”:

  1. It is recommended that the board of directors conducts a review of peer organizations of a similar size, with similar missions and budget size, and being in the same geographic area, all of which must be documented. This way you can determine a level of compensation that would be appropriate to offer senior leaders in your organization. This data can be obtained from salary and benefits surveys.
  2. The compensation arrangement must then be approved in advance and by an authorized body of the organization. This is often referred to as a “compensation committee”, and none of the persons on this committee can be in receipt of the compensation. You can also use the executive committee or another sub-group/task force of board members.
  3. The board or independent body conducting the review should document everyone involved, including how they do not receive compensation from the nonprofit—their “independence”—and the process used to conduct the review. They must also include the disposition of the full board’s decision to approve the executive director’s compensation for which minutes from the meeting will be suitable. Simply put, the documentation needs to demonstrate that the board has considered the comparable data when approving the compensation.

It is highly recommended that you adopt a written policy that requires the full board to approve the compensation including salary AND benefits. 

Policies on how excess funds are invested

Contrary to what you might have thought, nonprofits can make a profit and complete the fiscal year with an excess in the budget. This will occur when the revenue earned exceeds expenses for the year, and this can be very beneficial for a nonprofit organization.

This is because it can afford the nonprofit an opportunity to get ahead for the upcoming year, plus breathing room to plan for times when there may be a drop in donation or unforeseen costs and expenses. 

The question is, how will the money be reinvested back into the organization? Well, there are a number of ways to do this:

Paying debts

During a stronger financial period, some nonprofit organizations may choose to pay outstanding debts that have accumulated over the years. It is important that you consider forecasts for the subsequent periods to ensure that you are making a calculated decision to pay off debts now. 

Incentivize employees

While you are not able to funnel the surplus cash back to board members or faculty staff, nonprofits are able to officer incentives to staff. If the incentives are not considered to be based on profit goals, nonprofits are allowed to provide their staff with incentives where they are able to earn additional compensation. 

Re-invest

Realistically, this is the first place a nonprofit will consider putting the surplus. This additional investment can help to improve the effectiveness of the organization and the ability to fulfill its mission. 

Build a financial cushion

The surplus can also be put aside as a finical reserve. While nonprofit budgets are not monitored by board members, they are by the Better Business Bureau Wise Giving Alliance whose check and balance system monitors how charitable organizations operate. In order to be in compliance with the BBB Wise Giving Alliance standards regarding charity accountability, a non-profit is not allowed to accrue a reserve that totals more than three times the annual budget. 

This is a stage at which you may want to consider a nonprofit audit to ensure you are operating within regulations. 

If you require any assistance regarding cash management, in particular, what to do with a surplus of cash at the end of the fiscal year, you can contact our team and we’ll be happy to advise you.

Endowment policies

An endowment is generally described as assets—investment vehicles—that are set aside so that the original asset (aka the “corpus”) can grow over time as a result of income earned from interest on the underlying invested funds. This corpus can also be added to over time. 

While endowments are usually used by large institutions, such as universities and hospitals, they can also be utilized as a part of any charitable nonprofit’s financial management and/or revenue strategy.

It’s important to note that an endowment is not the same as “reserve funds” because it implies that some (or all) of the use is in some way restricted. They are primarily designed to keep the principal corpus intact so it can steadily grow over time while allowing the nonprofit to use the income generated from the annual investment for programs, operations, or specific purposes. 

When creating an endowment, it is best practice to support it with guiding documents to specify intent or create a corporate resolution by the board of directors to establish guidelines. This is what we mean by “restrictions”.

Before creating an endowment, you’ll need to consider that your organization may want to inform the community or donors that it is thinking about building long-term assets for future sustainability, allowing any concerns to be voiced.

The endowments growth and subsequent annual income will depend on how well the underlying investment performs. The board of directors may not want full responsibility for the oversight of the funds market performance. In this case, a nonprofit may consider hiring an investment firm or financial manager for other/better recommendations. 

Conflict of interest policy

Because of the board’s fiduciary duty to ensure assets are used in accordance with the charitable purpose of the organization. 

A policy on conflicts of interest should require that individuals with a conflict—or the potential for one—must disclose it, and to prohibit interested board members from voting on any matter in which there is a conflict. 

The nonprofit must also determine how the conflict will be managed. This is evident in the IRS Form 990 requirement for the process to be disclosed, and how they can determine whether board members have conflicting interests. 

Be aware that unmanaged conflicts can result in significant penalties known as “intermediate sanctions” that are assessed against the beneficiary and the organization. 

The goal of your organization should be to raise awareness of the importance of the subject and encourage full disclosure and discussion on anything that can possibly be a conflict. Encouraging a “culture of candor” is a must. 

Conflicts can often be nuanced and have less to do with financial conflict and more to do with a “duality of interest”. It is advisable to take time at least once a year to discuss these types of situations during a board meeting, and then discuss how the board would manage a potential conflict. 

You can consider circulating a questionnaire each year to discover whether any board or staff members may have a conflict of interest. In this, you should request that individuals disclose any current conflicts and that they must make the organization aware of any conflicts in the future. 

Non-profit financial help

We are strong believers in working with nonprofit organizations to help alleviate financial concerns and empower them to continue providing hugely valuable services to different communities. 

That is why our specialist team is available to handle the financial responsibilities of your organization. 

To make things even easier, our entire operation is online meaning that you can schedule a consultation with us at any time and we are available to help regardless of your location. 

Click here to learn more about our non-profit services. 

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