Nonprofit Financial Policies and Controls a Small Organization Actually Needs

A request for written financial policies usually comes from outside: a funder’s application, a new treasurer asking who can sign checks, or the accountant preparing your Form 990 asking about a conflict of interest policy. It is tempting to download a 40-page manual and adopt it whole.

Most small nonprofits need far less. Of the leaders who apply to the Center for Nonprofit Coaching, 41% run organizations with operating expenses under $250,000 a year (67 of 152 in our intake data), where the executive director is often the finance team as well. This page, part of our guide to managing nonprofit finances, covers the short list and who owns each policy.

What Financial Policies Should a Nonprofit Have?

A small nonprofit needs two groups of written policies. The first governs how money moves: who can approve and sign, how cash comes in, who checks the bank account, and how the budget is approved and reported. The second covers governance: conflicts of interest, whistleblower reports, document retention and how the board sets the executive director’s pay.

The money policies come first, because money moves every week.

• Spending and signing authority. Who approves purchases, expense reimbursements and credit card spending, and who signs checks up to what amount. The Propel Nonprofits sample policy lets the executive director sign checks up to $2,500 and sends larger ones to the treasurer or board chair.
• Cash receipts. Every check and gift is logged on arrival and deposited intact, with donor-restricted gifts noted. Our overview of where nonprofit revenue comes from lists the sources to cover.
• Monthly bank reconciliation. Someone who does not sign checks compares the bank statement with the books every month.
• Budget approval and reporting. The board approves the annual budget before the year starts and sees budget against actual results at each meeting, laid out like an annotated sample budget.
• Reserves. A written reserve policy says how savings are built and who may spend them.

The governance policies are the ones Form 990 asks about.

• Conflict of interest, with an annual disclosure from board members and key employees.
• Whistleblower, naming who receives reports and promising protection from retaliation.
• Document retention and destruction: what is kept, for how long, and who may destroy it.
• Executive compensation process, tied to how the board evaluates the executive director.

Which Internal Controls Work With Two Staff?

Internal controls work with two staff if no single person authorizes, handles and checks the same transaction. Split the four money jobs: keeping custody of cash and checks, approving payments, carrying them out, and monitoring the bank account. When the staff is too small to separate them, a volunteer treasurer takes the monitoring job.

Those four roles come from a guide to financial controls for small nonprofits by Cindy Cumfer, hosted by the City and County of San Francisco for organizations without an administrator with financial expertise. It also bars the treasurer who reconciles the bank statement from signing checks.

Some executive directors fear the board will read controls as distrust. The San Francisco guide names the opposite risk: that “someone may be falsely accused of stealing funds.” A reconciliation done by someone else is the record that clears you.

Controls protect the executive director as much as the money.

An illustrative example, with round numbers: a $180,000 youth program run by an executive director, a part-time program coordinator, a contract bookkeeper and a volunteer treasurer.

1. The coordinator opens the mail, logs every check and prepares the deposit.
2. The executive director approves bills against the budget and signs checks up to the board’s limit. Above it, the board chair signs too.
3. The bookkeeper records transactions and neither approves nor signs.
4. The treasurer gets the bank statement straight from the bank, with read-only online access, and reconciles it monthly.

That monthly reconciliation is the core of what the treasurer should review.

Who Owns Each Financial Policy?

Each financial policy has four owners: someone who proposes it, the board that approves it, the person who runs it day to day, and someone who checks that it is followed. In a small nonprofit the executive director usually proposes and runs most policies, the treasurer or finance committee checks them, and the full board approves.

The Internal Revenue Service (IRS) instructions for Form 990 count a policy only if the board, or a committee it authorized, adopted it by the end of the tax year. In the strongest board and executive director partnerships CNPC sees, both sides can say where governance ends and management begins. Written policies put that line on paper. One workable split, to check against your bylaws:

What Does Form 990 Ask About Your Policies?

Form 990 asks in Part VI whether you have a written conflict of interest policy, a whistleblower policy and a document retention policy, how you set the executive director’s pay, and whether every voting board member received the return before filing. The IRS says federal tax law generally does not require these policies, yet every filer must answer.

The full Form 990 is filed by organizations with gross receipts of $200,000 or more or total assets of $500,000 or more. Smaller organizations can file Form 990-EZ, or the Form 990-N e-Postcard if gross receipts are normally $50,000 or less. The IRS says whether to adopt each policy depends on an organization’s size, type and culture.

Line 15 asks whether the board or a compensation committee approved the executive director’s pay without anyone with a conflict involved, using data from comparable organizations and a written record of the decision. Line 12 asks whether officers, directors and key employees disclose possible conflicts every year, and how the policy is enforced. Line 19 asks whether you make your governing documents, conflict of interest policy and financial statements public.

How to answer each line is your accountant’s call. The leadership job is getting the policies adopted first.

How Do You Get Ready for an Audit or Review?

Start by finding out whether you need one. A single audit is required once you spend $1,000,000 or more in federal awards in a fiscal year, and state charity rules such as California’s add a revenue threshold. Check your grant and loan agreements too. Then keep the records your policies produce, filed by month, in one place.

The federal rule is the Uniform Guidance at 2 CFR 200.501. California, for example, requires audited financial statements from charities with gross revenue of $2,000,000 or more, not counting government grants and contracts for services, according to the California Attorney General’s Guide for Charities. Form 990 Part XII then asks whether an independent accountant compiled, reviewed or audited your statements.

Each policy leaves a record: signed reconciliations, approved invoices, board minutes approving the budget and policies, conflict of interest forms, and grant agreements with any restriction letters. When the report arrives, our guide to reading audited financial statements shows what a leader should notice.

How Do You Bring Policies to the Board?

Bring policies to the board in stages, a few at a time, so each one gets a real discussion. Draft each policy with the treasurer, explain in a short memo the risk it addresses and who owns it, ask for a vote, and set a date to review it.

Propel Nonprofits adds two steps: an informal risk assessment before drafting and staff training after adoption. A one-page cover memo for each policy keeps the board discussion short.

1. The risk it addresses, in one sentence.
2. Who proposes, approves, runs and checks it.
3. What changes for staff, and from when.
4. The vote you are asking for.
5. The date the board will review it.

If budget approval needs rebuilding too, the guide to building an annual budget covers the approval calendar.

Which Policy Should You Adopt First?

Adopt signing authority and the monthly bank review first. This week, ask your bank to send the monthly statement directly to your treasurer and to give the treasurer read-only online access, then put a one-page signing authority policy on the next board agenda. Those two changes separate the person who spends from the person who checks.

The Center for Nonprofit Coaching is not an accounting firm, and when a problem needs technical work, such as restructuring a chart of accounts, we say so during matching. What a coach can help with is the leadership side: what to propose first and how to open the conversation with your board, through one-on-one coaching for executive directors.

Six coaching sessions cost $300, $400 or $600 for organizations with operating expenses under $250,000, under $500,000 or over $500,000 a year. Volunteer coaches donate their time, which keeps fees 85%+ below market rate. For a thinking partner on that board conversation, apply for coaching.

Frequently Asked Questions