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Systems & Procedures

No matter how small your organization is, following solid financial management procedures makes good sense. Doing so helps ensure the staff and board of the organization are fulfilling their stewardship responsibilities and makes it more likely the organization will be sustainable for the long term and able to continue to fulfill its mission. Establishing and regularly updating good financial policies and procedures when the organization is small positions it to grow smoothly without needing to completely redesign its financial operating systems.

There is abundant detailed information about accounting systems and procedures, and examples of finance-related policies, available elsewhere on this website and on many others. Below are key principles and some basic tips for small and midsized organizations to consider.

Key Principles:

• The board and staff should adopt a set of policies that clearly state the organization’s expectations for transparency and accountability for all finance-related functions.
• Procedure manuals will document financial processes to promote good internal controls. Board members and senior staff will ensure procedures are being followed. An effective manual will be specific, include who is responsible for each action, and require every recorded financial transaction be matched to adequate supporting documentation. The manual should be updated regularly.
• Having a written financial procedures manual is critical to good risk management. It institutionalizes how your organization operates, so that information won’t vanish if your key administrator wins the lottery and goes to (pick your dream place), after leaving your organization a nice parting gift, of course.
• Sufficient investment in infrastructure must be made to enable staff to perform financial operations effectively. This includes hiring skilled personnel with adequate training in nonprofit finance and accounting practices and acquiring and maintaining up-to-date hardware and accounting software. Even very small and volunteer groups would do well to seek the most capable person to handle the finances and ensure the group is in compliance with required nonprofit reporting and filing.

Procedure Tips for Small and Midsized Organizations:

Ensure Transaction Coding and Approval
Coding a transaction means that, in addition to the usual contact data and reference document ID for a vendor or income source, someone has noted other information critical to accurately recording the transaction into the accounting software. These additional data elements include what income or expense account(s) the transaction is assigned to, what activity(ies) it pertains to (program(s), management, fundraising, etc.), and what grant (if applicable). The memo section will briefly describe the purpose of the transaction. An organization might design internal processing forms (paper or electronic) that include all of the data fields needed to ensure complete information and coding for each transaction. Including a place for an approval signature before processing will help to achieve good internal controls. As noted, this can all be accomplished electronically, by establishing the set of data requirements (e.g., account, activity class (purpose), relationship to a grant (for expenses), and restriction status) and a method for documenting approvals.

  • See downloadable Expense Authorization Form Example below.
  • See downloadable Credit Card Transaction Coding Form (Qtr Pg)  below.
  • See downloadable Deposit Coding Form Example below.

Set a Regular Schedule
Do things on a regular schedule. Cut checks or do online bill-pay no more than once per week. Making payments on demand can result in poor cash flow decisions and disruption to the workflow of the bookkeeper and supervisors.

Track Deadlines
Keep a calendar with finance-related deadlines for annual professional surveys, business and solicitation license renewals, payroll tax deposits, sales tax payments, and filing 941s, unemployment quarterlies, 990, 1099, W-2, and transmittals, etc. Even if an outside vendor handles payroll, follow though to ensure all filings and tax deposits have taken place.

  • See downloadable Financial Tasks Calendar & Checklist below.

Use Checklists
Develop and follow a month-end checklist to close the books for the month. This should include a review of each month’s transactions to make sure each has been assigned to the right account and activity class and relevant grant. Also, each bank, asset, liability, and net assets account should be reconciled to statements from external institutions (e.g., banks, credit card companies, lenders) or internal schedules or lists (for example: a list of what is owed to the organization, a list of prepaid expenses or inventories, a list of furniture and equipment with depreciation amounts, a list of payables, a list of restricted grants and releases).

Organize Financial Documents
Keep a financial statement binder divided by month or electronic folders to collect and store copies of bank statements and reconciliations, schedules (lists), financial statements, and documentation for all adjusting entries for each month. This binder (or set of e-folders) will also come in handy as a reference during your audit (or review). Some accounting software will permit adding attachments (such as scanned receipts or invoices) to transactions. This is a good way to provide electronic documentation for each transaction.

Keep a Monthly Follow-up Folder
Write notes to yourself (paper or electronic) as ideas, issues, and questions arise (notes regarding adjustments to make at month end, budget notes, audit (or review) notes/questions, etc.) and put them in a follow-up folder immediately while you are thinking about it. Review folder contents at month end.

Keep an Audit (or Review) Prep Folder
Keep an audit (or review) prep folder (paper or electronic). Make and file copies of documents you know will be requested for the audit while you have them in your hands (foundation award letters, 941 payroll reports, new leases, equipment purchase receipts, for example). Prepare for the audit (or review) all year long to cut down on the time required to gather information at the end of the year. Striving to be “audit-ready every month” is a good goal.

Align Your Budget and Accounting Structure
Design your chart of accounts income and expense line items to align with budget income and expense line items. Financial reports, accounting structure, and budget should all match in format. Consistency among these enhances communications and makes it easier for staff and the board to compare apples to apples.

Carefully Store Organizational Documents
Make sure important organizational documents and records are stored securely and archive copies are held off site by your accountant, counsel, and/or board officers. Consider scanning and storing them in an online vault or other secure online storage platform. For documents you will need to make frequent copies of (such as the IRS Letter of Exemption/Determination Letter, Form 990, Bylaws, Articles of Incorporation, etc.) make a good clean copy of the original to make other copies from and store it in an envelope labeled with the document name and date and marked “Make Copies from This.” Store the original in a separate envelope in your file marked “Original – Do Not Remove!” This helps to prevent the originals from getting lost and keeps the quality of the copies from deteriorating. These days, scanning and making PDF copies of these documents makes it easier to share them with interested parties. (Be sure to cover the social security number of an individual 990 preparer when copying or scanning this document for sharing.) If an accountant prepares your 990, you can ask for a public disclosure copy.

Establish File Naming Protocols
Develop a good naming protocol and system for organizing folders for electronic files. Version control can be a problem when circulating both word processing and spreadsheet documents for comment and editing. If you are consistent with the file name and end it with a version date in year-month-day order, the files will stack up in (ascending or descending) date order. For instance, the operating budget might be called “ORG Ops Budget FYx8” and a second or third version would be called “ORG Ops Budget FYx8 v 20x7.10.15” and “ORG Ops Budget FYx8 v 20x7.11.02”.

© 2023 Elizabeth Hamilton Foley

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