Financial Management and Governance Best Practices for Nonprofits

Effective governance and sound financial practices are key to ensuring strong nonprofit management. For any nonprofit leader, this is critical to effectively support the organization's chosen causes, maintain trust with supporters, and enable organizational longevity. Regardless of your organization's mission, adhering to these practical tips for managing finances and governance will help keep the organization in compliance and operating at its highest potential. 

1. Establish Strong Internal Control Policies

The first aspect of effective financial management and governance is installing internal control policies to guide critical processes. Internal controls exist to regulate staff, board members, and external vendors from misusing funds. To start, a segregation of duties policy should be put in place to the highest extent possible. This policy should establish a clear delineation as to who has access and control over certain actions within the major financial transaction cycles. For example, the person who receives mailed funds should not the same person who deposits them. Likewise, whoever approves vendor orders should not have custody of the funds to pay that vendor. 

In conjunction with these policies, there should be multiple layers of review and approval for each duty. Expenditure approval should also have a clear process that has oversight on it. Organizations should consider requiring more than one person’s approval on purchases over a specific dollar threshold. Once these policies are created, they must be formalized and subject to regular review. This will help retain meaningful control over funds, ensure that individuals are subject to necessary supervision, and avoid misappropriation of donor dollars. 

2. Systematic Board Recruitment and Acceptance

The nonprofit board plays a decisive role in both governance and financial management. Board members provide guidance and insight to the organization to ensure it's able to meet its goals to serve its larger purpose. Thus, recruitment and acceptance of board members is a key part of building a strong, competent executive team. 

First, the size of the board should reflect the size and complexity of the organization to ensure maximum impact. Likewise, the board should be meaningfully diverse, both in experience and demographics. This will help the board contribute a wide array of experiences and insights, helping the organization navigate any and all challenges.  

Once board members are selected, they need to have a clear understanding of their responsibilities and obligations. This will help them retain neutrality and carry out their duties in a compliant and impactful manner. It is also incumbent upon the organization to educate board members on state regulations and best practices as they relate to the specific nonprofit. By taking these steps, leaders will help set their board members up for success while enabling them to maximize their impact on the organization. 

3. Clear and Concise Board Duties

Clear and concise board duties keep governance on track by informing the work of the board. Thus, it's critical to manage these closely, with specific attention to certain duties. 

Conflicts of interest within the board should be reviewed at least annually.  

Board members and nonprofit members both need to be held to a high level of scrutiny. This helps ensure that board members retain independence from the organization and that all decisions are in the nonprofit's best interests.   

Review and implement clear policies on executive compensation, internal controls, whistleblowers, retention/destruction, and gift acceptance.  

Each of these subjects must be considered. They must have clearly defined policies that are also subject to regular review to ensure that none of them conflict with the nonprofit's goals or mission. 

Review and approve filing requirements and financial documentation prior to finalizing.  

A key capability of the board is its ability to provide objective financial oversight and advice relative to finances. Thus, the board should be part of the filing and financial document review process to ensure the organization remains compliant with its nonprofit status. 

Maintain minutes for all board meetings.  

Not only is this a requirement for legal compliance, but minutes help to keep the board accountable to the nonprofit's goals and needs. Furthermore, this provides a means for future review and audit as necessary. 

4. Transparency

The last facet of strong governance and good financial management is transparency. This means transparency throughout all levels of the nonprofit as well as to the board and the public. To help maintain this type of accountability, it's important to begin by establishing financial performance metrics. Once established, these can then be used for both benchmarking and clear disclosure to the public. This helps garner trust while also instilling confidence as to where and how finances are being spent.  

To further this goal, the organization should also make all form 990s, financial statements, and annual reports available publicly for consumption, with the website being the preferred medium. Likewise, public disclosure of all governance policies will help with transparency and accountability. 

Conclusion 

Good financial management and governance are key to ensuring the success of nonprofit organizations. Through the establishment of strong internal controls, systematic board recruitment and installation, the creation of clear and concise board duties, and financial transparency, nonprofit leaders can be confident in the ability of their organizations to find both longevity and success. 

Need help with establishing good financial management or governance practices for your nonprofit? Lutz has extensive experience helping nonprofits navigate these considerations and is here to help you. Contact us for more information or visit our website to learn about our nonprofit accounting services.