5 Important Policies in Nonprofit Financial Management

It’s the fiduciary duty of the board of directors to make sure that the nonprofit assets are used for the purpose of a charitable purpose. To ensure accurate financial management, your organization should maintain financial policies.

Nonprofit Accounting

Nonprofit organizations’ accounting differs from for-profit accounting. A nonprofit must have a statement of financial position that reports your organization’s liabilities and assets. It should itemize when the liabilities need to be paid and when the assets will transition into cash. Accounting for a nonprofit organization is important and since nonprofits provide services that benefit the community, it must issue a statement of activities. The statement of activities shows the expense and revenue amounts with respect to the two classifications of net assets.

Conflict of Interest

This is one of the most crucial policies to have. The policy must be in writing and the board and staff should review the policy. A conflict of interest policy should require individuals with a conflict to disclose the conflict and forbid interested board members from voting on any issue where a conflict exists. There are certain state laws that govern nonprofits to include rules on what is required to be included in your conflict of interest policy.

Payment and Reimbursement Policies

When accounting for expenses in nonprofit organizations, many organizations provide guidelines to indicate which board expenditures can be reimbursed. Nonprofits are permitted to pay reasonable compensation for services performed. Payments and expense reimbursements are not regarded as compensation when used for a business purpose. Nonprofits are permitted to reimburse necessary expenses that were incurred while performing organizational activities such as meals, travel, and hotels.

Executive Compensation

Compensation of the executive director should be established by the board of directors. The compensation must be reasonable and non-excessive. The best method for establishing proper compensation is to perform a review of what amount similar organizations compensate their executives. You must file IRS form 990 to describe the process used to authorize executive compensation.

Gift Acceptance Policies

Your organization should decide if every gift should be accepted. There are certain types of gifts that your organization should not accept since you may be faced with more expense and burdens. For example, a gift of real estate could increase property taxes. A gift acceptance policy can aid with handling the expectations of donors. It also provides a guide to staff members who are receiving end-of-year contributions. To increase your organization’s financial transparency, post the policy on your nonprofit’s website.