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5-crucial-topics-to-address-nonprofit-financial-policy-sample

5 Crucial Topics to Address in Any Nonprofit Organization’s Financial Policy ( + Free Sample)

Briana

Your financial policy document is your "go-to" for proper money management in your nonprofit organization. Similar to the nonprofit treasurer checklist, it outlines procedures for how to handle different situations. Having this policy in writing facilitates an easy transition when management changes hands. 

Rather than relying on a set of assumptions, this document provides an anchoring set of regulations that makes a great reference should you ever find yourself unsure of a decision. 

Not sure what policies to include or how to present the information? 

Here’s what we’ll cover today:

No time to read this article now? Download it for later.

5-crucial-topics-to-address-nonprofit-financial-policy-sample-financial-policy-document

The Financial Policy Document

Nonprofit financial policies provide a comprehensive listing of instructions, restrictions, guidelines, and processes for all financial situations. Ideally, the document should be detailed enough that anyone who comes into the company during a management turnover can consult the guide and pick things up exactly where they were left.

For example, if your organization wants to bond the nonprofit treasurer or spell out specific details of what needs to be included in the nonprofit treasurer report template, the nonprofit policies, and procedures manual is the place to document those requirements. 

Pro Tip: While the suggestions that follow are applicable to all organizations, there are a few specific focus areas for smaller entities. If your organization falls into that category, consider checking out our five internal controls for small nonprofits.

It’s also important to outline situations to mitigate risks and ensure legal compliance. If there is any doubt as to what needs to be done or how it should be done in the financial department, this is what staff can consult to confirm the proper procedure.

A complete financial policy generally includes the governance of numerous financial statements that cover a broad range of topics. The goal is to provide support and guidance for any financial situation your nonprofit organization or staff may encounter. 

This can be a substantial document to have in your arsenal, especially when it successfully provides detailed outlines for all processes and procedures. Removing uncertainty around handling particular tasks promotes consistency and smooth operations. 

5-crucial-topics-to-address-nonprofit-financial-policy-sample_Matthew_financial-policy-docMatt is loving the free policy document sample below!

You may want to establish a finance committee or general committee to function as a group in order to write, review, and audit this document. In addition, this team would be charged with adding any newly adopted policies, financial practices, cases, and actions that impact finances during annual review cycles. 

Through the course of this article, we will highlight some of the most important topics to address in more detail. To give you a good idea of what an actual, complete financial policy can look like, check out the template below

We have faced the perils of the internet to find the best nonprofit financial policy we could find, and thanks to Propel Nonprofits, we have found it. 


Pro Tip: Although each statement in the financial policy document may be written with the long-term in mind, the document should be reviewed regularly in order to keep the document relevant and updated. The last thing you want is to refer back to a policy to find it is no longer applicable to your current systems in a time when this guidance is critical. 

5-crucial-topics-to-address-nonprofit-financial-policy-sample-conflict-of-interest

#1: Conflict of Interest

A conflict of interest is when any member’s personal situation could create a situation where the individual’s actions, judgment, decisions, or reliability become (or could become) compromised. 

Detailing situations that resolve conflict of interest can be one of the most important topics for your financial policy document. It is important that everything is confirmed in writing. Having financial policies available to all members of the organization is ideal. Additionally, there would be a stated expectation that all members agree to abide by the formal policies when they join the organization. 

Here are some situations that could fall under the umbrella of "personal situation":

  • Family situation

  • Friendship connections

  • Social determinants 

  • Financial status

  • Personal investment in a situation

Not that having a personal relationship (e.g., a family member or a friend) with an existing member of the organization, a supplier or a beneficiary, isn’t necessarily a "bad" thing. However, ensuring that your policies highlight the expectations for disclosing any close relationships is extremely important. 

For example, let’s say your organization is looking to replace the roof on the office building. Your spouse owns a roofing company and could potentially do the job at a lower cost. This is a potential conflict of interest. 

Some organizational policies may strictly forbid employees from entering into agreements with people they have close relationships with while other organizations have a procedure to document any relationship to ensure the proper checks and balances are in place, such as bringing that information to the attention of the executive director and the rest of the board. Additionally, to maintain internal controls and financial accountability for the nonprofit board, the member with the relationship may be prohibited from participating in any vote or decision to protect the overall integrity of all involved. 

Other than mandating the above restrictions, these are some other relevant considerations that guidelines need to be created to handle: 

  • Outline of Resolution of Conflict - This is the plan and instructions that stipulate exactly how the board of directors will deal with the situation, providing a step-by-step procedure that will apply to any situation where there is a potential resolution of conflict. 

Pro Tip: Note that the IRS tax document Form 990 includes an expectation that there is a provision for handling situations such as this when it arises, so it should be a priority to establish policies regarding this topic as soon as possible. 

  • State Provisions - When developing these policies, make sure to check state guidelines because in many cases, there are specific provisions or criteria which must be handled in a particular fashion or be addressed. 

  • Resulting Penalties - It should be made clear how severe this situation can be as it places the board in the unenviable position of being exposed to sanctions and significant penalties if the board does not take steps to ensure neutrality in decisions. Those penalties do not just apply to whichever board member stands to benefit from the decision, but the board at large. For example, IRS Form 1023 indicates that a nonprofit could lose its tax-exempt status if they operate in a manner inconsistent with charitable purposes, such as inappropriately handling conflicts of interest.

5-crucial-topics-to-address-nonprofit-financial-policy-sample-whistleblower-compensation

#2: Whistleblower Compensation

Per Merriam Webster, a whistleblower is a person who reveals something covert or who informs against another such as an employee who brings employer wrongdoing to the attention of a government or law enforcement agency.

As a matter of federal law, anyone who reports unsavory or illegitimate management or accounting strategies is granted protection from organizational retaliation. In other words, if someone reports any practices a company is doing, they are not allowed to seek revenge in any way as that individual is protected under general law.

5-crucial-topics-to-address-nonprofit-financial-policy-sample-whistleblowerThis is Anthony's whistleblower face!

As all nonprofit organizations are expected to comply with these mandates, it can be a show of good faith to have an internal process in place to address related complaints. This will safeguard whistleblowers, as required by law, but will also assist in any investigation required in the event concerns are ever raised. 

A defined policy also grants additional transparency in financial management practices. Any interested party will see that you and your nonprofit are taking steps to listen to complaints, offer whistleblower protection, and ensure that all standards and procedures are legitimate and ethical. 

It is in your organization’s best interest to create provisions for these situations, whether specifically for financial accountability or in general because if nothing else, it will assure your staff, volunteers, and donors that there is a measure of protection in place which creates an atmosphere of trust.

Remember that a nonprofit organization can live or die by its reputation, so anything which will show that you are organized and prepared to deal with situations is going to reflect well on you and attract others to join your mission and stand by you throughout the journey.

5-crucial-topics-to-address-nonprofit-financial-policy-sample-gift-acceptance

#3: Gift Acceptance

As charitable donations come in a variety of forms, not just cash, it is important to have financial guidelines to handle in-kind donations and other varieties of gifting including stocks and physical goods. 

A gift acceptance procedure gives you a written set of guidelines to govern not only how your nonprofit handles gifts it receives, but grants you provisions on when and how to refuse gifts. 

Wait, refuse gifts? Why in the world would my organization want to turn down a gift! Isn’t that the whole point – to acquire assets and then use them to further our mission?

While those are valid thoughts, there are actually situations where it may be in your best interest to make a polite refusal when offered certain donations. 

Here are a few of those situations to illustrate the point:

  • High Maintenance Gifts - Sometimes, accepting a gift can actually be detrimental to your finances in the long run, particularly if the gift in question requires upkeep. Certain gifts, such as certain buildings or properties, may need costly repairs or maintenance to keep them functional, which may be more trouble than they provide benefit. This may also relate to donations that involve appreciation or depreciation values which may require monitoring.

  • Gifts with Legal Obligations - While meaning well, some donors offer gifts that may come with unexpected restrictions or requirements from a legal perspective which can be difficult for your nonprofit or charity to perform or sustain. This may include license requirements, maintenance expectations such as waste disposal, or even additional tax situations which complicate matters too much for your already "taxed" accounting staff.

  • Overly Restricted Donations - It’s not unusual for a donor to have specific conditions associated with how a gift is to be used to fulfill mission goals. However, there may be times when the restrictions are so specific, or the required use is accompanied by such a multitude of regulations, that it becomes a liability. 

  • Mission Misalignment - Occasionally you may receive an offer for a gift, stock, or endowment fund that simply doesn’t correspond to your mission or values. While the donor may have meant well, remember that accepting a gift is a personal choice. Nonprofits are value-based organizations and being consistent is key, not only for your reputation but for everything else. If you feel that accepting certain gifts could result in a negative hit to your reputation, consider a polite refusal to avoid negatively impacting current and future donations.

  • Disreputable Donor - While the gift offered in some circumstances is perfectly aligned with your mission and may prove beneficial, again, you have to consider the power of your NPO’s reputation. If the gift comes from a donor who has a reputation that is negative because the individual has done things in the past which contrast your mission statement or for other reasons, it may be in your best interest to turn down the gift to protect yourself from current or potential donor backlash. 

Having a written policy in place can provide you a graceful exit from situations where you find it is in your best interest to refuse a donation, hopefully in such a way that no one suffers offense. You can simply explain how there are regulations that your organization must abide by which make it impossible for you to accept that particular donation. 

Show your appreciation that the individual reached out and took the time to try to help your organization and provide support. 

Perhaps you can even modify the gift or make an arrangement that would increase the benefit for your nonprofit and allow you to make better use of the donation.

5-crucial-topics-to-address-nonprofit-financial-policy-sample-reimbursement

#4: Reimbursement

In the interest of transparency, nonprofit organizations are required to keep detailed and organized depictions of all cash flow, incoming or outgoing funds, and document exactly how all funding is being distributed and used from your accounts. 

There are specific regulations that cover situations where a nonprofit pays reimbursement expenses out of pocket in order to ensure that these funds are accounted for and properly documented. For example, many exempt organizations have unpaid officers that may receive reimbursement or an allowance for expenses. The accounting for these payments will impact employment taxes. 

Because how you document expenses determines whether or not your employees or volunteers have to report the reimbursement as compensation that could result in payroll taxes, having a section in your Financial Policy Document can ensure that reimbursements are accounted for properly. Not only can you set limits to prevent misuse, but you can provide proper procedures for using an "accountable plan" that will allow you to properly reimburse your members without subjecting them to additional taxation.

5-crucial-topics-to-address-nonprofit-financial-policy-sample-reimbursementsEverybody loves reimbursements – including Tristan!

These are the requirements and guidelines for how to appropriately manage an accountable plan.

Requirements:

  • Expenses must have been incurred by your nonprofit

  • The volunteer or staff member must report the expense within 60 days

  • They must also return any excess reimbursement within 120 days

Guidelines:

  • Record who made each of the expenditures

  • Detail what was purchased

  • List the time and date of transactions

  • Explain the significance of the purpose for your nonprofit

Make sure to dictate procedures for booking travel options, what the submission and approval guidelines are, and perform scheduled audits to assure no instances of misuse. Keep detailed records of all of this information so that there is no doubt which can be cast on your financial methods. 

Pro Tip: Including a mandatory section on your reimbursement form to provide documentation is one of the most effective ways to avoid misuse of reimbursements. You should clearly stipulate in your description for this section the exact types and forms of documentation accepted. For example: invoices, receipts, photos, screenshots, PDFs, and confirmation emails. 

5-crucial-topics-to-address-nonprofit-financial-policy-sample-executive-pay

#5: Executive Pay

An important aspect of your financial policy needs to address the procedures and salary determinations that show how much your CEO/Executive Directors will get paid. The challenging goal is to find a balance that provides a competitive rate that can lure quality executives to your organization while avoiding "excessive" pay. 

This is not usually an easy hurdle to jump and you can carefully document the exact process your NPO uses to determine the pay, which the IRS actually requires on Form 990 to determine whether your executive pay is excessive or not. Verification involves being able to show that you researched pay rates in comparable organizations within the same geographic scope and used this information to make a reasonable determination. 

Since the IRS is going to be evaluating this information, it is important to analyze just what they consider to be features that determine whether your CEO pay gets an excessive rating or not

  • Objectivity - When performing the research into similar competitors’ pay rates, the IRS is going to want an independent source to make the evaluation. In short, you need to find someone who is not associated with your nonprofit to produce an objective analysis. Recruitment agencies may be able to provide this service for you. 

  • Comparable Analysis - This independent contractor is also going to be the one who determines what is considered "comparable pay" by taking into account a series of factors to discover what other organizations are considered similar to yours. Some of those factors include the geographic factors specified above, but will also look for charities and NPOs with similar missions, a comparable budget, and similar staff requirements. 

  • Documentation - Finally, both the board of directors and the independent body need to document that there was no compensation received from the nonprofit to the objective researcher and that they have no connection or conflict of interest. This documentation also needs to include the process used to perform the research, and verification that the board made use of the information provided when determining executive pay, along with proof that the board approved the chosen salary. 

5-crucial-topics-to-address-nonprofit-financial-policy-sample-simplify

Simplify The Process

As a Financial Policy Document contains many separate sections and contains a considerable amount of pages and features, one way to save a significant amount of time in its development is to take advantage of nonprofit treasure software or other systems that can provide templates, automation, and simplification which can save a wealth of time. 

Our solution, Springly, helps free up some time in your day by automating time-consuming tasks, providing helpful reports, and offering education on important topics through our blog. Whether you are looking for general advice, basic financial literacy resources, a glossary of financial terms, or a very specific monthly nonprofit treasurer report template, we help to ensure you have all the knowledge you need to create and organize your materials and reports. 

Enjoyed the article? Download it to keep or share with others!

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