Nonprofits don’t always consider the importance of proper accounting practices. What happens if your nonprofit makes money at the end of the year? Do you know if an employee or board member has a conflict of interest? Having solid accounting practices not only helps the overall success of your organization, but they are necessary for a smooth audit process. Let’s highlight the top three essential accounting best practices.
Policies, Controls, and Assignments
Internal policies and controls are the most important practices in your nonprofit for numerous reasons. From fraud prevention and proper asset management to ensuring your board understands their fiduciary responsibilities, internal policies and controls are all about accountability. Start with creating an accounting policy manual for your nonprofit. This is something you can work on with your accountant. Make sure there is a code of conduct, a clear understanding of delegation of authority and segregation of duties.
Make sure not to overlook the split of certain accounting duties. The executive director shouldn’t be the only person handling funds coming into the nonprofit. Assigning different employees to certain accounting tasks protects against fraud. For example, having just one employee handling all of your organization’s assets can be a huge warning sign for potential fraud during an audit.
Create an Operating Budget with Realistic Operating Expenses/Fundraising Plans
We have written about creating an operating budget and we work with many of our clients each year to help develop their operating budgets. Building in flexibility within the budget is essential, but setting goals and understanding possible cash flow issues BEFORE they occur will make your executive director’s life much easier.
Determining realistic operating expenses as well as setting attainable goals should always be the starting point of your budgeting process. You will need to tell donors where their donations are going in relation to your mission, but you also have to pay employees, rent, utilities and, of course, marketing. You don’t want to be like Scrooge on your operating budget, but you also shouldn’t think your fundraisers and events are going to make 100% more than the year before. Your committees are there to help you when it comes to determining your fundraising plans as well as expenses.
Board Policies and Expectations
Regardless if your board is an advisory board or working board, it is critical that all members understand what is expected of them and make sure they are independent of your organization. An independent board means no board member is employed by the nonprofit and there are no family members who work for you. When the board is making decisions, they should not be influenced in any way by personal factors. Creating a board member handbook is key to this best practice.