A nonprofit’s financial management system involves much more than tracking money in and out.

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Your ability to deliver services effectively rests upon a solid financial structure. Even the best organizations have gaps in their financial management procedures.

Adding to the challenge is the artificially low cap funders often place on overhead. They’re seeking to stem abuse and ensure that the majority of dollars go to services.

However, this situation can result in key areas being ignored, which puts the entire organization at risk. Fortunately some funders allow capacity building grants and developing your financial management system would certainly apply.

The first step is assessing all aspects of your system. A simple way to proceed is to break down activities and functions by four areas: planning, operations, recording and reporting.

Planning – Strong financial management begins with a thorough budget, including a process that includes program managers, financial staff, leadership and the board.

Many organizations use a board subcommittee to review and develop the budget, which the entire board must approve. For most organizations, all sources of funding won’t be nailed down before the year begins. That’s why it’s important to identify exactly where gaps in coverage lie, whether it’s a staff position, program costs or overhead.

This information is then used in grant writing and fundraising so that efforts are targeted toward programs and expenses needing additional funding. Program managers should be involved in developing budgets for proposals, and fiscal staff should review them. This will ensure that there isn’t duplication of funding or worsening of a funding gap by adding additional staff that won’t be fully covered, for example.

Another neglected area is capital improvement budgeting. Depending on your asset base, an adequate annual amount should be tucked away for repairs and replacement.

Risk assessment is another area that’s often left to languish. Examine and update insurance needs annually. Getting new quotes periodically will prevent premium creep.

Operations – On a day-to-day basis, an organization should follow operating policies and procedures for all areas of financial management. This area is often a challenge for small organizations, as segregation of duties is integral to sound management.

Tasks related to writing and signing checks, receiving disbursements, making bank deposits and reconciling bank statements should be handled by different people so as to minimize misappropriation of funds. This is an area your CPA can assist you by making practical recommendations.

Payroll is another area that requires strict oversight. All new hire and raise information should be approved in writing by a supervisor. Timesheets should be prepared and reviewed by a supervisor.

Government requirements for gathering employee information and proper handling and reporting of employee taxes are essential. Policies regarding reviews, benefits and paid time off should be in writing and strictly adhered to.

Finally, purchasing policies and procedures should be in place. If you charge fees, procedures regarding their collection and handling need to be documented and followed.

Recording – This is the area most people think of as financial management. It is essential to hire qualified staff to enter and maintain all financial data, preferably on a computerized system that is backed up regularly.

Back-ups should be stored off site – your CPA’s office would be a good choice. This system needs to be secure from both internal and external hacking activity.

A chart of accounts needs to be developed and used to ensure that expenses and income are posted in the right place. Expenses related to specific grants and funding sources must be allocated correctly.

In addition to your annual review by a CPA, funding agencies may do their own audit of your books. Your ledger accounts should be reconciled at least quarterly.

Reporting – A result of your financial management system will be the ability to create accurate, timely reports for the board, funding sources, stakeholders and the IRS.

Management and your board need to review financial statements monthly and investigate any problems or variances as well as track performance. Programs should be reported individually, especially if they have specific funding sources attached. An annual audit or review (depending on your size) is also essential. – Elizabeth Penney, M.B.A.