Reporting and Operations
Creating a policy is like making a decision when you have time to be thoughtful, to do adequate research, and to consult colleagues and other professionals rather than making decisions in haste as circumstances arise. Creating thoughtful policies is a fundamental risk management strategy and a hallmark of good stewardship.
It may seem hard to distinguish between policy vs. procedure, but think of one as intent and the other as the mechanics of carrying out the intent. Policies should be clearly written to make the accountability intent apparent.
Below are some basic policy considerations for small and midsized organizations:
Policies regarding bank accounts should minimally cover: Who can sign checks? Who can authorize wire transfers? Should double signatures be required for checks over a certain amount? Who can open/close accounts and make transfers? How often do signatories change and what is that process? How is separation of duties accomplished in reconciling the accounts to ensure good internal controls? Who receives original copies of bank statements and who reconciles them each month? Who has on-line access to the bank accounts?
Policies regarding company credit cards should minimally cover: Who can obtain a credit card? What is the maximum credit limit? What procedures and approvals should be in place to control spending and to provide timely and accurate reporting of expenses as they occur? What is the payment policy (i.e., pay in full each month)? What supporting documentation is required for credit card charges?
There can be either excess or insufficient cash for day-to-day operations. In the case of excess cash, determine the optimum cash on hand needed for routine operations and keep this amount in the checking account. Decide what should be done with cash above this amount by developing a policy or guidelines regarding its movement to higher-yield (yet fully-liquid) active assets/money market accounts or short-term, low-risk investments. Create an action plan (in advance) to prevent a cash-flow crisis – it is easier to negotiate a line of credit or cash-flow loan from a bank or foundation while you have cash. The ideal would be to set up an internal line of credit by establishing a cash reserve fund from accumulated surpluses. Create a policy for accessing and repayment of the cash reserve or line of credit. You may also want to consider talking with your bank about establishing a sweep account arrangement wherein excess cash is swept into a higher-yield vehicle each night.
Executive staff and selected board members should create an investment policy, determining in advance:
- what kinds of investments are appropriate to your organization
- what risk threshold can be tolerated
- who is authorized to initiate or make changes to investments
- how investment managers/advisors are to be hired and evaluated
- what portion of earnings will be retained in endowment or board designated funds to grow the principal, etc.
To maximize funding opportunities, even small and midsized organizations might consider accepting donations of stock and should develop a policy for handling those donations. Many small and midsized organizations have a policy to liquidate stock immediately upon receipt to minimize the risk of the stock depreciating in value and causing a loss. Accepting donations of stock and handling the sale of donated stock may require opening and maintaining a brokerage account. Doing so should follow Bank Accounts policies established per above.
Capital Purchases and the Capitalization Threshold
A capital purchase happens when an organization acquires equipment or other assets that have a useful life of more than one year and cost more than a certain predetermined dollar amount. The process of recording the purchase as a fixed asset and then “expensing” it over its useful life as it depreciates (is used up) is called capitalization. The capitalization threshold is simply the dollar amount over which it makes sense to capitalize the purchase and expense it over a number of years rather than recording it as an unusually large expense in one single year.
Capital purchases should be tracked on a depreciation schedule (spreadsheet) showing:
- the date of purchase
- item description
- number of years of useful life
- calculation of the annual depreciation amounts from the date it was put in service.
Ideally, the organization will have a capital budget and will have planned for and preapproved the purchase. Policies regarding capital purchases should include the threshold amount and any other approval requirements and funding arrangements the board and management deem appropriate. Don’t forget to include new capital purchases in your insurance inventory.
Your accountant or auditor should be able to provide you with reliable record retention guidelines. The guidelines should be included in your organization’s procedures manual along with a statement that it is the organization’s policy to follow the record retention requirements and indicating whose responsibility it is to do so. Also included in the policy could be instructions regarding safe and appropriate disposal of sensitive records.
Record Retention (Delaware Association of Nonprofit Agencies)
Record Retention Policies: How Long Do You Need to Keep Records?
Pennsylvania Nonprofit Report (Thomas Havey LLP, CPAs and Consultants)
Detailed written instructions for day-to-day financial operations for staff (or high-level volunteers) compiled in a financial procedures handbook or manual is a fundamental risk management strategy. Think what would happen if the processes your organization uses to do business are carried around in someone’s head and that person left suddenly. Procedures should be set in place to ensure appropriate separation of duties, indicating the specific process for authorizing and processing disbursements and logging and handling cash receipts, petty cash, etc. Topics should also cover bank reconciliations, reconciling between accounting and fundraising records regarding donor contributions, and scheduling of regular general ledger transaction reviews by department heads or executive staff. Even very small organizations can achieve some level of separation of duties.
Have a standard employment memorandum of understanding prepared by staff and vetted by the organization’s counsel. Create employee handbooks (covering leave accrual and use, grievance process, harassment issues, whistleblower policies, etc.) and procedural handbooks (covering the keeping of timesheets, how to request reimbursements, payment for vendors, use of purchase order system, etc.). Review and revise these regularly and have the organization’s counsel approve these before distribution. (Law firms in some communities provide pro-bono services for smaller nonprofits and may be willing to review personnel and other policy and organizational documents for your organization.)
Keep an up-to-date personnel file for employees documenting a) changes to employee compensation or benefits; b) use of vacation and other leave; c) copies of job descriptions, evaluations, incident reports, etc.
Most nonprofits depend on volunteers to some extent, and small and midsized organizations may engage volunteers in significant mission and management activities. Organizations should develop clear guidelines for volunteers, emphasizing the expectation that the volunteers will follow the organization’s workplace and internal controls policies. In some cases it may be appropriate to provide a volunteer handbook and specific volunteer job descriptions. The organization may want to consider obtaining bonding coverage for volunteers if they regularly handle cash. This level of attention shows professional respect for volunteers and appreciation of the valuable service they provide.
Below are some other governance and risk management policies not strictly related to accounting but that can have a financial impact.
- Conflict of interest
- Gift acceptance (i.e. will your organization accept a gift from a corporation whose products are antithetical to your mission?)
- Insurance coverage requirements
- IT and Internet security, data backup protocols
- Privacy of donor contact information
- Requirement of background checks for employees and volunteers working with children
Written policies for the organization should be gathered into a Financial Management Manual along with systems and procedures. The existence of appropriate policies is an indicator of the organization’s commitment to due diligence, good stewardship, and accountability.
© 2008 Elizabeth Hamilton Foley