Nonprofit Accounting Basics

Who handles the finances?

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

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Every nonprofit must clarify how the board and the staff interact when handling the financial issues affecting the organization. Solid job descriptions, appropriate policies and procedures, and a system of checks and balances will ensure the financial management and oversight are in good hands. Naturally, all the specifics in duties, as described below, can vary greatly in individual organizations.

Role of the board

The principal financial role of board members is to act as fiduciaries for the organization. This entails securing organizational viability through planning and assessing the effectiveness of the plan. The board oversees the overall financial activity of the organization and ensures appropriate internal controls are in place. The board approves the budget and must receive timely and accurate reports from staff to be able to survey the financial development and achievement of the fiscal goals.

Setting financial indicators, asking pertinent questions, and staying vigilant about environmental factors that might affect the financial performance of the organization, allow the board to stay on top of its oversight responsibilities.

Role of the treasurer

As the role of all officers, the duties of the treasurer normally are spelled out in the bylaws.

The treasurer tends to be the gatekeeper of financial information for the board and in general, ensures the rest of the board members are well versed on important financial issues. If the board has a finance committee, the treasurer may serve as its chair but another board member may take this responsibility to distribute the duties more widely. More specifically, the treasurer communicates directly with the chief financial officer of the organization and assists, when needed, with the budget preparation and introduction of the budget to the board. He reviews the audit process and answers any questions board members might have about the audit report. A good treasurer is familiar with the activities in the organization, understands nonprofit accounting requirements, and is able to convey financial information to the rest of the board members in a down-to-earth manner.

Role of financial committees

Many boards benefit from having a standing committee that is permanently engaged in helping the board focus on its fiduciary duties. A finance committee may recommend financial policies, help review the budget, and take a first look at financial statements. If there is no separate audit committee or task force, the finance committee may take the role of overseeing the audit process, although it is usually wise to separate these two functions. If there is no separate investment committee, the finance committee could draft investment policies and hire and oversee the performance of an outside investment manager.

Role of the CFO

In a small nonprofit, the chief financial officer may be the chief executive, and in a larger organization, she may be another staff member whose main duty is to manage the financial aspect of the organizational affairs. The CFO is principally responsible for preparing the budget, ensuring the organization has viable business plans, keeping abreast with new developments in the nonprofit accounting laws and principles, making sure all staff members follow appropriate ethical standards when dealing with money issues, and, finally, serving as the designated contact person for the treasurer or the finance committee when the board needs additional financial data. As the need arises, the CFO hires additional staff to help with the details of financial management. These positions could include financial directors and managers, a controller, a bookkeeper, and other accounting assistants.

Role of the board when there is no staff

Not all nonprofits have staff. Many start-up organizations have working boards whose roles are multi-faceted. The board must figure out how to oversee and implement at the same time. Board members handle daily tasks while serving as the governing entity. The greatest challenge with the finances usually is putting in place appropriate checks and balances. Even if fear of fraud is not the main motive for setting up an efficient financial monitoring system, appropriate internal controls help eliminate vulnerability and opportunity to fraud while strongly increasing the organization’s accountability. The key element is to share duties and not to concentrate financial tasks under one person. As soon as the organization hires staff, it should check the bylaws and verify whether the roles of board members and officers need to be redefined. Particularly the role of the treasurer often needs readjustment.

Internal controls

When setting up a system of internal controls, here are some guidelines:

  • Segregation of duties. Have a different person open the mail, endorse and deposit the checks, reconcile the books, create reports, and oversee the system.
  • Policies. Draft policies that cover check signing, expense reimbursement, credit card usage, discretional funds, petty cash, access to confidential documents, and so on. Keep policy and procedures manual up to date.
  • Conflict of interest. Exclude persons with conflicts of interest from decision making. Take bids, document decisions, and leave personal benefit considerations outside of the office or boardroom.
  • Job descriptions. Make sure everyone on staff and on board has a clear job description that defines duties and authorities.
  • Audit. Engage an outside auditor who also reviews your processes and procedures and provides guidance on how to improve your system.