In the world of nonprofit financial management, internal controls are the steps organizations put into place to guard against theft, loss, and fraud. Think of internal controls as locks or safeguards against temptation. With the right internal controls in place, you’re less likely to find yourself in the uncomfortable position of discovering employee fraud.
These tips or best practices for internal controls can help your organization take good care of its finances.
The Need for Internal Controls
Some organizations may question the need for internal controls. After all, you trust your employees, right? Trust has nothing to with good nonprofit financial management. They are an important step to remind employees of your organization’s commitment to ethics and integrity.
Internal controls provide a shared set of guidelines that outline exactly what procedures should be followed when employees handle the organization’s finances. This shared set of expectations avoids guesswork and builds a common understanding of the way in which you expect finances to be handled. By making things clear to all, you’re avoiding gray areas which can be exploited as loopholes.
Best Practices for Nonprofit Financial Management and Internal Controls
Some organizations have multiple steps when outlining internal controls, but these four steps have been found to be quite effective at helping to avoid fraud and mistakes. Use these four nonprofit financial management tips to outline expectations around internal controls with your team.
- Document the process: The first step is to document all of the procedures that you want followed around the handling of donations, checks, cash, and other financial assets. When information is in writing, it is easy to share and use to train others. A simple, streamlined process for nonprofit financial management is best since it is easier for people to remember and follow. Outline the process for each task, and use bulleted lists of steps. Share the documentation, post it publicly in your company, and train everyone on the steps so that the entire team has a shared understanding of the expectations.
- Segregate duties: One person should not be assigned the job of handling money. Anytime money is counted, transferred, or prepared for a bank deposit, two people should be present. The person who signs the checks should be different from the person who writes the checks. Separating or segregating duties around money makes it difficult for one person to perpetuate fraud.
- Monitor operations: Keep a close eye on your bank statements, credit card charges, and accounting system. Review accounting reports monthly. Do not wait to reconcile bank and credit card statements as reconciliation can uncover problems quickly such as unauthorized charges or withdrawals. When you keep a close, attentive eye on your finances, it is harder for someone to sneak money out of an account without getting caught.
- Stay consistent: Maintaining a consistent amount of money in your checking accounts helps you watch the financial situation. Sudden changes in the account balance may signal a problem unless you anticipate paying large bills or receiving hefty donations. Consistently paying bills at the same time each month, reconciling bank statements on the same day or week, and monitoring charges are all part of keeping a healthy eye on your financial situation.
Nonprofit Financial Management Starts with Vigilance
The best tool for nonprofit financial management is vigilance. Monitoring your organization’s finances signals to all that not only do you care about it, but that you are going to take steps to intervene if something goes wrong. Hopefully, nothing ever will. But with the right internal controls, you can make sure of it.
Nonprofit Financial Management and Consulting from Beck & Company
Beck & Company can help you create your own set of internal controls or with any nonprofit financial needs. We are a Washington DC area of nonprofit advisors and are Virginia certified nonprofit accountants. We work with nonprofits of all sizes serving many different constituents nationwide, providing a variety of consulting, auditing, and accounting services. For more information, please contact us at 703-834-0776 x 8001.