The title of the article, “Creating Financial Policies for Your Nonprofit: Why and How.”

Creating Financial Policies for Your Nonprofit: Why and How

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Imagine you are driving somewhere you have never been before. Even if you have an idea of where you will end up, you will need some type of directions to ensure you make it to your destination without getting lost.

The same goes for financial management. While you likely have ideas for managing your organization’s finances, keeping your team on the same page is difficult without a clear plan. Nonprofit financial policies function like roadmaps that detail how your organization should operate in certain situations and handle different aspects of financial management.

To help you get started with nonprofit financial policies, this guide will cover why they are important, which policies to create, and how to develop them effectively.

Why is it important to create nonprofit financial policies?

Developing and implementing nonprofit financial policies allows organizations to:

  • Ensure compliance. Nonprofits are subject to IRS guidelines, state laws, and other regulations to ensure they use funds responsibly. By creating and following financial policies, organizations can stay compliant with these stipulations and avoid any penalties associated with violating them—namely, losing tax-exempt status. Additionally, financial policies help nonprofits follow Generally Accepted Accounting Principles (GAAP).
  • Promote transparency and accountability. Federal and state organizations are not the only groups that want to ensure responsible financial management. Donors, sponsors, and other stakeholders also want to know that you are stewarding their funds appropriately. By developing financial policies surrounding financial tracking, reporting, and allocation, you can maintain transparency, build trust, and cultivate stronger stakeholder relationships.
  • Prevent fraud and mismanagement. Since nonprofits typically have limited resources and fewer internal controls, they are more vulnerable to financial mismanagement. Policies that separate responsibilities among team members, implement financial controls, and mandate audits will protect your organization against fraud.
  • Facilitate decision-making. If each team member understands your financial priorities and processes differently, making consistent, informed decisions will be challenging. Nonprofit financial policies standardize your financial management approach and provide a decision-making framework for areas like budgeting and investing to help your team navigate complex situations.
  • Strengthen financial planning. Not only do financial policies help you make decisions, but these decisions also lead to better financial outcomes. With procedures in place for managing funds, you can allocate resources more effectively, adapt to crises, and support your organization’s long-term financial sustainability.

While formalizing your organization’s financial policies may seem daunting, translating your procedures into cohesive documents strengthens collaboration among team members and improves financial management for everyone involved.

What financial policies should nonprofits develop?

While there are many different types of policies your organization may create, YPTC’s nonprofit financial management guide recommends starting with the following:

Gift Acceptance Policy

A gift acceptance policy covers your nonprofit’s guidelines for accepting contributions. While the procedures for accepting monetary gifts will likely be more straightforward, you will need clear rules for handling in-kind donations to prevent receiving gifts your organization cannot use. For instance, there may be certain items with legal restrictions that your nonprofit cannot accept.

To help donors confidently contribute gifts to your organization, outline the following:

  • The types of gifts your organization can and cannot accept
  • The conditions under which you will accept different types of gifts
  • The process of recording each type of gift

Not only does this type of policy help you collect appropriate gifts, but it also allows you to respectfully decline contributions that violate your guidelines. Simply post your gift acceptance policy on your website and direct donors to the relevant page.

Conflict of Interest Policy

A conflict of interest policy ensures proper handling of key stakeholders’ external financial interests or relationships that may cause issues.

For example, let’s say your nonprofit is looking for a furniture rental vendor for its upcoming gala. If a board member happens to own a furniture rental company and tries to convince the team to work with their company over other, more cost-effective options, that would be considered a conflict of interest.

Within your policy, determine what constitutes a conflict of interest and how you will review, evaluate, record, and act upon these scenarios. A proper conflict of interest policy protects your organization from biased financial influences and allows you to maintain trust with all stakeholders.

Expense Reimbursement Policy

If employees, volunteers, board members, or other stakeholders incur work-related expenses on your nonprofit’s behalf, you will need guidelines for reimbursing them. Your expense reimbursement policy should include elements like:

  • The types of expenses your organization can reimburse
  • The process for submitting reimbursement requests
  • The documentation needed to support reimbursement requests
  • The method and timeline for processing and issuing reimbursements

Once you create an expense reimbursement policy, stakeholders will be more confident and willing to incur expenses on your behalf, knowing your team has a solid process for reviewing and approving reimbursements.

Fiscal Policies and Procedures

Lastly, you should develop a comprehensive document outlining your organization’s financial operations. Make sure your team is on the same page about the following areas:

  • Internal controls
  • Tax compliance and audits
  • Budgeting and financial planning
  • Financial reporting
  • Cash management
  • Expense management
  • Revenue management
  • Grant and contracts management
  • Asset management
  • Investment management
  • Reserve fund management
  • Risk management

Revisit and update this document at least once a year to ensure it aligns with your most pressing priorities and current financial management approach.

How can nonprofits create effective financial policies?

To ensure your nonprofit’s financial policies are effective, follow these tips:

  • Assess your organization’s needs. While all nonprofits need financial policies of some sort, larger organizations with more complex operations may require more detailed policies than smaller nonprofits. Additionally, the policies you create will depend on your funding sources. For example, if your nonprofit does not invest its funds, you likely will not need a robust investment management policy.
  • Involve key stakeholders. Different stakeholders have different areas of expertise surrounding your mission and operations. Consult leadership, board members, finance staff, and program managers to ensure your policies are relevant and reflective of your nonprofit’s goals.
  • Make policies as clear as possible. Use simple language that any stakeholder referencing your policy can easily follow—regardless of their financial knowledge. Enrich your policies with specific examples or stories illustrating when to follow each set of guidelines and how to implement them appropriately.
  • Communicate policies across your organization. Once you have finalized your financial policies, share them with staff and board members and make them easily accessible. For instance, you may add them to the employee handbook or your staff-only network. Engage new employees in proper training to ensure they understand their roles in upholding your organization’s financial management standards.

As your nonprofit grows and changes, its financial policies should, too. Build flexibility into your policies to account for shifting circumstances, and review them regularly to ensure they stay relevant. Consider hosting occasional Q&A sessions where employees can ask specific questions about your nonprofit’s financial policies to ensure everyone is on the same page.

Developing nonprofit financial policies will align your team on financial matters and set your organization up for continued success. If you need help creating or implementing effective policies, reach out to a fractional CFO who has experience working with nonprofits to strengthen their internal controls. They’ll use their expertise to outline policies that align with your organization’s specific goals, processes, and priorities.