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Checks & Balances Ideas for Nonprofits

Checks and balances are activities that protect organizations against errors and fraud. Also known as internal controls, these checks and balances provide an extra level of protection to the organization so that errors or losses are issues are caught and can be fixed or managed. Internal controls may also protect against fraud, including money theft. The good news is that you don’t  need to spend a fortune to have good controls at a small environment, nonprofit organizations.

Below are some ideas that can be implemented easily to protect your organization:

1- Have bank statements sent to the home of the executive director or a board member not involved in accounting. This person can take a quick look at the statement and at copies of checks for any unusual activity. Then he can give the statements to accounting personnel. Since many use online banking, someone apart from accounting can take a look online at bank transactions, even before statements are mailed out.

2- Always have two people counting cash. One person can count first while another one witnesses it, and then the other person counts it, writing down the total and then securing cash with a rubber band and/or an envelope. Keep it in a safe before depositing it in the bank, not in a drawer or in an obvious place. If needed, get a safe and have it bolted to the floor or wall.

3- Wire transfers must be done by two people- one to initiate the transfer and another one to approve it. Both could have passwords or PIN numbers for extra security. In the case of online payments where the bank pays someone directly, at least one person outside accounting should approve this before it is done. You can set this up with your bank.

4- Petty cash is kept in a safe, not in a desk drawer. Thieves know that drawers may contain petty cash and they go there first. Keep petty cash small and replenish often, checking on receipts.

5- Review bank reconciliations monthly with no delays and look at odd deposits that have not cleared the bank and old checks that are still outstanding. Check on deposit amounts on the books and on the bank to make sure they are the same. Also, look at checks being cashed to see if the amount and payee make sense. Many online banks allow you to actually see a copy of the check online, which can be very helpful.

6- Give receipts to everyone giving your organization money, especially cash. The receipt book should have duplicates so that the top receipt goes to the donor and the copy stays in the book. Depending on the amount, the person receiving the money could sign a receipt to make sure the organization has proper records.

7- If using faxed forms for donations or payments, mark the original faxed page as “Original” in red. This is especially important in credit card donations. Otherwise, it is too easy to charge a card multiple times for one donation. Make sure that donors know that faxed forms are NOT to be mailed. A good option here is to handle most cash inflows through a website.

8-People working with cash and accounting should take vacations. Many fraud cases are discovered when the perpetrator is home sick or away and someone else takes over for a few days. It’s good to have more than one person trained in certain accounting tasks so that if something happens, he or she can fit in with minimum training.

9- Make sure your insurance policy covers losses, such as fraud, just in case. This policy should also cover volunteers and part-timers. Be sure to double check with your insurance company regarding any special events or programs that may require a special rider.

10- Consider getting background checks on everybody handling financial tasks. It’s not that expensive and you can decide about hiring the person upon reviewing the background check. These checks are often required by insurance companies, so it’s usually not a big deal.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award

 

Grant Management Ideas

When a nonprofit receives grants, either from government entities or foundations, management needs to keep records well organized for questions or reviews. This can be tricky in the case of multiple funders with their own reporting and compliance issues. Even smaller funders may want to know what happened to their money and require some reporting, even if informal.  Showing disorganization and lack of controls may discourage donors to keep on giving, spelling disaster to nonprofits.

Below are some ideas that are likely to help you in this process.

  • Set up a summary sheet for each grant with reporting dates and other crucial information, such as education requirement of staff covered on each grant that is updated for each new grant and is reviewed every week to make sure nothing falls through the cracks. This could be done on paper or online, but make sure others within the organization have access to this information easily in case people go on vacations or leave the nonprofit. A template could be created so that all summary sheets look alike, making it easy to find information.
  • Make sure the accounting system captures revenues and expenses on each grant. You could identify grants through the chart of accounts by reserving a couple of digits towards specific grants or through “classes” or another method specific to your software. You may also need to train your accounts receivable and payable staff to recognize grant funds coming in and out, so they can code them properly. If not, you will have a nightmarish time providing reports to grantors and other interested parties.
  • Develop a good filing system. Be sure to download and print all OMB Circulars and other documentation relevant to grant control, including notes on meetings and phone conversations. Keep them filed and accessible at all times. You can make a summary listing of all non-allowable costs that you are likely to have and keep it handy.
  • Establish a budget for the organization based on grant budgets. Every grant-funded project should have its own budget numbers entered in your accounting system.
  • Review reports on each project monthly to identify errors and monitor financial compliance.  The Board and upper management usually receive summary reports, but other managers should review financial reports by grant source.
  • Review documentation on journal entries, accounting entries, associated with grants. Each expense and revenue should be justified with proper documentation. If you see a number that doesn’t make sense, ask to see the backup paperwork related to the number.

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award

 

Why Aging Reports Are Good for You

Do you wonder what “aging reports” are? Often used by management for cash control, these reports are available in many popular programs, such as QuickBooks and Peachtree.

Aging reports are not old, “aged” reports; rather, they provide detailed financial information on accounts payable and receivable, including pledges receivable. For instance, suppose your organization owes $1,000 and you want to know more about this amount, such as who you owe, how much and for how long. You can get this information on an “Accounts Payable (A/P) Aging Report.”

If you’re interested in what others owe your organization, an aging report on accounts receivable is for you. For example, you see $10,000 in pledges receivable and wonder who owes you, how much and for how long. These are all available on “Accounts Receivable (A/R) or Pledges Aging Report.”

All aging reports follow the same format with date intervals on the top and names, dates and amounts to the left. The idea is to give users a quick way to see the timing of debt due or amounts to be received.

** Aging reports don’t show paid items, only unpaid ones **

Below is an example of an aging report regarding accounts payable—amounts owed to others.

pic excel aging

In this case, the organization owes $300 for up to 60 days. So, depending on the situation, this bill may be paid first since it’s the oldest bill due. Since most organizations value good reputations about paying their bills on time, this report is a great tool to prioritize payments and avoid problems.

An aging report for receivables will look like this example, but the information would be regarding money owed. Oftentimes, fundraising people use this report to follow up on late pledge payments.

Pay attention to the dates of such reports. Since bills are being paid and donations are received regularly, the numbers change often. If you see no changes, you must verify with the accounting department what is going on. Maybe there is a cash shortage or maybe the accounting software is not being updated, as it should. Reports are only useful when data is entered regularly with no delays.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award

Accounting Helping You?

“Business is great” is not as effective as “Business has had sales of $10,000 per month,” and you presenting a financial report with the numbers on it. The more precise you are, the more credibility you have. And to be precise, you need a way to compile, classify data — that’s the role of accounting in businesses, including nonprofits.

Without accounting, you really don’t know if your business is doing well, and you cannot answer simple questions, such as how much you paid for office supplies this year. If you’re small, you may get away by using your checkbook as an accounting system, but as you grow, you will see how hard it can be to control expenses and analyze transactions without a more formalized system.  Accounting software is so affordable and easy to use now that it makes little sense to be operating in the dark — without proper financial information.

Below are some compelling reasons to employ some form of accounting:

Objectivity:

Accounting is objective, rational, unbiased with no feelings attached to it. That’s why it’s so valued by managers who want data that is real and not based on gossips or recollections. Since these numbers are backed up by documentation, oftentimes the accounting department becomes the go-to place for many areas within a business. Of course, we have accounting fraud and bad accountants that make up numbers, but overall, if you have a well-run accounting department with proper controls, the information is good and reliable.

Accuracy:

The more accurate the information, the better off you are. It may not be 100%, but often financial reports can be relied upon for management to make decisions and plan for the future. You may have good intuition and make decisions based on that, but having something to validate someone’s intuition doesn’t hurt. For example, if you thought you had a great month and received about $100,000 in revenues, but the accounting system tells you that you made only $30,000, then you may need to re-think your estimation or look for reasons why the accounting system shows such a low number — it could be something you didn’t consider.

Organization:

Managers often use accounting to find specific information. Accounting organizes data so that it can be found easily. For example, if you want to find how much you spent on food for a program, you can go to a food account and see all food expenses there, organized. Because of accounting, all relevant data is in one place, in a certain order. Without an accounting system, you will need to look for paper docs, add them up and maybe miss a couple of those, making this task clumsy and ineffective.

Many people are scared of accounting, assuming it’s difficult and cumbersome.  But in reality, it‘s not.  Many popular programs, such as QuickBooks and PeachTree, have free online tutorials and help groups, making accounting accessible to many people with no accounting background. From experience, often the accounting system becomes the main information system of an organization with people relying on it for other functions, such as a customer service or membership information. Because of this need, many accounting systems offer other modules or add-ons to gather information besides financial data.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.

Nonprofits – Mind Your Programs

The program area is the most important facet of a nonprofit organization. It defines the organization and it justifies its existence.  Without programs, the nonprofit has no reason to exist.  It doesn’t mean that all programs should be the same since nonprofits have different goals. For instance, if the purpose of an organization is to help the homeless, the nonprofit will offer programs in accordance with this goal. Most likely programs would involve temporary housing, food distribution, and job training.

Identification

This seems to be a no-brainer, but sometimes it can be a challenge. A program in one place may be fundraising in another organization. For instance, a nonprofit could sell used clothes in a thrift shop. The thrift shop is most likely part of the fundraising area and not the program. However, if the organization provides job training for teens, the thrift shop may be part of a program, especially if it has teens working there, being trained in the shop’s operations and selling techniques.

The first step in identifying programs is to look at the organization’s mission statement. A good, clear mission statement is critical. The clearer and simpler the mission statement, the easier it is to identify major programs–the reasons for the organization to exist. Suppose a nonprofit’s mission statement is to “provide temporary shelter to the homeless.” It is simple and focused. If the organization hosts a car race, then it is not part of a program–most likely it’s fundraising.

On the other hand, an organization with the mission statement “helping people to become self-sufficient” is too general, increasing the chances of confusion about what is a program and what is not. The more focused the mission statement, the easier it is to identify programs versus other operational areas. It makes it easier for the organization to stay on track, as well.

It’s worth noting that the IRS is also interested in this area, as both program information and mission statement are required on the tax form 990. If programs don’t connect well to the mission statement, the organization tax-exempt status may be at risk.

>>> Beware

“Mission creep” is an important item that should be reviewed often.  This creep usually happens when certain stakeholders want to take the nonprofit in directions not really related to its mission statement.  Donors and grantors may also contribute to this creep by offering funds for programs outside the scope of the organization’s mission. It’s management responsibility to identify and avoid mission creep. Or the nonprofit will be all over the place without a real path or strategy. Depending on the case, it may jeopardize its tax exemption as well.

Check out the book d“Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.