Nonprofit Financial Management: 4 Key Policies to Implement

It’s no secret that your nonprofit’s fundraising efforts provide much of the revenue you need to run your programs and make an impact in your community. However, effectively funding your mission involves more than just fundraising.

However, your organization also needs to practice effective financial management to make the most of its revenue. The foundation of a good nonprofit financial management strategy is a common set of policies and procedures that everyone at your organization can reference, no matter how they’re involved with your funding.

In this guide, we’ll walk through the following five financial policies that are essential for nonprofits like yours to implement:

1. Gift Acceptance Policy
2. Conflict of Interest Policy
3. Expense Reimbursement Policy
4. Staff Compensation Policy

If your organization has an existing set of financial policies, review them regularly to make sure they’re up-to-date and all important information is included. If you’re starting from scratch or find gaps in your policies, consider reaching out to a nonprofit accountant. These professionals have the expertise necessary to ensure your financial procedures are useful for your organization’s unique situation and align with government regulations for nonprofits. Let’s dive in!

1. Gift Acceptance Policy

Imagine this: an animal shelter has recently completed a campaign to expand its facilities, meaning it can now take in 40 additional rescue cats. To effectively care for these new animals, the shelter staff needs a variety of extra supplies, from food to toys to litter boxes. They decide that the most cost-effective way to secure these supplies is to solicit in-kind donations, and they receive many useful contributions from their passionate supporters.

That is, until one well-meaning supporter donates a large bag of dry cat food. The shelter staff think this will be very helpful to their cause—until they realize that the bag has already been opened, meaning the food might not be safe to give to the rescue cats. But if they tell the supporter that they can’t accept the donation, they might seem ungrateful.

This type of problem can occur at any nonprofit, and the way to solve it is to implement a gift acceptance policy, which outlines:

• The types of donations your nonprofit can and can’t accept. 
• The circumstances under which you’ll accept various donations.
• The proper procedure for managing and reporting different types of gifts.

If the animal shelter in our scenario had a gift acceptance policy, they could use it to lessen the blow of their “thanks, but no thanks.” Being able to back up your rejection of a gift with official documentation lets supporters know why you can’t accept their generosity, even though you acknowledge and are grateful for their support. Plus, by sharing these guidelines with supporters, you’ll be less likely to receive donations you can’t accept.

2. Conflict of Interest Policy

Nonprofit leaders and board members have a duty to act in the best interest of the organization they serve. However, situations occasionally arise where this duty conflicts with a personal or business interest, leaving both the individual and the nonprofit in a difficult position.

Having a conflict of interest policy helps prevent these types of situations from compromising your organization’s integrity. They include three main elements:

• Your nonprofit’s definition of a conflict of interest.
• The procedure for disclosing potential conflicts.
• The steps to take if a conflict arises.

Let’s say a nonprofit is looking into a new payroll processing solution, and one of its board members is the president of a company that makes this type of software. Many organizations would consider this a conflict of interest, so the board member would need to follow the proper procedure to disclose it. 

Then, the nonprofit would take the steps outlined to prevent the conflict from influencing their decision. For instance, the board member may have to abstain from the software vote, or the organization might be required to choose a different solution. This way, they can ensure the board continues to act in the organization’s best interest.

3. Expense Reimbursement Policy

Although the overwhelming majority of your expenses should be covered by your organization’s revenue as outlined in your budget, there may be times when your staff or volunteers spend their own money on behalf of your cause. For example, if your fundraising director presents at a conference, they might use their personal credit card to book their flights and accommodations. However, because they were representing your nonprofit, they’ll likely want those costs reimbursed—which your nonprofit can only do if you have an expense reimbursement policy.

This policy should lay out the following requirements:

• What types of expenses can be reimbursed.
• What information should be included in a reimbursement request.
• Who is responsible for approving and providing reimbursements.
• How reimbursements will be recorded.
• What to do if excess reimbursements are accidentally provided.

To ensure you can accurately track all of your nonprofit’s expenses, make sure to include deadlines in your reimbursement policy. Jitasa’s financial management guide recommends stating that reimbursement requests should be submitted within 60 days of the expense being incurred. Additionally, any excess reimbursements should be returned to your organization no more than 120 days after they’re provided to prevent fraud.

4. Staff Compensation Policy

A common myth about nonprofits is that their staff not only don’t make a living wage, but also that they shouldn’t because employee salaries take away from funding the organization’s mission. Although it’s true that nonprofit staff are often willing to take a pay cut to work in a field they’re passionate about, offering a competitive salary and benefits can help your organization retain more employees. This allows you to save money on recruiting new employees and build the team you need to further your mission.

At the same time, it’s important to establish salaries for your nonprofit’s leaders that aren’t excessive in the eyes of the IRS in order to preserve your organization’s integrity. This is where a staff compensation policy comes in.

Your staff compensation policy should include the following elements:

• Information about who is affected by the policy. Some nonprofits include all employees in their policy, while others just include those in leadership roles.
• Procedures for approving compensation. Lay out a schedule for compensation discussions, as well as the criteria for your organization’s leaders and board to make decisions.
• Comparability data. One way to ensure your employees are compensated reasonably but not excessively is to research organizations of similar sizes and in the same geographical area as yours and follow their lead.
• Compensation plan structures. While it’s easy to think of compensation as simply salaries, Astron Solutions recommends taking a total rewards approach to compensation. Consider not only your employees’ salaries but also the additional benefits you offer, such as health insurance, retirement funds, paid time off, and professional development opportunities.

Make sure to discuss your compensation policy with your organization’s human resources department, lawyer, and accountant to tap into different areas of expertise and ensure it complies with all nonprofit regulations.

Once your nonprofit establishes and reviews the four financial policies discussed in this guide, create a handbook of fiscal policies and procedures for your organization. This resource helps everyone at your organization understand how best to manage funding in their respective roles. Make sure to adapt these tips and strategies to your organization’s unique financial situation, and don’t hesitate to reach out to experts if you need help or have questions along the way.