Montana Nonprofit Association

promoting a strong nonprofit sector in MONTANA

Principle: Financial Management

Nonprofits have an obligation to act as responsible stewards in managing their financial resources. Nonprofits must comply with all legal financial requirements and adhere to sound accounting principles that ensure fiscal responsibility and build public trust. Nonprofits should use their financial resources to accomplish their missions in an effective, efficient and strategic manner and should establish clear policies and practices to regularly monitor how funds are used.

 KEY   ★★★ Legal Practices are legally required of all Montana nonprofits 
  ★★ Essential Practices are widely recognized as industry standards and generally expected of all nonprofits 
  ★ Recommended Practices should be considered by all nonprofits, with implementation dependent on capacity and life stage 

Practices

FISCAL RESPONSIBILITY AND POLICIES 

1. ★★★ A nonprofit has a responsibility to ensure that its assets are used solely for the benefit of the organization and not for personal or other gain. MT, US


2. ★★ A nonprofit has one or more board members with an understanding of the organization’s finances. A nonprofit may have a finance or audit committee that includes board members who are well-trained and informed to understand financial statements and annual tax filings. The board member(s) with this understanding or the finance/audit committee guides the full board to ask questions that enable them to understand and monitor the financial condition of the organization.

3. ★ The board of directors annually reviews the percentages of the organization’s resources spent on programs, administration, and fundraising. It is management’s responsibility to meet strategic and budgetary goals set by the board, including the allocation of dollars among these functional categories. The board influences that allocation through its strategic goals and the final approval of the budget.

4. ★★ A nonprofit creates, approves and adopts the organizational budget and operates the organization in accordance with this budget. The budget is regularly reviewed for necessary budget amendments throughout the year, depending on actual results and changes in strategic direction during the year. In the event of unexpected results, the board of directors is made aware of this outcome and participates fully in determining a plan to amend or restore the budget to its approved state. 

5. ★★ A nonprofit spends an appropriate percentage of its annual budget on programs in pursuance of its mission. Expense allocation represents the mission and activities of the nonprofit. There is a wide range of acceptable expense allocations within the nonprofit sector. A nonprofit consults industry and subsector standards to determine an appropriate range for administration and fundraising ratios. An organization also provides sufficient resources for effective administration of the organization and, if the organization solicits contributions, for appropriate fundraising activities. Each organization considers relevant industry subsector data to determine the reasonableness of its expense allocations.

6. ★ A nonprofit considers bequests, planned gifts, and pledges when determining the annual budget but does not deploy these dollars for program expenditures until the gift is actualized. 

7. ★ A nonprofit establishes and maintains a financial reserve sufficient to sustain its operations for a period of time should a significant loss of funding occur until replacement funding can be obtained.
In addition, budgeting for a financial reserve allows nonprofits to meet other short- and long-term goals. While three to six months’ reserve is considered a minimum, the target reserve amount is based on a risk assessment rather than an arbitrarily set figure. In addition to risk mitigation, budgeting for a financial reserve is a prudent practice that allows nonprofits to meet other short- and long-term goals.

8. ★★ Nonprofits have written financial policies that are adequate for the size and complexity of the organization and are periodically reviewed and updated. These policies address investment of the assets of the organization, gift acceptance, purchasing, unrestricted current net assets, loans/lines of credit and internal controls to prevent error, fraud, theft or mismanagement.

9. ★★★ A nonprofit that invests has a board-approved investment policy that outlines the acceptance and use of gifts of appreciated securities and ensures responsible investment of funds in accordance with all legal requirements and that is periodically reviewed and updated. MT, US

10. ★★ A nonprofit periodically assesses its risks and purchases appropriate levels of insurance to manage its liability prudently. General liability coverage and Directors and Officers Liability Insurance are strongly recommended. A board-approved risk management policy is developed and then reviewed and updated periodically.
 

11. ★★★ A nonprofit must follow legal obligations as stewards of donated funds to expend donated funds responsibly and to ensure the funders’ intent is fulfilled according to funders’ wishes and requirements. MT, US


12. ★★ A nonprofit follows ethical obligations as stewards of donated funds to expend donated funds responsibly and to ensure the funders’ intent is fulfilled according to funders’ wishes and requirements.

13. ★ A nonprofit develops guidelines for use of donated funds for programs that are subsequently discontinued. These guidelines include a statement that donor will be informed that such redirections may occur as is practical upon acceptance of the bequest/gift. Also in “Fund Development” 
 
14. ★★★ A nonprofit must have a system in place that allows individuals to report misconduct without fear of consequences (commonly referred to as a “whistleblower policy”). Retaliation against whistleblowers or destruction of records related to a government investigation may be in violation of federal law. US

15. ★ A nonprofit, with board approval and full knowledge of its legal obligations and liabilities, may undertake responsibility for fiscal sponsorship of another organization. Also in “Strategic Alliances”

FINANCIAL REPORTING  
 
16. ★★★ A nonprofit must annually file an applicable Internal Revenue Service Form 990 according to its annual gross receipts and any state filings as required. Also in “Governance”, MT, US

17. ★★ The board of directors performs a meaningful review of Form 990 prior to filing. Also in Governance

18. ★ A nonprofit’s accounting system tracks functional expenses for reporting on the 990 and generates accurate and relevant financial reports, which include the comparison of actual to budgeted revenue and expense and a year-to-year comparison that identifies and explains any significant variances. These reports are provided to the board of directors for regular review and discussion, preferably no less than quarterly. The full board monitors actual performance against the budget.

19. ★ A nonprofit with annual total revenues in excess of $500,000 subjects its financial reports to an annual audit by a certified public accountant. A nonprofit with revenues under this threshold or exempted by law considers conducting an outside review of its finances annually.

20. ★★ Nonprofits that conduct audits consider establishing an audit committee that does not share members with the finance and/or executive committees. In any case, a committee or subcommittee of the board composed of independent directors oversees the audit function. The committee responsible for the audit has the opportunity to meet with the auditor without the management of the nonprofit being present. Every member of an audit committee is able to read and understand an external audit or financial review report.

21. ★★ Financial audits and other financial reporting forms are approved by the organization’s board of directors and are verified and certified by the organization’s Chief Executive Officer and Chief Financial Officer to ensure they are accurate and filed in a timely manner. An organization under the $500,000 threshold, however, meets all requirements of federal, state, local, and/or private granting entities.

22. ★★★ A nonprofit is required to make its annual tax returns and tax exemption documents available to the public. Also inAccountability, Transparency, and Disclosure”, US

 


Evaluation  ~  Fund Development

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