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 manner and should establish clear policies and practices to regularly monitor how funds are used.
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.
2. Nonprofit board members should understand the organization’s financial statements and annual tax filings well enough to ask questions that enable them to understand the financial condition of the organization.
3. The board of directors should review and approve an annual budget for the organization. While each board must determine the appropriate budget needed to achieve its organization’s mission, various industry benchmarks provide target ranges of 65-80% of expenditures for programs and 20-35% for administration, fundraising, and evaluation. Also in “Governance”
4. A nonprofit should create and adopt a balanced budget on which its organizational activity is planned. In the event of a budget deficit, the board of directors should be made aware of this unexpected outcome and should participate fully in determining a plan to restore the budget to a balanced state.
5. A nonprofit should consider bequests, planned gifts, and pledges when determining the annual budget, but should not include these dollars in budgeting for program expenditures until the gift is actualized.
6. A nonprofit should establish and maintain a financial reserve that is equal to three to six months of operating expenses.
7. To the extent possible, given the size of the organization, a nonprofit should have in place appropriate internal controls and procedures to monitor and record assets received, held, and expended. A nonprofit should have a board-approved financial management policy that is periodically reviewed and updated.
8. A nonprofit that invests should have a board-approved investment policy that ensures responsible investment of funds in accordance with all legal requirements and that is periodically reviewed and updated.
9. A nonprofit should periodically assess its risks and purchase 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 should be developed and then reviewed and updated periodically.
10. A nonprofit should develop guidelines for use of funds donated by bequest for programs that are subsequently discontinued.
11. A nonprofit has legal and ethical obligations to expend donated funds responsibly and to ensure that funds are dispensed according to funders’ wishes and requirements. US
12. A nonprofit must have a system in place that allows individuals to report misconduct, without harmful consequence for doing so (commonly referred to as a “whistleblower policy”). Retaliation against whistleblowers or destruction of records related to a government investigation may be violations of federal law. US
13. A nonprofit, with board approval and full knowledge of its legal obligations and liabilities, may undertake responsibility for fiscal sponsorship of another organization.
14. All nonprofits must annually file an appropriate Internal Revenue Service Form 990. US
15. A nonprofit should generate 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 should be provided to the board of directors for regular review and discussion, preferably no less than quarterly. The full board should monitor actual performance against the budget.
16. A nonprofit with annual total revenues in excess of $500,000 should subject its financial reports to an annual audit by a certified public accountant. A nonprofit with revenues under this threshold or exempted by law should nevertheless consider conducting an outside review of its finances annually.
17. Nonprofits that conduct audits should 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 should oversee the audit function. Every member of an audit committee should be able to read and understand an external audit or financial review report.
18. Financial audits and other financial reporting forms should be approved by the organization’s board of directors and should be 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, should meet all requirements of federal, state, local, and/or private granting entities.
19. A nonprofit is required to make its annual tax returns and tax exemption documents available to the public. US
Human Resources ~ Accountability & Transparency
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