The Importance of Nonprofit Internal Controls

Many people who work with and lead nonprofits and ministries have never heard the term “internal controls.” However, the term is an important concept as you work to make the organization transparent and especially when you undergo the scrutiny of an accountant during an audit. But, it is often challenging, actually downright difficult for small nonprofits and ministries to have strong internal financial controls. And, while no one likes to talk about it, there are times when organizations come up short—they are unable to explain where financial resources have gone or what they were used for. Imagine for a minute if you were a donor and had contributed $10,000 to an organization, wouldn’t you want to know that the organization was able to track every penny of the funds? So, let’s talk about internal controls.

A workable definition of internal controls are “systems and strategies that the organization has in place to protect its resources.” The term internal tells us that these are systems and strategies within the organization. Our internal controls need to be in writing –in the form of policies and procedures that are required for every person within the organization – no exceptions!

Many small nonprofits and religious organizations struggle because they operate with very few staff and volunteers. Quite often, there is just one or two people who are doing everything. I am sure you can understand that in the eyes of an accountant, this does not make the finances of the organization secure.

How to set up Internal Controls at your Nonprofit

Following the steps outlined below, your organization can have a system of internal controls in place to increase the security of resources.

First, have policies and procedures in place.

Make it a policy that the organization will have a board approved budget each year. Recognizing that a budget is simply a projection, it is understandable that the budget may need to be modified throughout the year. Put into place policies for how the organization operates. For instance, a receipt is required for reimbursement, time sheets are required for all staff, checks must be signed by two individuals, checks may not be signed with a name stamp, etc. The key to success with policies and procedures is to enforce them. This means that no exceptions are made.

Second, have a system in place for paying all invoices.

As invoices and bills come in, there needs to be a system in place to ensure that they are paid on time, but that they are not paid twice. Who checks them and verifies that items were received or services were provided as indicated? Even with just one or two people involved in the financial process, there can be a system of checks and balances in place for accounts payable.

Third, all cash received should be counted by two people if at all possible.

And, whenever possible, a receipt should be written for cash received. Then the receipt can be verified against the bank deposit. It is also helpful for small organizations to write deposit details on all bank deposit receipts. There are times when the deposit will be entered into the accounting software at a later time—writing the detail helps to ensure that you remember what the deposit was made for.

Fourth, reconcile the bank statement every month.

Many organizations fail to reconcile their bank statements on a regular basis. Reconciling bank statements are one of the most effective strategies to catching fraud or mistakes in a timely manner. Ideally, the person who writes the checks should not be the person who reconciles the bank statements. In small organizations, it may be necessary to have the board treasurer reconcile the statements so that different people are involved in the process.

Through internal controls, we are seeking to reduce the likelihood and appearance of misappropriation of funds. However, know that even with the best systems and policies in place, there is always a chance that mistakes will be made. What systems can your organizations put into place today?

This post was contributed by Debbie DiVirgilio, owner and principal consultant of The Faith-Based Nonprofit Resource Center. Debbie has more than 20 years of experience serving in the nonprofit sector. Since starting the consulting firm ten years ago (formerly known as DiVirgilio & Associates), she has acquired more than $40 million in funds to support the needs of individuals and communities. Visit www.nonprofitexpert.com for more information about nonprofit best practices.