Strong Foundations: 5 Key Nonprofit Financial Policies

Whether you work for a large national museum or a small local nature center, managing your organization’s finances effectively is essential to making a difference in your community. Nonprofits often have limited resources with which to accomplish ambitious goals, meaning you should always have a handle on how much money your organization has and how it’s being used in relation to your mission.

Clear policies are the backbone of strong nonprofit financial management. Establishing guidelines for bringing in and allocating finances ensures that your whole team is on the same page about how to handle your organization’s resources.

In this guide, we’ll review five key financial policies your nonprofit should implement to promote effective resource management. Let’s get started!

1. Gift Acceptance Policy

Imagine you work for a children’s museum that is planning its annual silent auction fundraiser, which will support its educational programming for elementary-aged kids in your city. To reduce your upfront event costs, you solicit in-kind contributions of auction items from corporate sponsors and individual donors.

One donor brings in a gift basket filled with kid-friendly supplies for baking and decorating cupcakes. You think this would make a great auction prize—until you realize that the boxed cake mix in the basket is several months past its expiration date and several of the frosting tubes are missing their safety seals, making the items dangerous to give away. How do you tell this well-meaning donor that you can’t accept their contribution without seeming ungrateful?

The answer is to create a gift acceptance policy for your organization, which should outline:

• The types of gifts—both in-kind and financial—that you can and can’t accept
• The conditions under which you can accept each gift (for instance, the museum in our example should stipulate that perishable goods cannot be expired or opened)
• The procedure for recording various contributions in your accounting system

Backing up your rejection of a donation with an official policy can help misguided donors see that, while you appreciate the thought behind their contributions and want to accept them, you truly can’t. Plus, Jitasa’s guide to in-kind donations explains that gift acceptance policies “not only tell supporters what not to give but also provide some direction as to what they can do to make the greatest difference for your mission.” So, if you publicize your gift acceptance policy, your organization might receive more useful donations in the first place!

2. Conflict of Interest Policy

Every organization uses the term “conflict of interest” slightly differently. However, the general definition in a nonprofit context is a situation in which a leader or board member has a personal or professional interest that may interfere with their ability to make the best possible decisions for the organization they serve.

For example, let’s say your museum’s team wants to purchase new software to streamline its email marketing efforts, and one of your board members is an investor in an email marketing platform. Although their duty is to choose the solution that best aligns with your organization’s needs and budget, it would benefit them financially if you chose the tool they’ve invested in.

To manage situations like this, your conflict of interest policy should spell out the procedure for staff and board members to disclose conflicts of interest, as well as the steps to manage those conflicts. In the example above, the board member with the conflict may have to abstain from voting on the new email marketing platform, or that solution might be taken out of consideration, depending on the organization’s policy.

3. Expense Reimbursement Policy

Although your nonprofit should have enough revenue on hand to cover all of its essential expenses, there may still be times when your staff or volunteers spend their own money on behalf of your organization. For example, your development director might use their personal credit card to book their flight when representing your museum at an industry conference and then ask your organization to reimburse them.

Whether they can get their money back on their reservations depends on your museum’s expense reimbursement policy, which should outline:

• What expenses can be reimbursed (type, amount, etc.)
• How to submit a reimbursement request
• Who will approve and provide the reimbursement
• How to record reimbursements

Make sure to include deadlines in your policy for submitting and providing reimbursements. This helps ensure staff and volunteers receive the money they’re owed and allows for more organized recordkeeping.

4. Audit Policy

Only some nonprofits are required to conduct financial audits. While the IRS occasionally audits tax-exempt organizations, most nonprofit audits are conducted independently. Independent audits can either be done internally by having your team systematically review your organization’s financial records or externally by hiring a third-party auditor.

Your nonprofit is required to undergo external financial audits if:

• Your bylaws stipulate that the organization must conduct audits every year or every few years
• You receive more than $750,000 in federal funding per year
• Your annual funding exceeds your state’s nonprofit audit threshold
• You’re applying for a grant that requires you to submit an audit report along with your proposal

However, even if your organization isn’t required to undergo audits, you might still create a policy for conducting them. Financial audits boost your organization's accountability and help you identify strengths and areas for improvement in your strategy, so undergoing them has benefits beyond just compliance. You’ll also gain a better understanding of your financial situation through hands-on experience (if your audit is internal) or an objective, expert perspective (if it’s external).

Your policy should detail how frequently you’ll conduct audits and whether they’ll be internal, external, or a combination of the two. For instance, you could conduct an internal audit every year and an external audit every five years to reap the benefits of both while establishing a regular schedule of accountability.

5. Staff Compensation Policy

Staff compensation is one of the most challenging areas of nonprofit management to navigate. There is a common misconception that nonprofit employees don’t—and shouldn’t—make living wages so that the organization can put as much money as possible toward its mission. In reality, adequately compensating your employees boosts satisfaction and retention, giving your nonprofit more capacity to make a difference in the community!

However, some nonprofits have also damaged their reputations by overpaying their leaders. This is why staff compensation policies are critical—they outline procedures for setting and increasing compensation so your employees are paid fairly but not excessively for their work.

Additionally, Astron Solutions’ guide to nonprofit human resources recommends taking a total rewards approach to staff compensation. This means you should consider both direct compensation (salaries, bonuses, and other monetary forms of payment) and indirect compensation (such as health insurance, retirement benefits, paid time off, and professional development opportunities) as you create this policy.

As your museum develops all of the above financial policies, compile them into a handbook that you’ll share with your entire team upon completion. That way, anyone who comes into contact with your organization’s finances—whether they’re employees, volunteers, or board members—will have a consistent reference for how to effectively navigate their situation to the benefit of the whole organization.