6 Must Have Financial Policies for Associations and Non Profit - OTUS Group (2024)

Introduction: Financial management is a crucial aspect of running any association or non-profit. Effective financial policies not only safeguard assets but also ensure compliance, transparency, and the efficient use of resources. This blog post outlines six essential financial policies that every association and non-profit should implement.

1. Budgeting and Fiscal Planning Policy: This policy is critical for guiding the annual budget preparation and aligning financial resources with organizational objectives. It includes:

• Timeline and Approval:
  • Complete and approve the budget before the fiscal year begins. For example, a client with a March 31 year-end recently had their budget approved in advance, allowing effective planning, especially for a projected financial shortfall.
• Monthly Budget vs. Actual Review:
  • A monthly review of the budget compared to actual expenses and revenues is required. This ensures ongoing financial control and allows for timely adjustments.
• Integration with Strategic Goals:
  • The budget should align with the organization’s strategic plans. Include procedures for regular monitoring and reporting for consistency and transparency.
• Roles and Responsibilities:
  • Emphasize that budgeting is not solely a finance function but requires buy-in from all departments. Encourage a collaborative approach where different teams contribute to the budgeting process, reflecting their needs and goals. This collaborative effort ensures a more accurate and realistic budget that serves the entire organization.

2. Internal Controls Policy: Essential for safeguarding assets and ensuring the accuracy of financial records, this policy should cover:

• Segregation of Duties: This prevents fraud and conflicts of interest. For example, the person who records transactions shouldn’t be the same individual who authorizes or approves them.
• Example of Authorization Protocols: In the case of one of our clients, internal controls are clearly defined based on expense amounts. For expenditures under $5K, approval is required from the Executive Director (ED) only. For amounts between $5K and $10K, both the ED and the Vice President (VP) need to authorize. For any expense exceeding $10K, approval from a board member in addition to either the ED or VP is mandatory. This tiered approach ensures appropriate oversight and checks at different financial thresholds.
• Regular Audits and Reviews: Regular internal and external audits are crucial to review and verify the accuracy of financial records and the effectiveness of internal controls.

3. Investment Policy: Outlines the organization’s approach to managing its investments, including:

• Purpose and Objectives:
  • State the purpose of investments, such as funding operations or supporting long-term goals. Clearly define the investment objectives with a balance between risk and return, aligned with the organization’s overall mission.
• Scope and Limitations:
  • Specify the types of permissible investments and any limitations or restrictions, focusing on balancing risk with the financial goals of the organization.
• Client Example for Cash Reserves:
  • A practical application of this policy can be seen in one of our clients’ approaches to managing their cash reserves. They chose to invest in cashable Guaranteed Investment Certificates (GICs), which provided them with the flexibility to access funds if needed, while also earning monthly interest income. This strategy aligns with the policy’s aim to maximize returns on reserves, without compromising liquidity and financial security.
• Roles and Oversight:
  • Assign responsibility for investment decisions and outline the process for regular monitoring and review. This ensures that investment activities are aligned with the policy guidelines and are reviewed for performance against established benchmarks.

4. Reserve Fund Policy: A crucial framework for ensuring financial stability and sustainability:

• Purpose and Level of Reserves:
  • Clearly define why reserves are maintained, whether for operational stability or specific projects. Establish target levels, ranging from 3 to 12 months of operating expenses, based on your organization’s needs and CRA guidelines.
• Usage and Replenishment Guidelines:
  • Specify conditions for using the reserves and outline a strategy for replenishment to maintain long-term viability.
• Review and Reporting:
  • Implement regular reviews of reserve levels and ensure transparent reporting to stakeholders, adapting the policy as needed to align with the organization’s evolving circ*mstances.
• Further Reading on Reserve Levels:
  • For a more in-depth analysis on determining the right reserve level for your organization, consider reading our previous blog post. It offers insights into various factors that should influence your reserve strategy.

5. Expense Reimbursem*nt Policy: Establishes clear rules for reimbursing work-related expenses incurred by staff and board members:

• Eligible Expenses:
  • Clearly define the types of expenses that are eligible for reimbursem*nt, such as travel, supplies, and training, and stipulate any limits or restrictions.
• Approval Process:
  • Detail the process for submitting and approving expense claims. For instance, in one of our client organizations, employee expenses, including charges on employee-issued credit cards, are approved by their respective managers. The expenses incurred by the Vice President (VP) require approval from the Executive Director (ED), while the ED’s expenses are subject to approval by a Board member. This tiered approval system ensures accountability and transparency at all levels.
• Documentation Requirements:
  • Outline the necessary documentation, such as receipts or invoices, required for expense claims and the procedure for submitting these claims.
• Transparency and Compliance:
  • Ensure that the policy adheres to relevant tax regulations and promotes transparency. Regular reviews and updates should be made to reflect any changes in tax laws or organizational procedures.

6. Procurement Policy: A crucial policy to ensure effective and ethical procurement in your organization:

You might be aware of the Canadian Government’s recent dealings over the ArriveCan app, where they contracted an IT company for over $100 million. The Auditor General, Karen Hagan, highlighted this as a case of ‘glaring disregard’ for basic procurement principles, partly due to the vendor’s lack of a fixed location. This incident underscores the vital importance of a solid procurement policy, particularly for large-scale, high-value projects.

• Procurement Process and Budget Compliance:
  • Outline your procurement steps clearly, from need identification to vendor selection and contract management. Particularly crucial is a policy for expenses that exceed the planned budget. For instance, if a project goes over its initial budget, steps like additional board approval should be in place before allocating more funds.
• Ethical Considerations and Conflict of Interest:
  • Your policy should ensure all procurement activities are conducted ethically. Include guidelines for addressing potential conflicts of interest, ensuring decisions are made fairly and transparently.
• Monitoring and Evaluation:
  • Regularly monitor vendor performance and periodically evaluate your procurement practices. This ensures you’re getting the best value and maintaining strong relationships with your vendors.

Conclusion:

Implementing these six financial policies lays a strong foundation for effective financial management, crucial for the success and sustainability of your association or non-profit. Regularly reviewing and updating these policies ensures they continue to meet your organization’s evolving needs.

But remember, creating these financial policies is just the beginning. It’s their active implementation, regular review, and adaptation that truly make the difference. If you’re unsure where to start or need guidance on how to tailor these policies to your organization’s unique context, we at Otus Financial Management are here to help. Our expertise in financial management for associations and non-profits can provide you with the support and guidance you need to strengthen your financial governance and strategy. Reach out to us for a consultation to discuss how we can assist in optimizing your financial management practices.

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