Recently, an article asked the question, “Are you one mistake away from disaster?” It really struck us how accurate it is to ask that question. Yet few nonprofits do ask it of themselves.
Unfortunately, some learn the hard way that not having good internal controls does put them one mistake away from disaster. Your organization’s reputation could be on the line if something goes wrong. And losing the goodwill of the public (and your donors) is the first domino in a long line to fall should a mistake derail your organization’s carefully built goodwill.
Here’s how having solid internal controls can prevent one mistake from creating a disaster for your organization.
What Are Internal Controls?
Internal controls are the policies and procedures that guide how your organization does things, especially as they pertain to managing money. Good internal controls ensure transparency around financial dealings. They create checks and balances to make sure that everyone handling your organization’s finances is doing so appropriately.
Examples of Internal Controls for Nonprofit Organizations
Common internal controls may include:
- Segregation of duties—separating who approves, records, and reconciles financial transactions
- Monthly bank and credit card account reconciliations by someone who does not manage the cash or issue checks
- Policies for handling cash, such as always having two people witness when cash is counted into or out of the safe
- Written approval required before purchases over a certain dollar amount
- Expense reimbursement policies
- Limits on credit card expenses
- Processes to approve new vendors
- Time tracking, including timesheet approval by supervisors
- Having an external CPA or auditing firm conduct an annual financial review
Your IT department should also have its own version of internal controls. This may include:
- Limiting access to sensitive systems, such as payroll systems
- Tracking permissions by user role and restricting access when appropriate
- Encouraging strong passwords and frequent password changes
While having so many policies may feel onerous, they’re actually quite freeing. Knowing how to handle cash, who approves vendors, and how to ensure the security of the organization’s IT systems is critical and provides everyone with peace of mind.
What Happens Without Internal Controls?
Without internal controls, your organization is a disaster waiting to happen. People may be tempted to take shortcuts, such as allowing one person to count out petty cash. Petty cash can “disappear” in such situations. Allowing one person to sign checks leaves loopholes for theft. And not having an annual audit or financial review by an independent CPA may leave small mistakes on the books that can lead to bigger problems later if left uncorrected.
Steps to Take Now
It’s likely that you already have some internal controls in place but are lacking others. That’s typical of nonprofits, especially ones undergoing “growing pains.”
Begin by reviewing your current internal controls. Where are the gaps? Some gaps are easy to fix, such as ensuring supervisors approve time sheets and limiting who can use the organization’s credit cards.
You may want to work with a consultant who can help you identify policy gaps and areas of concern. Because consultants work with many organizations, they know which areas are prone to problems.
Once you have internal controls in place, be sure to train your team on them. It is one thing to set down rules; it is another to make sure that everyone knows what they are. Ensure shared expectations of how and when the new internal controls should be followed.
Internal controls should not be seen as restrictive. When managed correctly, they are actually freeing, because they give you peace of mind that your organization has taken every step possible to protect itself from one mistake that can lead to disaster.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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