Not-for-profits (NFP) fulfill a need within their communities. Through the establishment of a unified mission, NFPs are eager and energetic to serve the needs that are present and arise within their community. Though ready to make a difference each day, their bookkeeping can become a couple steps behind what it should be. As an NFP, sharing and living out the mission should be the number one priority. However, being able to report on the financial activity should be a paralleled priority.
Bookkeeping is critical in the overall NFP success by reporting timely and accurate financial information. Below is some insight into what processes and internal controls are, why they are important for every NFP organization, and some applied examples!
Processes Versus Controls
Every NFP has their own unique method when it comes to completing their bookkeeping. This method will consist of a process and controls. A process is culminated of the various steps that need to be completed. An example of a process may be when an NFP receives an invoice, they enter that invoice into their bookkeeping software, and then the invoice is paid with a check.
Controls are a way to verify that the information within the process is correct. In essence, controls are selected and practiced to mitigate risk. Using the process above, an implemented control would be once an invoice is received, the Executive Director initials the invoice saying that the services were completed and puts an account number on the invoice. Controls provide a level of protection that the NFP has checks and balances.
Risks Without Processes or Controls
So, what happens if you do not have the protection that comes with processes and controls? Below we will reveal six posed risks to consider.
- Invoices may be double paid. Without processes or controls in place, invoices may be paid by a manual check and a computer-generated check. The solution is to have all invoices paid by the bookkeeping software and stamped “paid” or have the check remittance attached as proof of payment.
- Deposits (contributions) are not entered into the accounting software or put into the bank accounts on a timely basis. Those deposits could be lost or unintentionally put into an incorrect bank account. The solution is to have all deposits entered into the bookkeeping software, then brought to the bank within 48 hours of receiving.
- Not keeping invoices and deposits in an organized manner for review by governance, internal staff, or external entities. The solution is to create a standard way of filing documents. Some organizations file invoices by vendors and deposits by month.
- Non-timely financial statements and bank reconciliations provided by the board of directors or finance committee. The solution is to have financial statements and bank statements readily available to identify errors or irregularities.
- Loss of general public confidence by bad record keeping, late financial statements, or tax returns. The solution is to be aware and stay up to date on operations, applicable supporting documents, and regulatory filings.
- Internal or external fraud may occur. The solution is to monitor assets, promote operational efficiency, and encourage employees to adhere to policies and laws.
Types of Controls
Each NFP has the ability to choose what kind, where, and how they want to place controls in their process. No matter the selection, it is good practice to have a combination of preventative and detective controls.
Preventative controls are done prior to a completed transaction. Below are some preventative controls that can be implemented for an example of paying a bill:
- Once the bill is received, the receptionist initials the date it was received.
- Then, the bill is provided to the applicable department receiving the services. This is where the manager can initial and write the bookkeeping account code on the bill.
- The bills are then entered into the bookkeeping software.
- When the checks are printed, attach to the invoice for the Executive Director to sign.
- After signing the checks, the check stub with invoice remittance is provided to the receptionist for mailing. The check remittance and invoice are then given back to the bookkeeper to be filed.
On the other hand, detective controls are implemented after the transaction is completed. Some examples of detective controls are:
- Every month the bank statement is mailed to the Board of Director’s President’s or Treasurer’s address. The statement is opened and all the deposits and check images are scanned. Once approved, the board member initials, dates, and sends the bank statement to the bookkeeper for the bank reconciliation process.
- Bank reconciliation is performed (monthly), then provided to the Treasurer for any outstanding items. The Treasurer initials and dates the reconciliation for proof of review.
- Monthly financial statements such as the statement of financial position (balance sheet), statement of activity (income statement), and statement of cash flows along with actual to budget and actual to prior year reports are provided to the Board of Directors and Finance committee for review and approval. This can be documented in the board of directors’ minutes.
Why Internal Controls Matter
Though we offered examples above, it is important to note that each NFP will have various levels of internal controls based on the size of the organization and associated risks. A recent trend is for NFPs to hire an outside bookkeeping company to process transactions while reporting financial results. By doing this, an additional control is introduced to the process that diminishes an administrative burden.
We want NFPs to succeed and provide awesome services and programs for the communities they serve! If you have any questions regarding the process, internal controls, or other items, please feel free to contact one of our friendly auditors for a free consultation. We are here to serve! And, we thank you for serving others with excellence.