Without the right internal controls, even honest mistakes can lead to big losses. In this post, we’ll break down the essential practices your nonprofit needs to protect your funds, avoid costly mistakes, and build trust with donors.
Did you know that a lack of internal controls was cited as the reason for 35% of fraud cases in nonprofits?
You might not think much about internal controls…until a simple mistake or intentional theft turns into a big headache.
Whether you’re just starting out or tightening up existing processes, these simple steps can go a long way in protecting your mission and building trust with your donors.
Internal controls for nonprofits are a set of rules and practices that help your organization handle money responsibly.
Think of them as built-in checks and balances, ways to make sure that donations are protected and expenses are approved properly.
These practices are usually written out in an official internal control policy, so everyone on your team knows what’s expected and can be held accountable.
Even if you’re a small nonprofit, putting simple controls in place can go a long way toward keeping your financial transactions running smoothly and transparently.
While nonprofits manage finances differently from businesses, internal controls for charities are just as essential. They help safeguard your donations and reduce the risk of errors, fraud, or misuse.
But internal controls do more than keep your finances in check. They help you build trust with your donors, board members, and broader community.
When your internal controls are strong, people can feel confident that their support is being used wisely.
Every nonprofit handles money a little differently, so internal controls can look a bit different, too.
Here are six key internal controls that most nonprofits can benefit from to improve financial stewardship.
One of the most important money-handling procedures for nonprofits is making sure no single person has control over an entire financial process.
This means separating responsibilities for approving expenses, handling money, and recording transactions. It helps reduce the chance of mistakes or fraud going unnoticed.
For example, if one person deposits checks and also records donations, there’s room for error or dishonesty. But if another staff member reviews the deposits, it creates a healthy system of checks and balances that protects both your organization and the individuals involved.
Having a written internal control policy is crucial for nonprofit transparency. It spells out your procedures and expectations so everyone, from board members to part-time staff, knows how money should be handled.
This can include details like who approves expenses, how reimbursements work, or what to do if you find a financial discrepancy.
A simple, easy-to-understand policy helps prevent confusion and sets a tone of integrity for your whole team. Plus, when questions or situations arise, you already have guidelines to reference.
When your organization handles donations or sensitive information, it’s important to know that you can trust the people working with you.
A background check is an internal control that helps reduce risk, especially in finance.
Along with a clear job description, background checks ensure that people are placed in roles they’re equipped for and that your team has integrity from the inside out.
It doesn’t mean you’re assuming the worst about anyone, but it does show you’re taking steps to protect your organization.
Regularly reviewing your bank and credit card accounts helps catch any errors or unauthorized activity early.
This includes reconciling accounts each month, comparing them to your internal records, and making sure everything lines up. It may feel like a tedious task, but it’s actually one of the best ways to protect your funds.
For example, if a duplicate charge goes unnoticed, it could throw off your budget. Or if a fraudulent transaction appears, catching it quickly means you can take action before it causes bigger issues.
Authorizations ensure financial decisions go through the proper channels before money is spent.
By requiring supervisor or board approval for purchases and reimbursements over a set amount, your nonprofit creates a natural checkpoint that prevents overspending or questionable expenses.
For instance, if a staff member needs to purchase equipment over a certain amount, having a policy that requires written approval helps confirm the expense is necessary and within budget.
Clear authorization processes also make it easier to track spending and reassure donors that funds are being handled responsibly.
Cash handling is one of the riskiest areas in nonprofit financial management, which makes strong controls essential.
Have clear procedures, like:
These necessary procedures help prevent theft, loss, and unintentional errors.
Internal controls are a mindset that should guide every part of your organization. Here are a few best practices your nonprofit can follow to strengthen accountability and keep things transparent across the board.
Even small nonprofits benefit from occasional internal audits. These voluntary reviews, whether done by a board member, outside consultant, or an internal team, can uncover gaps in your processes, check for compliance, and confirm that your records match reality.
Think of it as a routine check-up to keep your financial health on track.
Bonus Tip: Keep the internal audit a surprise. Unannounced audits are more likely to uncover any potential fraud or discrepancies!
Make sure everyone in your nonprofit, including your board members, understands how money flows through your organization.
A great way to do this is by creating a flowchart that visually maps out the process. Not only does this help everyone see the bigger picture, but it also sparks conversations about who’s responsible at each step and where potential weaknesses might be.
This kind of transparency improves communication and can help catch any issues before they become serious problems.
Automation tools are especially helpful for larger nonprofits looking to streamline their processes and reduce human error.
Consider using tools that automate repetitive financial tasks, so your team can focus on more strategic work.
Plus, automation adds an extra layer of security, reducing the risk of fraud.
At the end of each fiscal year, compile a comprehensive report that summarizes your income, expenses, and overall financial health.
This report should be reviewed by your nonprofit leadership, and in some cases, shared with your donors.
It not only reinforces transparency and accountability but also helps you assess how well your internal controls worked throughout the year and where you need to make improvements.
By setting up strong financial processes from the start, you can avoid unnecessary stress down the road and sustain your mission.
If you’re looking for a simple and effective way to manage donations, Donorbox is here to help!
Sign up for Donorbox today and take the next step in streamlining your nonprofit’s donation process while keeping your financial controls in check.
With a background in professional writing, Lydia has over five years in nonprofit communications under her belt. Lydia’s passion for supporting nonprofits sparked during her college internships with global mission organizations, where she gained valuable insights into fundraising marketing strategies. These experiences have continued to fuel her dedication to empowering nonprofits through her writing.
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Lydia Wohlgemuth