From purpose to the source of revenue and types of expenditures, non-profit organizations differ in many ways. However, one objective all non-profits have in common is they strive to keep administrative costs down. For many small non-profits, all administrative functions, including the accounting department, are operating on a tight budget. In order to meet budgetary constraints, the accounting department is often operating with an extremely small staff.  In many smaller non-profits, the entire accounting department is comprised of one employee or an external contracted accountant.

Difficulties with a Small Accounting Department
With an accounting department this small, the biggest obstacle an organization must overcome is implementing a strong internal control system, especially over cash.

It’s easy to just hand the reigns of the entire organization’s financial records over to one person, but in doing so, the organization is at great risk of fraud and/or theft.The management of the organization is tasked with creating an internal control system that will best mitigate the risk that the organization will become a victim of fraud and theft.

Strengthening Your Internal Control System
This obstacle can be overcome. A strong internal control system is possible in even the smallest organization.  However, it will require the organization, both employees and board members, to work as a team.This can be a daunting task to employees who are not confident in their accounting knowledge, but we have a few suggestions on how to strengthen your internal control system over cash, even if you aren’t well versed in finance or accounting.

1. Get the executive director involved.  The executive director should be a check signer to strengthen the safeguarding of assets by segregating the function of recording cash disbursements from the approval of cash disbursements.This means the accounting staff member should not be an approved check signer because they are responsible for recording transactions into the organization’s accounting software. A member of the board, such as the treasurer and/or president, should also be an approved check signer, in case the executive director is not available to sign checks.

2. Implement an invoice approval process. All transactions should go through an approval process, and your accounting staff member should not be approving invoices for payment. Invoice approval should be completed by a member of management or a member of the governing body.

In addition, the person approving transactions should not be the same person requesting payment on an invoice.  Therefore, if you designate your executive director as the person approving all invoices, a separate policy should be implemented for approval of invoices requested for payment by the executive director.

3. Timely review of monthly bank statements and bank reconciliations. The executive director or a member of the governing body should review the bank statements and bank reconciliations prepared by the member of your accounting staff on a monthly basis.

In order to complete a thorough review of the bank statement, this person should have access to copies of the canceled checks, either via online access or received with the bank statement.It is ideal if the review of the bank statement occurs prior to giving the statement to the accounting staff for reconciliation; however, sometimes this is not an efficient method with regards to closing month end timely.

If you can’t review the bank statement prior to when the bank account reconciliation is performed, it should be reviewed in conjunction with the person’s review of the monthly reconciliation.

4. Require an audit trail. This suggestion seems like the simplest, but it can be the hardest to implement.  For all transactions recorded, require supporting documentation be retained, in accordance with a document retention policy. The creation of an audit trail can be accomplished in various acceptable ways.

One method for creating an audit trail for all cash disbursements would be to require a form to be completed by the person requesting payment on an invoice with supporting documentation attached to the request.  Include required requestor and approval signatures on this form. Once the invoice is paid, a check stub should be affixed to the disbursement support.

Moving Forward
Not all of these suggestions will work for your organization, but just implementing one or a variation of one of them, will begin the process of mitigating your risks. If you create an atmosphere and environment that emphasizes following procedures and high standards of accountability, you may be able to prevent big headaches in the future. For more tips on how to strengthen your cash control, talk to an advisor with knowledge and expertise in the non-profit field.