Internal Controls Every Nonprofit Should Have

What Are Internal Controls?

Internal controls are the policies, procedures, and practices an organization uses to protect its assets, maintain accurate financial records, reduce risk, and establish accountability.

For nonprofits, strong internal controls are especially important because organizations are responsible for managing funds entrusted to them by donors, grantors, government agencies, boards, and the communities they serve.

Internal controls do not need to make financial operations complicated. Effective controls should create clear responsibilities, appropriate oversight, and consistent processes.

1. Separate Key Financial Responsibilities

Whenever possible, the same person should not control an entire financial transaction from beginning to end.

For example, the person approving an expense should ideally be different from the person issuing the payment and the person reconciling the bank account.

Smaller nonprofits may not have enough staff for complete segregation of duties. In those situations, additional review by an executive director, board treasurer, or another authorized individual can provide an important compensating control.

2. Establish Clear Approval Procedures

Organizations should clearly define who has authority to approve purchases, payments, reimbursements, contracts, journal entries, and other financial transactions.

Approval thresholds should also be documented so employees understand when additional authorization is required.

Clear approval procedures reduce uncertainty and help prevent financial decisions from being made without appropriate oversight.

3. Perform Independent Bank Reconciliations and Reviews

Bank and credit card accounts should be reconciled regularly to the accounting records.

Just as important, completed reconciliations and supporting statements should receive an appropriate independent review.

This review helps identify unusual transactions, errors, missing documentation, or differences that require investigation.

4. Maintain Supporting Documentation

Financial transactions should have documentation that clearly explains what occurred and why.

Invoices, receipts, contracts, approvals, reimbursement documentation, grant records, and other supporting materials should be retained according to the organization's policies.

Good documentation creates an audit trail and helps demonstrate that organizational funds were used appropriately.

5. Control Access to Financial Systems

Access to accounting software, banking platforms, payroll systems, credit cards, and other financial resources should be based on an employee's responsibilities.

Organizations should periodically review access and promptly remove or modify permissions when responsibilities change or an employee leaves.

Administrative access should be limited to individuals who actually require it.

6. Review Financial Reports Regularly

Internal controls do not end when transactions are entered into the accounting system.

Leadership and the board should receive timely financial information and review actual results against budgets, significant variances, cash balances, restricted funds, and other relevant financial activity.

Regular review allows potential problems to be identified before they become larger issues.

Strong Controls Support the Mission

Internal controls are not simply accounting requirements. They are part of a nonprofit's financial infrastructure.

When responsibilities are clear, approvals are documented, accounts are reviewed, access is controlled, and financial information is monitored consistently, organizations are better positioned to protect their resources and maintain accountability.

Strong financial controls ultimately allow nonprofit leaders to spend less time responding to preventable financial problems and more time advancing the organization's mission.