Essential Financial Policies Every Board Must Prioritize for Effective Oversight

Boards play a critical role in guiding organizations toward financial health and sustainability. Without clear financial policies, boards risk mismanagement, loss of trust, and challenges during audits or funding reviews. This post highlights key financial policies every board should never overlook, focusing on reserve policies, expense approvals, internal controls, and why these areas matter to funders and auditors.

Why Financial Policies Matter for Boards

Financial policies provide a framework that guides decision-making and accountability. They help boards:

• Protect the organization’s assets

• Ensure compliance with laws and regulations

• Build trust with funders and auditors

• Support long-term financial stability

  
  

Without these policies, boards may face unexpected financial risks, delays in approvals, or audit findings that can damage reputation and funding opportunities.

Reserve Policies: Building a Financial Safety Net

A reserve policy defines how much money an organization sets aside to cover unexpected expenses or revenue shortfalls. Boards often overlook this policy, but it is essential for:

• Financial stability during uncertain times

• Maintaining operations without disruption

• Demonstrating fiscal responsibility to funders

  
  

What a Reserve Policy Should Include

• Target reserve amount: Usually expressed as a number of months of operating expenses (e.g., 3 to 6 months)

• Purpose of reserves: Clarify when and how reserves can be used

• Funding strategy: How the organization will build or replenish reserves

• Review schedule: Regular assessment of reserve levels and policy relevance

  
  

Example

A nonprofit board sets a reserve target equal to four months of operating expenses. The policy states reserves can only be used for unplanned expenses or revenue gaps, not routine spending. The board reviews the reserve level annually to adjust for changes in budget or risk.

Expense Approval Policies: Controlling Spending with Clarity

Expense approval policies ensure that spending aligns with the organization’s goals and budget. They prevent unauthorized or excessive expenditures and provide transparency.

Key Elements of Expense Approval Policies

• Approval limits: Define who can approve expenses and up to what amount

• Documentation requirements: Receipts, invoices, or contracts must accompany expense requests

• Segregation of duties: Different people should request, approve, and pay expenses to reduce fraud risk

• Reimbursement procedures: Clear steps for employees or board members to claim expenses

  
  

Practical Tips

• Set different approval levels based on dollar amounts (e.g., manager approval for expenses under $1,000, board chair approval for higher amounts)

• Use standardized forms or software to track approvals and documentation

• Train staff and board members on the policy to ensure compliance

  
  

Internal Controls: Safeguarding Assets and Ensuring Accuracy

Internal controls are processes designed to protect the organization’s assets and ensure accurate financial reporting. Boards must understand and oversee these controls to reduce risks of errors or fraud.

Common Internal Controls Boards Should Monitor

• Segregation of duties: No single person should handle all parts of a financial transaction

• Regular reconciliations: Bank statements and financial records should be reviewed monthly

• Access controls: Limit who can access cash, checks, or financial systems

• Audit trails: Maintain clear records of all transactions and approvals

  
  

Why Funders and Auditors Care

Funders want assurance that their money is used properly. Auditors look for strong internal controls to confirm financial statements are reliable. Weak controls can lead to audit findings, funding delays, or loss of grants.

How Boards Can Strengthen Financial Oversight

• Regular financial reports: Request clear, timely reports with explanations of variances

• Policy reviews: Update financial policies at least every two years or when circumstances change

• Training: Provide board members with financial literacy training to understand reports and policies

• Engage auditors early: Use audit feedback to improve controls and policies

  
  

Real-World Example of Policy Impact

A community organization faced a funding freeze after an audit revealed missing documentation for expenses and unclear reserve policies. After revising their expense approval and reserve policies, training the board, and implementing stronger internal controls, the organization regained funder confidence and secured new grants. This example shows how clear policies protect reputation and funding.

In conclusion, the establishment and adherence to robust financial policies are essential for the effective governance of any board. These policies serve as a framework that guides the financial decision-making processes, ensuring that the organization operates within its financial means while also pursuing strategic goals. By implementing comprehensive financial policies, boards can enhance transparency, accountability, and ethical practices within their organizations.