How to write the perfect financial management policy

Developing and implementing a written financial management policy is an essential practice for any charity, regardless of its size. In the absence of an adopted policy, staff and board members are likely to operate under a set of assumptions that may or may not be accurate or productive. This is a huge potential risk to any organisation. A financial management policy fills this void and mitigates the associated risks.

 

Essentially, a financial management policy is a list of agreed rules that should be adhered to in all areas of an organisation’s finances. Its purpose is to describe and document how the board wants financial management activities to be carried out. The main purposes of the policy are:

• To assist in fund management
• To assist in the maintenance of controls
• To provide a training and monitoring resource
• To be used as a reference document by the staff, management, board of trustees, auditors, and other stakeholders

The policy should cover an organisation’s accounting systems, practices, and procedures (e.g. the input, processing, output, control, and distribution of financial data and reports). It should be developed to set out the practices which will:

• Ensure that the organisation’s accounts conform to sound accounting principles and practices
• Enable the Treasurer, board of trustees, and management to obtain accurate and timely financial reports monthly, thereby promoting sound financial management
• Ensure correct and accountable use of funds and other resources

Some charities develop more comprehensive and detailed policies that incorporate more specific responsibilities.

 

The most important action is to create and adopt a policy that meets your organisation’s needs. To accomplish this, every financial policy needs to address key areas and create some rules. Financial rules are your organisation’s agreements about how it will look after its money. As well as helping your organisation to function better, financial rules show funders and other bodies that your group is looking after its money well.

 

To agree financial rules, your committee will need to decide organisationally relevant detail, such as (but not exclusively):

 

Financial Records

• What sort of financial records will you keep in order for your organisation to meet its legal and other statutory obligations, such as the Charities Act and Her Majesty’s Revenue & Customs regulations?
• Do the trustees have proper financial control of the organisation? Does the organisation meet the contractual obligations and requirements of funders?
• Will you use a petty cash book if cash payments are being made?
• Prior to the start of each financial year, will the trustees approve a budgeted income and expenditure account for the following year? If so, how will it be set and agreed?
• At the year’s end, how will the budget be reviewed, assessed and revised?
• Will a report comparing actual income and expenditure with the budget be presented to the trustees whenever meetings take place?
• Will the organisation appoint an appropriately qualified auditor/ independent examiner to audit or examine the accounts?

 

Banking

• What bank or building society accounts will you hold? How many signatories will you have and who will they be?
• Will the bank mandate (list of people who can sign cheques or authorise bank payments on the organisation’s behalf) always be approved and recorded by the trustees after any changes to it?
• Will the organisation require the bank to provide statements every month and will these be reconciled? Will the organisation use any other bank or financial institution or use overdraft facilities or loans without the agreement of the trustees?
• Will each cheque be signed by at least two people? Will any BACS payments be agreed and authorised by at least two different signatories?

 

Petty cash and cash handling

• How will you deal with petty cash and the amount of the float? What will be the maximum amount which can be paid out in cash

 

Income

• What form will monies received take (for example, cash, online payments, etc.)?
• How will these payments be recorded?
• Will all monies received be recorded promptly and (if relevant) banked without delay? Will the organisation maintain files of documentation to back this up?
• What form will donations take, and what kinds of donations will be received?
• How will you manage donations?
• What considerations will there be for Gift Aid and Gift Aid reporting?
• What form will your fundraising activities take? How will funds be managed, and how will you ensure separation (for restricted funds) and transparency?

 

Payments (expenditure)

• Will the organisation ensure that all expenditure is properly authorised and that this can be demonstrated? Who will be responsible for holding any cheque books? (including unused and partly used cheque books).
• What policies will be put in place to regulate online banking and credit card payments? Will a system of checks and balances be put in place? Or will spending otherwise be monitored and reviewed?
• Will the relevant payee’s name always be inserted on the cheque before signature and will the cheque stub always be properly completed?
• Are there certain small items which may be bought without going to a meeting for approval, and if so, what is the maximum amount of money that can be spent in this way?

 

Payment documentation

• Will every payment from the organisation’s bank accounts be evidenced by an original invoice?
• Will that original invoice then be retained and filed?
• Will any cheque signatory ensure that it is referenced with: cheque number, date cheque drawn and amount of cheque?
• How will wages and salaries be recorded with a clear trail to show the authority and reason for payments?
• How will the organisation record and agree expenses and allowances?

 

Reporting

• How will your organisation define the financial year (for example, if your accounts will run from 1 April to 31 March, from 1 January to 31 December, or on a different cycle)?
• How often will the treasurer report to the board? Will you require written reports? Will there be a finance sub-committee?

 

When these considerations are made, all details should be discussed between the treasurer, the finance committee and the executive board. All elements should be subjected to an informal risk assessment before drafting a policy.

 

Once a policy is drafted, it should be reviewed and discussed before being presented to the board for approval and adoption. All incoming staff should be trained on the finalised policy.

 

Any financial management policy should be reviewed at least annually.

 

To summarise, a robust financial management policy clarifies the roles, authority, and responsibilities for essential financial management controls, activities, and decisions.