For small nonprofits, financial resources are limited and every dollar counts. Internal controls — policies and procedures designed to safeguard assets, maintain financial accuracy, and ensure compliance — are critical to protecting these resources. Without them, nonprofits risk errors, fraud, and financial mismanagement that can jeopardize their mission and reputation.

Why Internal Controls Matter

It’s easy to assume that hiring trustworthy people is enough to keep finances in order, but even the most reliable employees are human. Mistakes happen, from misapplied costs to overlooked expenses, and these errors can add up to significant financial losses over time. Without safeguards in place, even a well-intentioned employee might unknowingly expose the organization to risk.

Fraud is another concern. Research shows that over half of occupational fraud cases are directly linked to a lack of internal controls (32 percent) or the override of existing controls (19 percent). Small nonprofits are especially vulnerable, as many lack the resources to establish formal oversight. In fact, only 39 percent of nonprofits with fewer than 100 employees have strong internal controls, compared to 81 percent of larger organizations.

The consequences can be severe. Fraud often goes unnoticed longer in small nonprofits, leading to greater financial losses. Beyond the numbers, the absence of internal controls signals potential problems to auditors and funders, undermining trust and credibility.

The good news? Implementing internal controls doesn’t have to mean a complete overhaul. Even simple steps, like segregating financial duties or conducting periodic reviews, can significantly reduce risk. These measures can help protect assets and create a culture of accountability, ensuring that every dollar is used as intended to support the mission.

10 Key Internal Controls for Small Nonprofits

  1. Segregate Financial Duties

Assign different responsibilities to separate individuals. For example, ensure that the person who logs incoming checks is not the same person responsible for depositing them. Similarly, payroll preparation should be handled by someone other than the person distributing or approving payments.

  1. Require Dual Signatures for Checks

Establish a policy requiring two signatures on all checks over a specific threshold. This straightforward measure reduces the risk of unauthorized payments and ensures transactions are reviewed by multiple individuals.

  1. Reconcile Bank Statements Monthly

Conduct monthly bank reconciliations to compare the nonprofit’s records with bank statements. This process helps catch errors, detect unauthorized transactions, and maintain accurate financial records.

  1. Control Access to Financial Systems

Limit access to sensitive financial systems and data based on job roles. Use strong passwords, two-factor authentication, and physical security measures to protect against unauthorized access.

  1. Pre-Approve Expenses in Writing

Implement a policy that requires employees to seek written approval for reimbursable expenses before they are incurred. This ensures proper oversight and adherence to budget limits.

  1. Review Vendor Lists Regularly

Assign an objective individual, such as a board member or external reviewer, to periodically review vendor lists. This helps identify fictitious or unnecessary vendors and ensures all relationships are legitimate.

  1. Establish Cash Handling Policies

Secure all cash in a locked drawer or safe and deposit it promptly after receipt. Require detailed records of all cash transactions to maintain accountability and prevent loss.

  1. Conduct Background Checks on Key Employees

Perform background checks for employees and volunteers who handle financial transactions. Conduct these checks before hiring and periodically throughout their employment to minimize risk.

  1. Monitor the Budget Regularly

Create an annual budget and compare actual spending against budgeted amounts. Regular reviews help identify discrepancies early and provide insights for better financial decision-making.

  1. Engage the Board in Oversight

Involve board members in reviewing financial statements, policies, and major transactions. This active participation enhances transparency and strengthens governance.

The Role of Technology

Technology can play an important role in strengthening internal controls for small nonprofits. With limited staff and resources, leveraging digital tools can help streamline processes, reduce human error, and provide real-time monitoring of financial activities. Key features include:

  • Automated Approvals: Many accounting software programs offer features like dual approvals for payments and expense reimbursements. These tools ensure that no single person can authorize or execute a transaction without proper oversight.
  • Real-Time Monitoring: Digital systems can flag unusual transactions or discrepancies as they occur, allowing organizations to address potential issues immediately. Alerts for large transactions or repeated payments to the same vendor can prevent errors and detect potential fraud.
  • Access Control Features: Financial software often includes role-based access settings, allowing organizations to limit what each user can view or edit. For example, a volunteer may have permission to enter data but not approve payments, while board members may only have read-only access to financial reports.
  • Expense Tracking Tools: Mobile apps for expense tracking and approvals make it easy to manage reimbursements and pre-approval processes, even when staff or volunteers work remotely. These tools also ensure that all expenses are documented.
  • Digital Record-Keeping: Cloud-based solutions provide secure, centralized storage for financial records, making it easier to maintain accurate documentation. This ensures compliance with auditing requirements and provides a backup in case of physical loss or damage.
  • Data Analytics: Nonprofits can use analytics tools to generate reports that provide insights into spending patterns, donor contributions, and budget variances. This information helps organizations identify trends and potential inconsistencies.

Building a Strong Foundation

Internal controls are more than just safeguards — they are the foundation of a nonprofit’s financial health and credibility. By implementing even a few simple controls, small nonprofits can significantly reduce risks, improve transparency, and build trust with donors and stakeholders. For assistance in assessing or strengthening your internal controls, contact PBMares Not-for-Profit Partner Bo Garner.