The Importance of Proper Documentation
Nonprofit leaders are mission-oriented, driven by a higher order of inspiration to serve the
community in a unique way. Proper documentation is probably the last thing on the mind of a
nonprofit leader, but it is necessary and absolutely vital to your long-term success as an
organization. Your mission is what drives and defines you, but proper documentation is what
can transition you from a group of people with a purpose, to a reputable, successful, growing
organization fulfilling that purpose.
This month, we focus on key documentation that every nonprofit manager should make sure
they have. This report provides descriptions of documents and their importance. As you read
through, note each document mentioned and ask yourself:
1.
2.
3.
Do I have this document?
Is this document current and up to date?
Where is this document located? is it accessible?
Documentation
Current Legal Status
Please note that at Cathedral Consulting Group, we are not lawyers and this is not legal advice.
The documents listed below are examples of what your organization may need. For specific
questions regarding legal documentation and insurance, contact your accountant and/or
attorney.
1. Your IRS determination letter. This is probably the most important legal document
your nonprofit organization has. This letter is proof that your organization is tax-exempt
and should be kept in a safe place. It is a good idea to review the letter once a year or
with each new Executive hire. A new Executive Director may assume that all is well with
the IRS letter, when Advanced Ruling Periods, a change in mission focus or even a
name change of the organization may call for specific actions on your part to maintain
your tax exempts status.
2. State registration documents are important to have and understand. Each state
maintains a list of all registered nonprofits and most states have specific laws that
regulate fundraising. Know which states your organization is fundraising in and comply
with state laws.
3. Articles of incorporation.
4. Form 990s should be filed annually. It is required that every organization make the three
most recent available publicly.
One way to familiarize yourself with the state of your documentation and filings (at least the
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public perception of such) is to search your organization’s entry on GuideStar and other similar
charity watchdog sites. It can be surprising to find out what your public record looks like to the
public. And without some effort on your part, many of the charity watchdog sites, especially the
smaller ones, will very likely be publishing outdated or incorrect information about your
organization.
Insurance & Risk Management
1. General Liability Insurance covers bodily injury and property damage. Every
organization is potentially subject to physical damage claims and should have general
liability insurance that will cover legal defense and any financial judgment incurred. In
the event of a possible claim, know the name and contact information of your insurance
representative and have your insurance documents in a secure, accessible place.
2. Directors and Officers Insurance offers protection against non-physical claims and is
recommended for most nonprofit organizations. Simply put, it is protection for employees
and board members for actual or alleged wrong decisions such as employment-related
practice issues or mismanagement of funds.
3. Insurance agencies offer Risk Management Evaluations, usually for free. Because
organizations and laws change often, risk and insurance evaluations are an ongoing
responsibility, not a one-time exercise. If your RM evaluation is out of date, consider reevaluating. Document all past and present evaluations and seek more than one opinion.
Financials
This section touches briefly on basic financial documents. Refer to our report on Financial
Statements, which can be found on our website, for more detailed descriptions.
1. Bank Account Documents.
2. Document a written Procedure for Spending Account Funds that should be given to
anyone with access to the bank account.
3. Bank accounts should be reconciled at least quarterly. Keep very close track of Bank
Statements and spending in order to prevent or catch any fraudulent activity or mistakes.
Control access to the account by password-protecting computer files that contain any banking
information. Physical documentation should be locked with the key location given only to a few
trusted people.
Avoid co-mingling of any kind. Keep the organization bank account free from personal funds
and use organizational assets wholly for the purposes of the organization and not for personal
purposes.
Budgeting & Forecasting
1. Establish a Budget to help you stay on track. Reconcile quarterly or annually by
comparing your budget with actual revenue and expenses. This will help keep expenses
as low as possible and prevent surprises and the need for emergency appeals – which
are so unappealing to your donors.
2. Financial software such as Quickbooks makes it easier than ever to keep financial
records well organized. As with any electronic program, the end product is only as good
as its input. Here are three statements you should print and review each month:
a. Income Statements show the money earned or raised (Revenue) minus the
money spent (Expenses) resulting in Net Assets, giving you a sense of how
efficiently your organization is operating over time.
b. Balance Sheets take current assets minus liabilities, and are helpful when it
comes to managing assets and debt in a way that will benefit the organization the
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most.
c. Statement of Cash Flow shows change in your cash throughout the year, where it
comes from, and in what ways it is being spent.
Many nonprofits, especially the smaller ones, do their accounting on a cash basis instead of
using the accrual method. This can be okay, and sometimes necessary if cash is tight. In that
case, keeping a close eye on the general ledger and weekly reconciliation of bank statements is
essential.
Employees
We recommend that you keep a separate file for each employee. Constantly update employee
records as needed, and hold on to records of ex-employees for a minimum of two years. This
includes:
1. W2 Forms (for payroll employees) or 1099 Forms (for independent contractors)
2. Background Checks & Drug Tests. This is quickly becoming a mandatory requirement
for many industries’ employee screening process, and is practically a must for
organizations that involve interaction with minors. .
3. Legal Status. If the employee is not a natural-born citizen of the United States, do they
legal admission to the US and permission to work here? Since 9/11 this has become a
very closely watched issue.
4. Standard Employment Letter. Not only is it important to have an employment letter on
file for each employee, but you should review the letter periodically to make sure it is
current and relevant.
5. Performance Reviews. The first review can be at 90 days of hire, and annually from
there on. An Exit Interview should be conducted and documented upon termination of
any employee.
6. Benefit Package. A manager should know what an employees real cost is. This includes
salary, benefits, training, bonuses, etc.
7. Responsibilities of each position clearly outlined and defined in written job
descriptions.
Management Board
1. By-laws that are up to date and relevant are essential for ensuring good governance. As
an organization grows and changes, the by-laws should be reviewed and amended.
2. A detailed Conflict of Interest policy should cover all potential conflicts involving board
members, employees, donors and sponsors. Important points to cover in this policy
should include:
a. Disclosure and Recusal procedures for members not truly independent of the
organization, its clients or its vendors.
b. Annual donation and participation requirements for board membership must
be clearly stated and updated as necessary.
c. Every board meeting should have documented minutes, which should be kept in
perpetuity.
Organizational Information
We recommend you keep a manual available to all staff that includes:
1. A clear Mission Statement which defines the purpose of the organization. Not only
should a mission statement be displayed for everyone to see, , but ideally, every
member of your organization should have it memorized. (To learn more, view our report
dedicated to the Mission Statement, which can be found on our website)
2. A detailed Organizational Chart should make clear reporting structures, direct reports
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and management responsibilities and should be familiar to all staff employees.
Document Storage
1. Store original copies of key documents and contracts in a secure location, such as a
locked filing cabinet or a safe deposit box.
2. For documents that should be easily accessible for all employees, consider posting
them, circulating electronically or publishing in the employee manual.
3. Protect your computer files by frequently saving onto a CD, USB drive, or external hard
drive.
Once your documents are properly organized, you will find running the organization efficiently
becomes easier. An additional benefit of proper documentation is transparency and
accountability, which will please potential donors. Your organization will immediately become
more reputable. Also, it is advantageous to have templates, manuals and written policies in
place to make hiring and training of employees more structured.
Articles for Further Reading
1. IRS Government Website: Find tax information as well as documents and forms for
nonprofit organizations directly on the IRS website. http://www.irs.gov/charities
2. GuideStar: This website provides information about nonprofits, such as yours.
http://www2.guidestar.org/
3. Financial Statements: For more information on financial statements including Income
Statement, Balance Sheet and Cash Flow, see website www.cathedralconsulting.com.
Peter Giersch is Managing Director and Melissa Mason an Intern Associate in the
Midwest Office.
For more information, please visit Cathedral Consulting Group LLC online at
www.cathedralconsulting.com or contact us at info@cathedralconsulting.com.
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