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Smart Internal Controls to Protect Funds for Canadian Charities
Managing funds responsibly is critical for any charity. Registered charities are trusted to use donations effectively to further their charitable missions. However, without proper internal controls, there's a risk of mismanagement or misuse of funds, which can damage a charity's reputation and even lead to losing its registered status with the Canada Revenue Agency (CRA).
Let's explore practical, easy-to-understand strategies your charity can use to minimize these risks.
1. Establish Clear Financial Policies
Every charity should have written financial policies that guide how money is handled. These policies should cover:
- Who is responsible for approving expenses
- How donations are recorded
- What documentation is needed for each transaction
Why it matters: Clear rules prevent confusion and reduce opportunities for fraud or mistakes. It also helps everyone understand their responsibilities when managing charity funds.
Tip: Review and update financial policies annually to keep up with changes in regulations or organizational needs.
2. Separate Financial Duties
A common mistake is allowing one person to control all aspects of financial management. Instead, divide responsibilities to create a system of checks and balances.
- One person should approve expenses.
- A different person should handle payments.
- Someone else should review bank statements.
Why it matters: When tasks are divided, it's harder for anyone to misuse funds without being detected. This separation helps prevent errors and fraud.
For instance, if one person writes checks, someone else should be responsible for reconciling the bank account. Similarly, if one person is responsible for handling payments, another person should be in charge of reviewing bank statements.
3. Create a Budget
A detailed, realistic budget helps keep spending on track and ensures funds are used for their intended purposes.
- Create a budget at the start of each fiscal year.
- Regularly compare actual expenses to the budget.
Why it matters: A budget provides a financial roadmap and helps identify overspending or unusual expenses early.
Tip: Share the budget with your board of directors and key staff members to ensure everyone is aligned.
4. Track Donations and Receipts Carefully
Accurately recording every donation and issuing proper receipts is a best practice and a legal requirement for Canadian charities.
- Use a secure system to track all incoming donations.
- Keep copies of receipts issued to donors.
Why it matters: Proper tracking prevents funds from missing and ensures compliance with CRA regulations.
Tip: Large donations require documentation, such as written agreements or donor letters.
5. Implement Approval Processes for Large Expenses
Set a threshold for expenses that require multiple approvals.
- For example, require two signatures for any expense over $500.
Why it matters: Requiring multiple approvals adds an extra layer of oversight, reducing the risk of unauthorized spending.
Tip: Use digital tools that track approval workflows to make this process more efficient.
6. Regular Financial Audits or Reviews
Periodic audits or independent financial reviews objectively assess your charity's financial condition.
- Large charities may require professional audits.
- Smaller organizations can benefit from informal reviews by trusted advisors or board members.
Why it matters: An outside review can catch errors or issues internal staff may overlook.
Tip: Consider an annual review even if a full audit is not legally required.
7. Train Staff and Volunteers on Financial Best Practices
Everyone handling money should understand your charity's financial policies and the importance of internal controls.
- Provide training when someone new joins.
- Offer refresher courses periodically.
Why it matters: Awareness and education help prevent mistakes and ensure everyone follows the same procedures.
Tip: Use real-life scenarios in training sessions to make the information more relatable and engaging.
8. Monitor Bank Accounts Regularly
A person not involved in daily transactions should review bank and credit card statements regularly.
Watch for any unusual or unauthorized transactions.
- Look for unusual activities or unauthorized transactions and changes.
Why it matters: Regular monitoring helps catch issues early before they become more significant problems.
Conclusion
Now, it's time to implement these strategies. Strong internal controls are the backbone of financial integrity for Canadian charities. By implementing clear policies, separation of duties, regular reviews, and proper training, your charity can protect its funds and maintain the trust of donors and the public. It's all about being proactive, transparent, and responsible with the resources entrusted to your mission.