How to Develop Scalable AP Policies for Your Nonprofit

Making up directions as you go along might work when you are trying to recreate your grandmother’s made-from-scratch apple pie. But it’s never a good plan when you are managing accounts payable for your nonprofit organization. Consistent AP processes keep data accurate, approvals moving quickly, and your month-end close stress-free.

Your nonprofit’s accounts payable policies create easy-to-follow guidelines to help provide that consistency. These AP policies not only ensure the smooth operation of your organization but also provide a framework to scale as your technology evolves.

Here is why you need accounts payable policies for nonprofits and how you can design them to scale with your organization.

Why Your Nonprofit Needs Strong Accounts Payable Policies

A nonprofit’s success hinges on its ability to manage finances transparently and efficiently. Effective AP policies support financial compliance, scalability, and operational efficiency. Here are a few reasons why strong AP policies are essential for every nonprofit organization:

Timely Payments and Healthy Cash Flow

Efficiently managing your accounts payable helps your organization make timely payments, fostering good relationships with vendors and service providers. Clear guidelines on handling approvals, even when key staff are out of the office, keep the process moving without unnecessary delays. Timely payments—with no late fees—help maintain a healthy cash flow, which is crucial for the sustainability of any nonprofit.

Fraud Mitigation

AP policies establish clear standards and procedures, playing a vital role in deterring fraud. This includes measures such as requiring dual signatures on checks and ensuring the separation of duties. By dictating these standards, everyone is aware of the expectations so your organization can recognize and address outliers quickly and prevent bad actors from exploiting the system.

Streamlined Onboarding and Knowledge Sharing

With strong AP policies, everyone in the organization knows where to find information about your processes, what is required, and why. This makes onboarding new staff easier and prevents knowledge from being siloed with specific individuals.

What Your AP Policies Should Include

Good AP policies should remove confusion and provide consistency in how you manage expenses and pay your vendors. Here are some of the key elements that should be included in your AP policy document:

Receiving and Approving Invoices

Outline how invoices can be received and who should approve them, including backup approvers when staff are out of the office. This ensures that there is no bottleneck in the process and that invoices are processed promptly.

Adding Vendors to Your Master Vendor File

Specify who can add a vendor and what information is required for each vendor. Include guidelines on how often the Master Vendor File (MVF) is reviewed and updated, and when to request updated 1099 forms. Regular updates to the MVF help maintain accurate records and ensure compliance with tax regulations.

Adding Invoices to Accounting Software

Detail the documentation required for each invoice and the process for checking duplicates. This includes attaching copies for an easy audit trail. Clear documentation standards help maintain accuracy and facilitate audits.

Paying Invoices

Establish a schedule for when invoices are paid and when the AP subledger is posted to the general ledger (GL). Do you run your payments every Thursday or on specific days of the month? Consistent payment schedules help manage cash flow and provide a clear timeline for financial reporting.

Reconciling AP with Bank Transactions

Reconciliation of AP with bank transactions is crucial for smoothly closing the monthly books. This process ensures that all transactions are accurately recorded and you can promptly address any discrepancies and identify any possible fraud.

Handling Uncashed Checks

Different states have different rules for remittance to the state for unclaimed payments. Your AP policies should include guidelines on how to handle uncashed checks in compliance with state regulations.

Separation of Duties

Establish clear separation of duties across AP processes to prevent fraud and errors. For example, the staff entering invoices should not be the same as those approving payments. This internal control measure helps safeguard the organization’s assets.

Handling Discrepancies and Disputes with Vendors

Outline guidelines for addressing discrepancies and disputes with vendors. Clear procedures help resolve issues quickly and maintain good relationships with vendors. Knowing what to do in specific situations—and when they need to be escalated—gives your staff autonomy.

How Your AP Policies Should Evolve with Automated Payments

Nonprofits can benefit from automating many of the manual tasks associated with AP processes. Automated payments can increase efficiency, reduce errors, and provide better control over financial operations. Here’s how your AP policies should evolve with automated payments:

Understanding the Automated Payments System

Document how the automation is supposed to work. Ensure that your team understands the process and can spot-check the automation to make sure it’s working as intended. Regular reviews and testing help identify any issues early and ensure the system operates smoothly.

Recognizing Common Outliers

Include common outliers in your AP process document so your team can recognize them and address them quickly. Automated systems can sometimes produce anomalies, and your team should be equipped to identify and resolve these issues before they become major problems.

Clarifying Reconciliation with Automated Payments

Provide clear guidelines on what reconciliation looks like with automated payments. This includes understanding how automated transactions are recorded and cleared, ensuring they are accurately reflected in the financial statements.

Provide Continued Training for Your Staff

Continued training is essential to ensure that all staff understand and follow the AP policies and procedures. Here are a few ways to provide effective training:

• Conduct regular training sessions to keep staff updated on any changes to AP policies and procedures.
• Create accessible resources and documentation for quick reference. Link to them in your fund accounting system so everyone has access.
• Establish a support system for addressing questions and resolving issues promptly.

By investing in ongoing training, you can ensure that your team is well-equipped to handle AP processes efficiently and accurately.

Review Your Nonprofit’s AP Policies as You Scale

Strong accounts payable policies are essential for the smooth operation of any nonprofit organization. They provide a framework for managing expenses, ensuring timely payments, and maintaining good vendor relationships. As your nonprofit grows and technology evolves, it’s important to regularly update your AP policies to ensure they remain effective and scalable. Plan to review your AP policies annually, and any time you have a significant change to your processes, such as when you change your fund accounting system.

Ready to see how automated payments can help you increase efficiency and mitigate fraud in your AP processes? Check out the Guide to Understanding Automated Payments. By staying proactive and adapting to new technologies, your nonprofit can achieve greater financial stability and success.