How to improve spend control for not-for-profits

Konstantin Bredyuk Director of Product at ApprovalMax

Not-for-profits (NFPs) belong to the types of organisations that most frequently outsource bookkeeping, accounting and finance matters. For delivering such services to NFPs, accounting practices rely heavily on the processes within these organisations and, in particular, the financial controls that have been installed.

What’s different about not-for-profits

A large segment of organisations operate as not-for-profit (NFP) which is a generic term for a variety of diverse organisations like churches, charities, schools, sports associations and others. As the name implies, they all have one thing in common: they don’t sell goods or services and, therefore, don’t make any profit. Instead they rely on funding from external sources, including local and federal governments, charitable donations or membership fees.

Why spend control is critical

Due to their business model, typical not-for-profits have rather rigid and limited budgets determined from outside the organisation. At the same time, the spending needs of NFPs are not that different from those of profit-oriented businesses as they too have utility bills, purchase goods and reimburse expenses. However, NFPs are faced with much stricter requirements in terms of authorisation transparency, spend traceability and audits. NFPs are also generally not very tech-savvy or, for that matter, well-versed in accounting. Most of them have “external staff” who generate expenses or who are responsible for authorising spending.

How to set up proper financial controls

Financial service outsourcing practices serving NFPs need to go well beyond common compliance services and get deeply involved in both defining and enforcing financial controls across the client’s operations. At the very least this involves:

  • Working closely with the client to identify how their money is spent. In other words, it is necessary to get a real-life picture of who spends what, when and why.
  • Set up proper formal authorisation processes that make sure all spending is properly authorised by the appropriate person/people within the client’s organisation – before payment takes place.
  • Provide detailed audit trails to document that the implemented approval process has been duly followed.

Spend control options: proactive, reactive, hybrid

There are several options for controlling spending, with each one focusing on a specific spend stage.

Proactive spend control works well when there is a formal buying process, e.g. with purchase orders. By setting up controls around purchase orders (who is authorised to raise them, what goods can be ordered, which suppliers can be selected, etc.) and establishing a robust review and authorisation process, proactive spend control can indeed eliminate, or at least significantly reduce, unwanted spending before it occurs. Introducing proactive spend control is the right choice for not-for-profits that have many people engaged in similar, regular purchasing activities either in one or multiple locations, typical for educational facilities.

Reactive spend control ensures that incoming bills are actually correct and to be paid by the organisation. This is achieved by establishing a transparent review and authorisation process for all invoices to verify details like the amount, supplier payment account, etc. before any money is paid. It also serves as an additional fraud control layer because it filters out fraudulent or erroneous bills.

The hybrid approach combines these two options and serves as a comprehensive spend control framework. It allows you to check the details of finance documents, to compare what has been ordered in a proactively controlled process with what is being billed and confirms that the ordered goods or services have actually been received. This cross-reference capability is called “X-way matching”.

An example of proactive spend management: purchase-order-driven expenditure control for schools and academies

School expenses vary and include books and stationery supplies, gas and electricity, ICT and computers, cleaning and catering services. But whatever the reason, expenditures must adhere to the current budget. So it’s vital to purchase for the best price from the most suitable supplier while upholding quality standards.

Putting in place a capable purchase order automation and authorisation system will make ordering as easy as possible for those authorised to spend money, while implementing a strong review and authorisation process provides for spend control and ensures that schools will get the best-possible value for their money.

An example of reactive spend management: volunteer reimbursement in churches

In general, churches need a proper process to deal with all sorts of costs, for example utilities and property bills. They also rely on volunteers, so there are always plenty of personal expense claims coming in that are treated as regular invoices.

Such expenses usually originate from various locations and require authorisation by different budget holders. Introducing a proper bill automation process that’s focused on the review and approval of bills will validate the legitimacy of reimbursement claims, hence eliminating fraud, as well as minimise the time required for paying out.

Spend management app stack for not-for-profits

Establishing proper financial controls may seem tricky but with the right tools, any practice can do it. A powerful app stack for NFPs contains three essential components that make spend management effective, efficient and fully digital:

  • At the core of the app stack is a cloud accounting platform such as Xero, which also serves as the system of records for all pre-integrated apps. This provides a clear financial overview of the whole organisation in real-time and enables not only informed decision-making but also simplifies collaboration within the organisation as all people involved see the same figures.

  • A cloud accounting platform can be accessed from anywhere at any time. That’s especially important for NFPs because volunteers usually don’t spend a lot of time in the office. With a cloud solution, managers can keep on top of finance, reimburse volunteer expenses or send invoices on the go.

  • To maximise the time saving achieved by switching to a cloud accounting platform, it makes sense to add a tool for digital data capture such as Receipt Bank, Hubdoc or AutoEntry – depending on the client’s specific requirements. Data capture software automates manual data entry from paper into the accounting system with pinpoint accuracy and organises all data using a mix of AI and human sorting. Document data is captured by simply taking a photo with this app or by forwarding receipts to a dedicated email address. The tool then extracts the relevant information from the submitted document and allows to review everything before publishing it to the cloud accounting system.
  • The last but by no means least component in the recommended app stack for NFPs is a process automation tool like ApprovalMax. This app moves the approval process outside of the accounting platform to keep external stakeholders out of it. After all, when board members approve a particular expense they don’t need to see all financial data. With ApprovalMax, it’s amazingly easy to set up multi-layered bill and purchase order approval processes which also provide a record of who approved what. It is a time saving process as there is no need to carry paper documents around or wait for someone’s approval via email.

  • ApprovalMax is also very useful for audit purposes because it automatically creates searchable reports that show a complete picture of all approval-related details, providing both a good aggregated view and the ability to easily drill down for any low-level details needed to perform analyses.

Implementing such an app stack automates time-consuming manual procedures and also delivers all data in real time – giving a major boost to efficiency and traceability. Processes that require collaboration can be set up in a way that’s convenient for all participants. The numerous benefits achieved for practices and their customers include:

  • Transparency, shared responsibility and clear handoff points between the practice and its clients while dealing with purchasing and accounts payable activities

  • Easy-to-use communication channels between client and practice, along with a fully automated trail of all communications related to the authorisation of purchase orders and bills

  • Fully paperless, web-based and mobile spend control solutions that increase overall efficiency considerably and provides the client’s decision-makers and purchasers with a convenient tool for acting on the go

Setting up processes tailored to the organisation’s specifics and with spend control in mind eliminates tiresome manual work so that NFPs – be it a charity, school or sports association – can focus entirely on their mission while fulfilling their obligatory tasks much more efficiently.

Konstantin Bredyuk, Director of Product at ApprovalMax

With roots in business process management and optimisation software development, Konstantin has undertaken hundreds of product implementations for ApprovalMax clients worldwide. Konstantin has been advising by numerous organisations on implementing bill automation, financial controls and client collaboration capabilities using Xero-based trusted app stacks, with business profiles ranging from SMEs to large accounting and advisory practices.

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