By
Gisa Hartmann

Like most small-sized NGOs the one thing we don’t have too much of is time, so we
try to keep our financial records in a manner that is easy to manage, but also
allows us to comply with all the various reporting requirements.

Financial records refer to any physical or electronic documents that
prove that your organization is using its funds in ways laid out in the budget.
This can include, but is not limited to, monthly bank and credit card
statements, invoices and paid bills, payroll processing documents, receipts,
bank deposit slips, cancelled checks, expense reports, reimbursement requests,
and petty cash slips.
Financial recordkeeping, therefore, means to keep track and organize these
documents, as well as supporting documents proving a transaction took place, by
recording any business transaction and to regularly summarize that information,
for example, in monthly financial reports.

You can do this using either accounting software or actual books such as accounting
journals, ledgers and a checkbook (we won’t expand on this today). However, if
you do decide to use accounting software, it is important that
you maintain back up hard copies or printouts of electronic documents. In addition, other types of documents such as grant letters and employee or consultant
contracts should also be included in your financial records. All of these
different types of records should be used to produce a periodic (often
quarterly) financial report, or a summary of your financial transactions in a
given period of time.

Overall, in the same way that you need to gather
evidence such as testimonies and statistics to prove a legal case, you need to
gather receipts and other documentation to prove that your organization is
spending its money responsibly, in ways designated by your budget.

What to keep and how long to keep it?

A well-planned recordkeeping system should make tracking, verifying and
summarizing your expenses in financial reports easy. It should also help you to
comply with all the financial reporting and document retention requirements you
must fulfill for your donors and for any relevant government agencies. Only
physical receipts can prove that the amounts in your financial reports are
correct, so you must keep a paper trail even if you are using bookkeeping
software.

You want to keep receipts and
documentation for any transaction involving money, such as monthly bank and
credit card statements, invoices and paid bills, payroll processing documents,
receipts, bank deposit slips, a checkbook that lists checks you have written,
as well as cancelled checks, expense reports, reimbursement requests, and petty
cash slips for small cash payments. All these documents are the basis of
transactions that you record in your bookkeeping. At the same time, you want to
keep records that place expenses in a legally-binding or explanatory context.
Here I mean documentation like grant letters, contracts with your employees or
contractors, or any other agreement or official correspondence that is tied to
income or expenses.

But how long do we need to keep these documents? Every country has its own set of
rules, and your organization should have its own document retention policy that
spells out clearly how long you will keep bank statements, receipts,
correspondence, contracts, and other important documents. In the US, the
Internal Revenue System (IRS) has set national guidelines published on their
website. The IRS mandates that organizations must keep records for a maximum of
seven years – unless you don’t file a tax or information return; then you must
keep them indefinitely.

Donors may also ask you to keep records for a certain number of years. Like
nonprofits, they also have to file annual financial returns and undergo regular
audits. If your donor is audited, the donor may require you to produce expense
documentation on a grant you received several years ago. Moreover, even if your
organization is not required by law to conduct annual financial audits, you
want to be prepared when the time comes.

Consult your accountant and your country’s requirements in order to draft your own
document retention policy. Once a year, use the policy to set a time to go
through your documents and see if there is anything you need to delete or
destroy.

Building your filing system (aka, finding what you need when you need it)

Consider this scenario: you are in quarter three of your one-year grant and you receive
a notice from your grant-maker that your first quarter expenses are indeed
being audited. You are required to provide proof of every expense you listed in
your financial report to this donor. When this happened to us, it wasn’t as
painful as it could have been because our filing system ensured we were able to
find everything. (Mind you, it still wasn’t a lot of fun.)

With this in mind, and given that there are so many different kinds of
financial documents,
it is imperative to establish a system that helps you to easily find a receipt.
It should be one you can maintain without allowing filing to take over your
regular work. It may include a filing system online or on your computer that
corresponds to the files you use for paper. However you choose to organize your
system, make sure that is intuitive and logical. This means that it
should follow some sort of rule: it can be categorized chronologically, by
program, by donor, or some combination of the above. You can even use different
color folders to code the different reporting periods, programs, or donors.

Asia Catalyst has a growing number of projects, and many times the funds for each
project are pieced together from different grants. We need to track who is
paying for each item (a well-written budget helps you to stay on top of that).
Our filing system is split into two meta-categories: incoming funds and
outgoing expenses. These two categories are then broken down into several
smaller categories. Incoming funds, for example, are divided into files for
each grant with a separate file for individual donations.

To keep up with different grants, our expenses have separate files for each
program and then sub-files for each type of expense. If a project consists of
multiple donors, I organize the files by grant first and then each grant file
is divided again into categories of expenditures. Some people prefer to have
their sub-files organized by names of vendors. We do this if we have a lot of
vendors of the same category (for instance, for Asia Report we have several
freelance translators and each gets her own file containing invoices and
records of payment).

Sometimes we also have need to divide up a single expenditure, e.g. staff salary, by
different grants. To keep track of that, we note on the respective invoice or
receipt how much of the total amount is attributed to each grant. Then it’s
easy to make a copy for each donor and file each away in the appropriate donor
file. In each of our donor files, there are records of how much was paid by the
respective donor and how much by others.

Each organization develops its own approach. An organization I have worked with in
China organizes their financial records by date. They record all outgoing
amounts in a journal where they note the date of the transaction, to whom it
was paid, for which purpose, and the amount, all in one line in the journal.
They also organize their receipts according to date. Because they report on a
quarterly basis, they keep one folder for each quarter in which they keep all
the receipts and documentation for that period. Since they don’t have many
transactions and only two donors, this system works for them.

Whatever system you use, make sure it is consistent. Explain it to at least one other
person in your office in case you are not around to give them the information
they seek. Ideally, your system should be so consistent that it becomes self-explanatory
when someone looks at your files.

Tracking receipts

While it may be relatively easy to keep track of
documents from official entities such as banks, consultants, or foundations, it
is much more difficult to maintain receipts. This is true for (at least) two
reasons. First, everyone in the organization can accumulate receipts, while
usually just one person (the bookkeeper or accountant) is responsible for
keeping track of the more official documents listed above. Second, receipts
have no uniformity: they come in all different shapes and sizes, in various
languages depending on where you are traveling, and with varying levels of
detail. To deal with these issues, your organization can create a template
chart for keeping track of receipts, which can then be used by any staff
member.

Ideally, filing will be done before you forget what a receipt was for. Some people like
to set aside a certain time of the week for filing. For people that travel a
lot, this can be quite a headache. While traveling, I try to keep a printed
chart in which I fill in each expenditure, give each receipt a corresponding
number, and add a receipt number next to the expenditure listed on the sheet.

I also mark the purpose on back of the receipt, especially if it’s in Chinese. If
you’ve seen a Chinese fapiao (official printed receipt) before, you’ll know
that they rarely indicate the exact purpose of the expense or cost! To
illustrate: I once bought office supplies at a Chinese bookstore and the goods
were discounted. When I looked at my receipt it indicated the non-discounted
price – more than I had actually paid. I usually now ask for a handwritten shouju along with a fapiao as these are more reliable. Despite facing these
difficulties, keeping a chart handy allows me to submit a complete record,
including my receipts, to the bookkeeper upon returning to the office.

So what if you can’t have an official receipt?

In any case where money changes hands, you must have a document – a receipt, a
statement, or even a handwritten invoice. We often also encounter situations
where we cannot get official receipts such as per diem payments to workshop
participants or travelling staff. We use a form on our letterhead on which we
indicate name, amount paid, date and purpose. Then the recipient signs and now
you have a receipt. Or if you have a lucky day and a donor hands you a check or
cash – you can develop a system for documenting that as well.

At Asia Catalyst, two people in the organization need to count and initial a
receipt that indicates where the money came from. We enter contribution checks
into a check log and make two copies of each check. The executive director uses
one copy and the actual check to prepare the bank deposit and a donations
report. These are verified by a second person in the organization.

After the check has been deposited, the deposit receipt and check copy are stapled
together and passed on to the bookkeeper who can then make entries in the books
and file the documents in the deposits file. The second copy of the check is
used to update our donor’s database and filed in a donations file. In a case
where we receive an online donation, for example through Paypal, the dated
donation email notice replaces the check copies. We even have a tracking system
for any amount of petty cash we spend which we keep with the cash – and of
course receipts neatly filed away.

Effective and continuous record keeping requires a certain amount of rigidity: you need
to be systematic, which means developing a system that you repeat each time you
encounter a certain situation. In the long run, it will save you time and help
you to meet your legal requirements. It’s a chore, but it can become
therapeutic just like washing the dishes.

Gisa Hartmann is China Program Director of Asia Catalyst.