Compliance and Transparency: Managing Interfund Transactions in Nonprofits

As a financial manager in a nonprofit organization, interfund (or inter-entity) transactions can add complexity to your accounting processes. Interfund transactions are used for a variety of purposes, including cost allocations, grant awards, and cash flow management. 

While most accounting systems have automated process for recording these interfund transfers when they occur, it’s typically up to the business to make sure the transactions are reconciled and settled periodically.

There are several critical data points you should be tracking to properly manage your interfund accounts, including:

• Date and amount of the transaction
• Source of funds used
• Overall use of the funds
• Purpose for the interfund
• Authorization and documentation of the transaction

Properly managing interfund accounts is important for several reasons:

• Compliance with funding and expense allocation requirements
• Transparency into the organization’s financial operations and subsequent visibility for various stakeholders such as board members and donors
• Accurate financial reporting to both internal decision-makers and external reviewers
• Fraud prevention and providing efficient and effective visibility to financial discrepancies
• Resource allocation mechanism and methodology to drive strategic outcomes

Making interfund review, reconciliation, and settlement part of your standardized accounting close process is essential to helping manage institutional risk — as well as increasing the accuracy and value of information shared with stakeholders. Doing so can drive trust and confidence in your nonprofit, as well as help demonstrate your organization’s commitment to fulfilling its mission.

How we can help

By properly managing your interfund transactions, you can increase the transparency, effectiveness, and compliance of your organization’s financial operations. CLA can help you design a system that takes the headache out of your interfunds.

Special thanks to Leslie Anderson, who contributed to this blog.