Developing financial policies are the same as developing any other types of company policies; the objective is to create institutionalized controls that you can replicate and refine to manage the company’s finances. There are a variety of financial policies that are common to all organizations, such as budgeting, tracking income, managing expenditures, travel policies, asset management, petty cash, salary and bonuses, etc. Each policy must be developed, reviewed and tested, refined, and most importantly, documented, so that it can be applied consistently and provide transparency into corporate financial practices.
A policy is not a legal document, but a guideline or principle that defines a key area of activity, how your company operates to achieve a specific task. A good policy provides a fair and sensible way of addressing a specific issue. And while policies can be adjusted, don’t change them too frequently; rather, policies have to be employed a while in order to become part of the company’s routine practice. When defining a good financial policy, be sure that it is fair, legal, comprehensive, realistic, and affordable.
Many financial policies are part of standard best accounting practice, and implemented to ensure the organization runs smoothly, and that staff members are held accountable. Policies decentralize decision-making so no one has the power to bend the rules. Policies also promote consistent operations, so the same procedures and protocols are used for all situations. And financial policies promote transparency and accountability.
When deciding to create a policy, there are specific steps to follow:
- 1. Decide who should create the policy. Those with responsibility for creating a new policy are more likely to embrace and enforce those policies.
- 2. Gather enough information to develop the policy. Explore different scenarios and contingencies as you formulate a new policy.
- 3. Set a reasonable time frame to develop the policy and stick to the deadline.
- 4. Clarify why the policy is needed. Writer a brief explanation of the need for the policy, e.g. the company needs to establish a new travel expense policy to help employees traveling on company business manage their out-of-pocket costs. The policy needs to be consistent and fair.
- 5. Clarify the existing situation. In the case of our travel expense example, it could be that there has been no policy in place and expenses vary wildly from employee to employee, or some employees wait for months before submitting expenses while others submit them weekly.
- 6. Define any terms in the policy, as needed, e.g. a per diem is a daily expense allocation, or an expense is a cost incurred while on company business, but not on personal business while traveling for the company.
- 7. Outline the purpose or need for the policy, such as the need for transparency and tighter budgetary controls over travel expenses.
- 8. Note the underlying organizational principles that serve as a foundation for the new policy, e.g. a need for transparency and tighter budgetary control.
- 9. Identify who the policy applies to, e.g. all employees traveling on company business.
- 10. Document the new policy, in detail, and circulate it for feedback.
Once the policy has been reviewed, refined, and approved, formalize the documentation and add it to the company’s policy and procedures manual and in some cases to the employee handbook, and make sure that all the appropriate staff members are briefed.