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Financial Management in Nonprofit Organizations

Executive Summary. Financial management plays a very significant role to make an organization successful whether it is a non-profit organization or a profit motive organization. Financial management is considered a critical path, which all organizations have to follow to attain success. This paper provides us with an insight into the application of financial management techniques of a Not for profit organization and also a comparison with For-profit organizations. Although, the strategic management process for both the organization is very similar. However, a non-profit organization often function in a monopolistic environment which renders services or produce a product which offers low measurability (profit) and depends on finances from outside sources. The nonprofit sector is growing and the need to understand its efficiency, governance is very important for its stakeholders, investors, donors, tax authorities and regulators.

Introduction. A Not-for-profit organization or Nonprofit organization or NPO is a tax-exempted organization that is formed with the primary objective or goal in mind. It renders service to the public without making a profit. To be considered as a non-profit organization an organization needs to be classified as an educational, religious, charitable or scientific organization. A Non-profit organization does not distribute its excess funds to its owners or stake holders rather the surplus funds are reinvested to pursue and meets the organisation mission and goals. Legally, we can say that a Not For-profit organization is an organization that does not declare profit rather utilizes all their revenues available with them after meeting their operating expenses for the benefit of the society or public. As per Internal Revenue Service, an unincorporated nonprofit organization is not given a tax exemption status or the designation of a 501(c) (3) organization.

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For-profit and non-profit organizations there are various things common, but they cannot be ruled out from some significant differences. One of the main points of distinction between a nonprofit organization and a profit organization is the reason for existence. A Profit organization generates income for its owners, employees, investors etc whereas an NPO is formed to serve the environmental or humanitarian needs. Under non-profit organizations, its income is channelized into services and programs that aim to meet people’s need and their benefits such as food, shelter, education, water and various other issues like deforestation, water, shelter & education and also other issues like deforestation, endangered spices etc. A profit organization offers products and services that have a demand in the market and the profit earned is shared among its owners, stakeholders, investors, employees etc.

Features. For any organization revenues (cash & receivables) are considered as the life blood of the companies. In For-profit organization, they reply on income earned from the suppliers, lenders to finance their operation whereas a non-profit organization completely reply on the donation, grants received from the individuals, government agencies and other organization. For-profit and nonprofit organizations and income sources describe the use of their money. In an NPO the money received from the donors is used to render services for the public or to accomplish the objectives and mission of the nonprofit organization and in the case of a for-profit organization income earned are retained by the owners or to pay the debts. These organizations have a more ethical leeway of spending their money.

Tax and Liability Considerations. A for Profit organization is taxed in a number of ways depending on its size of the organization. In the case of Small businesses houses like sole proprietorships & partnerships firms IRS treats the income as a personal income and in case of debts the individual is liable for all its debt where as a nonprofit organization can register itself under section 501(c)3 of the tax code. People who contribute to nonprofit organizations as donations are offered tax exemption on the money donated. As per the Service Corps of Retired Executives (SCORE), nonprofit companies are considered as a legal entity for tax purposes leaving founders of the company not liable for its debts.

Human Resources Considerations. The workforce of a nonprofit organization is very different compared with the For-profit organization. For-Profit Companies are staffed with salaried and contractual employees. Whereas a nonprofit organization usually employees a small workforce with a large number of people working for the company as a volunteer. The procedure of hiring of employees, firing them communication, employee motivation vary considerably in both the organization. Financial Management in Nonprofit Organizations. Financial planning & management are the major sections of a nonprofit organization that have to be taken seriously in order to keep the organization running. However, a not-for-profit organization has to face some difficulties that they must overcome in order to succeed.

Proper measures have to be in a place like specifying goals and having clear objectives along with the benefits required by the organization. Finding out the actual cash flow is difficult because the NPO depends solely on the revenues from donors who are not even beneficiaries of the service rendered. Consequently, the means of NPO’s primary purpose of financial planning & management as mentioned earlier is to capitalize on the benefits of any resource contribution. The difficulties in this area are that it is not common to predict when money will come from donors and as a result it could cause a serious crisis in management when there is a high demand for their services. This is why budgeting is very important for a not-for-profit organization.

Budget of Non-profit Organisation. All the companies of Not For-profit, commercial or government organizations use budgeting to establish a proper use of resources as planned by their management and to maintain good record keeping. The capability to budget effectively is part of being a successful not-for-profit organization. The budget is important because it can be used to set performance and motivation standards of its staff & board members (Pich ½, 2009). It can also be used as an implementation tool for measuring results if the organization’s mission is met or not. It is imperative to include accounting staff, fundraising staff, board members & other department leaders in the process. Thus, established a clear concentration on the direction for which resource will be distributed and make good use of what is available for the delivery of services. Budgeting is an excellent planning strategy that can help sketch potential financial goals and enhance management.

Planning of Nonprofit Organisation. Planning a budget is a nonprofit organization that includes an extensive glace of general operating expense, base on sizes and assets. Considering future inflows is very important in any organization. Budgeting appears to be very complicated because of the legal structure to maintain a nonprofits organization. Nonprofits have the tendency to centre most of their issue on board development, fundraising and volunteer management, and while for-profit centre on the information presented in the situation of nonprofit planning. In the budgeting procedure, there is a possibility of discovering future shortfalls that may lead to stringiest fundraising etc. For example, if an organization has goals to organize for building capital then a serious campaign may be needed or an expert may be brought in to assist with planning arrangements for the company to meet its needs.

It is also important to consider the fact that, unlike commercial business; nonprofit excess might be looked upon by donors and other citizens as the organization’s failure to deliver on its defined mission. With nonprofit organizations, it is imperative to approximate projects’ cash flows and program priorities have to be balanced in an excellent budget. Nonprofit managements have to assign their capability and capital to correspond to their intended spectators and recipients. Some nonprofits do request some form of compensation in services and that makes things difficult for the organization to increase service prices. The planning process must include lead-time for donations and should be included in the budget. Nonprofit financial managers preparing budgets should make sure that enough funds are available to manage programs even over the expected period of the budget circle to avoid shortages etc. Once the budget is approved by the Board of Directors, it should then be used as a managing instrument to build towards measuring efficacy.

An excellent budget should show resources allocated to all programs connected to strategic goals. It should be able to show that the operation objective and performance of an organization are effectively using reassures and can show that an action is needed for modification (Pich ½, 2009). A modified budget within an operational period shows proper supervision arrangement. A modified budget should be able to address unexpected circumstances. An important part of budgeting is staff management’s answerabilities because responsibility should be placed in the hands of staff that are able to lead the organization to accomplish its objectives. Thus, staff and management’s complete consciousness and involvement are highly needed if the organization wants to meet its mission and make good use of its budget.

Nonprofit funding Sources. Srinivasan in her article makes it that the one fundamental element which defines the capacity of the nonprofit zone is funding. The purpose of charitable companies is to enhance the public good. However, an organization needs working capital to be successful, along with a good team of accountants, operations, and financial management. Accounting takes care of the company’s payable and receivable, while operations focus on inventory and financial management deals. It also determines how funds are used on fixed assets and prepare dividend strategies corresponding to the companies’ goals. Funding is solicited through two major sources public and private funding in case of an NPO so that the organization can meet its goal.

Conclusion. For a Not For-profit organization, budgeting and cash management are very crucial. This aspect speaks loud by overextending the stewardship compulsion of a nonprofit company that accepts financial donations to meet its supposed goals from the public. Management faces some challenges dealing with nonprofit company’s revenue sources because of its unpredictable switch as a result of political atmosphere or economic factors. Financial accounting takes care of the organization’s payable and receivable. A fund accounting structure in the present day may combine both traditional accounting principles and applying the classified operations of FAS 117 standards. This method is challenging for a money-making organization to trail finance at a specific time and period to make sure that limited goals are accomplished. Nevertheless, using a fund accounting structure by nonprofit organization management must consider the two most important elements which are the financial management day-to-day reporting requirements and the capability to show stewardship of donated capital.

References

  • Anthony, Robert N. and David W. Young, Management Control in Not-for-profit Organizations, Richard D. Irwin, Inc., Boston, MA, 5th Edition, 1994.
  • Betty Nelson, SCORE: Nonprofit Vs. For-Profit (2002)
  • Bradach, J. L., Tierney, T. J., and Stone, N. (2008). Delivering on the Promise of Nonprofits Harvard Business Review, 86(12), 88-97.
  • Bolton, Patrick and Hamid Mehran, An introduction to the governance and taxation of not-for-profit organizations (Published 21 June 2006).
  • Horngren, Charles T., George Foster, and Srikant M. Datar, Cost Accounting: A Managerial Emphasis, Prentice-Hall, Upper Saddle River, NJ, 9th edition, 1997.
  • Pich ½, Michel. 2009. “Planning and budgeting in non-profit organizations. (cover story).” CMA Management 83, no. 1: 22-27.
  • Business Source Complete, EBSCOhost (October 29, 2011).
  • Srinivasan, S. (2011). Harvard Business Review on Business Model Innovation (2011), (EBSCOhost.)

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