Financial Management in Nonprofit Organizations – Discuss financial management in nonprofit organizations and write an essay that compares and contrasts the application of financial management techniques in nonprofit and for-profit organizations. Sources of funds, use of debt, performance evaluation (efficiency in use of contributions and meeting the organization’s objectives), governance mechanisms in non-profits, etc. would be good topics/issues for discussion in the essay. In order for any organization to be successful, it is imperative that a very strong financial management program exists and be managed properly.
In nonprofit organizations, a strong financial management program is the most critical step in success of the organization. Before we can discuss why a financial management program is necessary in a nonprofit organization, I must first define what a nonprofit organization (NPO) is. A Nonprofit Organization is a tax-exempt organization that has been put together with a common goal and/ or purpose in mind. This organization is formed to provide service to the public without obtaining or making a profit.
In order for an organization to be classified as a nonprofit it must be charitable, religious, educational or scientific. Nonprofit Organizations do not distribute excess funds to its shareholders or owners, instead they reinvest all surplus funds to the organization in an effort to continue meeting and pursuing its goals and missions. “Legally, a nonprofit organization is one that does not declare a profit and instead utilizes all revenue available after normal operating expenses in service to the public interest. These organizations can be unincorporated or incorporated.
An unincorporated nonprofit cannot be given federal tax-exempt status or the designation of being a 501(c)(3) organization as defined by the Internal Revenue Service. When a nonprofit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders” (Nonprofit and Fundraising Resources, n. d. ). Financial Management in Nonprofit Organizations Financial management in nonprofit organizations is fundamentally the same as financial management within a profit organization ith the exception of several key aspects that need to be specialized for the advancement and success of nonprofits. For-profit organizations tend to place much of their focus and emphasis on making a profit and growing their shareholder base. Nonprofit organizations are labeled as organizations that do not have stockholders, the entities where rights and authorities remain the responsibility of the members or financial supporters of the organization. Because they do not have stockholders and are not driven by a profit mission, they stand apart from for-profit organizations.
When it comes to financial management, nonprofits generally do not have the financial flexibility like that of a profit organization. The reason for this is because nonprofits generally have to place much of their dependency on donations, and with the strict guidelines that nonprofits face when it comes to their finances, they have to show its accountability and responsibility of all donated income; thus insuring that all money donated is utilized for that specific purpose only.
Many nonprofit organizations tend to be lacking in many of the necessary requirements and steps of the financial management process, which is the foundation and basis for the success of the organization. Many do not have the proper management tools in place, are negligent in following appropriate procedures, and negligent in the proper training and experience of financial management for their managers. It is important that the leadership in nonprofit organizations understand and practice basic skills in financial management.
Although busy and performing in several roles, it is imperative that they know what’s going on in the areas of finances. Leaving the complete responsibility to someone else regarding finances for the organization is a major problem, and will cause issues down the line. One particular problem that is identified with managing the finances of a nonprofit organization is that “executive directors and their financial management teams are overwhelmed and are often times balancing overlapping roles. The board of directors, its chair and executive director are the source of leadership; they lead the organization in its mission.
The manager’s role involves making decisions around the use of financial, human, and other resources to reach the organization’s goals and move it toward its mission, whereas finance should be managed solely as a separate entity. Both leaders and managers must also play role of administrators, balancing the conflicting needs of constituents: clients who need services; employees who want better benefits; donors, board members, and volunteers who seek recognition” (Werther, Berman, & Echols, 2005). Another problem within the management area of finances within a nonprofit is the lack of discipline/integrity amongst the managers.
Theft is at an all time high because of the lack or lax in financial management. The government has now instituted the new IRS Form 990 which requires all nonprofits to report any resources loss due to theft or fraud; however it may take years before it gets an accurate snapshot of the scope of the problem. That is why an effective financial management program is required. An effective financial management plan will guarantee that the organization is financially secure, allowing the mission to go forth and run smoothly.
A good manager will ensure that the sources coming in will be allocated in the areas that it’s intended for. “Budgeting and cash management are two areas of financial management that are extremely important exercises for not-for-profit organizations. The organization must pay close attention to whether it has enough cash reserves to continue to provide services to its clientele. Cash flow can be extremely challenging to predict, because an organization relies on revenue from resource providers that do not expect to receive the services provide.
It is difficult to forecast contribution revenue in a reliable manner from year to year, for that reason; the control of expenses is an area of increased emphasis. Budget therefore becomes a critical activity for a not-for-profit” (Blackbaud). Budgets in a nonprofit organization are the snapshot of the organizations projection of received resources or financial support and its expenses or money going out. It creates a direction in which the organization goes in by allocating the resources received and maximizing them to ensure it serves the purpose of the organization.
The budgets identify variable costs, fixed costs and mixed costs. Variable costs are the costs that are associated with the nonprofit organization and changes on a consistent basis. Those costs include, but are not limited to, utilities, fuel, food, etc. Fixed cost is the cost that remains the same within the organization, such as rent, salaries, office expenses, marketing and advertising. Mixed costs are combinations of both the fixed and variable categories. These costs include, but not limited to, supplies, hourly labor and utilities.
Cash management involves focusing on the efficiently using and maximizing all available resources to enhance return on capital for the organization. Cash is a fundamentally important resource for a nonprofit organization, it is crucial in so many areas because an organization must have enough cash to pay its bills. Accountability Requirements There are a number of methods in place for implementing a successful financial management system. The nonprofit organization should utilize a method that is appropriate for their mission and operation. There should always be accounting structures in place that show accurate information regarding all financial transactions • Actual expenditures should be detailed enough to be compared to the amounts budgeted/allocated • Records should be maintained and kept up on a constant basis to reflect any changes in revenue or funds • Records should be supported by source documents (receipts, billing statements, invoices, etc) Internal Control Standards Every nonprofit organization should have measures in place to safeguard all resources coming in.
A control mechanism that should be utilized is the ability to delegate so that no one person has sole responsibility for handling all transactions, eliminating the opportunity or chance for unethical financial behavior to occur. • Receipts should be annotated and deposited each day • Bank accounts should be reconciled on a monthly basis by someone other than the individual that signs the checks • Payments to vendors should only be submitted for approved invoices • The individual responsible for paying payroll should not be the same individual that signs the checks.
Sources of funds in nonprofit organizations Nonprofit organizations obtain and receive funding from a variety of resources; Direct Appeals, Grants, and Professional programs. • Direct Appeal – is the process of asking the public or individuals for donations to your organization. • Grants – Donated money from the federal government, you have to apply for this funding. There are many caveats to obtaining a grant, first and foremost you have to have a successful program in place in which the donator would like to help you improve. Professional Programs – Event based programs that involve donations, raffles, etc. These types of programs are designed to raise substantially large sums of money. Sources of funds in for-profit organizations For profit organizations exist primarily to make money. They earn money/revenue for providing services and getting paid for that service. The profits can be distributed to the owner or put back in the business; it is solely at the discretion of the owner(s). Unlike the nonprofit, their profits (if any) are distributed back into the organization.
In concluding on the need for professional financial management, for-profit leaders seem like a mismatch for running nonprofit organizations because unlike a for-profit business – which is focused on the bottom-line, as in making profits – the nonprofit’s main concern is with executing services or programs or changing behaviors or policies, etc. The money they make (whether by fundraising, cause related marketing, or selling something) is a means to their end. It is not the goal.
For-profit companies measure their success in their profit margins, their market share, the return of dividends to stockholders, etc. Nonprofits measure their success by people they have touched, policies they have changed. It is a completely different focus. So whether it is the difficulty of measuring organizational achievements, an issue of transitioning a for-profit executive into the nonprofit world, or trying to balance overlapping roles, it is clear that nonprofit management is complex and requires a distinct skill set gained from experience in the sector.
There is an obvious need for professional nonprofit managers. Sources of funds in nonprofit organizations Sources of funds in profit organizations use of debt in nonprofit use of debt in profit Reference Nonprofit and Fundraising Resources (n. d. ). What is a Nonprofit Organization. Retrieved July 26, 2009, from http://www. nonprofit. pro/nonprofit_organization. htm