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Financial Management in Nonprofit Organizations, Research Paper Example

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Research Paper

The presentation deals with the application of financial management in Not for Profits Organizations and how it differs from for profit organizations. Discussions are centered around then internal control tools used to ensure not for profit organizations exercised responsible accounting practices that ensure donors contributions are properly accounted for on an annual basis. Emphasis on separating responsibility for protection and management of assets are highlighted and the role played by National Endowment of Arts are presented as guide as to how not for profit organizations are regulated.

Comparisons are made of the similarities and differences between for profit and not for profit organizations, with the former using its numerated advantages to maximize revenues, achieve stability and being able to satisfy its shareholders and stakeholders through the application of financial management tools like debt to equity, EPS, assets turnover and others to assess its performance, and the latter applying the benefits of wide sources of revenues including fundraising events, strong capacity to attract donors, management protection and isolation, endowment ownership as well as PX and Revenue  ratios to achieve establish goals and objectives that ensure success.

The paper ends by discussing the risks and benefits each entity faces as well as their responsibility to conform to regulatory standards while pursuing their different goals of generating revenues and satisfying their customers at the same time.

Financial Management in Nonprofit Organizations

Managing Nonprofit Organizations are rather challenging, especially due to the financial aspects of the business where their revenue sources are frequently subjected to changes as a result of the impacts of economic and political forces (University of Massachusetts Boston, 2011).

Nonprofit Organizations always have to compete with for profit organizations for resources such as labor, financial contributions and other vital business inputs, and as such have to maintain accurate and reliable forms of reporting in order to be able to produce sound financial management documents that can be approved by stakeholders that are considering making them as means to achieve their charitable objectives (University of Massachusetts Boston, 2011).

Financial Managers in Nonprofit Organizations have to ensure they are adept a planning and implementation, as well as possessing competence in analyzing and interpreting financial information  in order to make decisions that will ensure short term day to day activities as well as long term investments are adequately financed.

Federal Grants for example, is one of the major sources of revenues for nonprofit organizations, and in order to receive them, grantees are required to implement financial management systems appropriate for their particular scale of operations, according to the National Endowment for the Art (NEA) (2008).

The NEA, which is the Federal Agency responsible for dispensing financial assistance to Nonprofit organizations involved in Arts related projects, is charged with the fiduciary responsibility of ensuring that taxpayers money are used appropriately, has  replicable guidelines that demands strict accounting responsibility from all recipients of  awards (NEA, 2008).

Internal Controls are required for all on Nonprofit organizations that receive external funding, and in order to ensure proper accountability, techniques such as the daily recording and depositing of cash receipts, monthly reconciliation of bank accounts, delegation of the responsibility for petty cash funds and payments except by checks to separate individuals, payment of vendors  by approved invoices only, immediate cancellation of all approved invoices on completion of payments, separation of responsibility for physical assets and its record keeping, and differentiating individuals paying  employee wages from those responsible for the writing of the relevant checks (NEA, 2008).

Controls like these in nonprofit organizations are deemed critical according to Holman, Ihrke, & Grasse (2011), due to the number of notable scandals like the NAACP, United Way, Adelphi University, New Jersey Symphony Orchestra, Nature Conservancy and the Milwaukee Public Museum that have surface among these organizations in recent years.

Blackbaud (2011), a leading global provider of software solutions and services designed for nonprofit organizations, asserts that financial management of not for profit organizations are similar to financial arrangement in the commercial sector  in many respects, although there are certain key differences that will shift the focus for a not for profit manager.

According to Blackbaud (2011), not for profit organizations lacks the flexibility of a commercial enterprise, due to the fact that they depend on resource providers that are not engaging in exchange transactions, and the resources provided are directed to providing goods and services to other clients. These organizations in order to remain viable are forced to continually demonstrate excellent stewardship in their accounting systems (Blackbaud, 2011).

According to Bowman (2011), the absence of investor owners that prevails in for profit organizations, provides not for profit  organizations with advantages like attractiveness to donors, insulated management, protected management, and endowment ownership.

Individuals, according to Bowman (2011) are more likely to donate to nonprofit institutions than for profit ones regardless of the exemption or deductibility, especially if they perceive that these business custodians are trustworthy and or public spirited.

Managers in for profit financial institutions that are performing poorly according to Bowman (2011), can be bought out and replaced with new management teams by stakeholders with vested interest, while not for profit entities in many instances, may be sponsored by other nonprofit organizations that will allow poorly performing managers to learn in the jobs as long as they remain in control of these boards and can exert political control on the process (Bowman, 2011).

Endowment ownership according to Bowman (2011), provides exceptional advantage to not for profit organizations over the for profit counterpart, because it enables it to produce perpetual sources of incomes from goods and services that are produce below production cost indefinitely.

Disadvantageously, not for profits organizations, because they are not accountable to shareholders and stakeholders, are challenged by constraints on their missions and capital, operating risks developed during periods of slums due to the inability to buy and sell stock to restore solvency, drifts away from established mission and high levels of waste, which can reduce their differing abilities to securing funding from external sources (Bowman, 2011).

For profit organizations due to their positions of financial strength are better able to maneuver during similar periods due to the lack of these restrictions.

According to Holman et al. (2011), for profit organizations differs from not for profits, in that it uses profit margins to drives sales and revenues instead of contribution, its revenues streams and equity are different, and it fully utilize all the relevant financial ratios to effect analyses and meet objectives that ensure adequate profit generations consistently.

Comparatively speaking, not for profit organizations according to Holman et al. (2011), uses punitive ratios of program management and fundraising events to raise contributions, and are rewarded or punished when their financial activities are graded by external sources such as Charity Navigator (Holman, et al. 2011).

For Profit organizations in general, will have their own internal auditing teams to measure their financial performances in relations to industry standards, GAAP and shareholders expectations of fiduciary responsibilities, before external auditing forms are brought to do their annual and other inspections.

A financial management control referred to a Revenue Ratios, which is the ratio of the revenue sources and the total revenues, are used by not for profit organizations to determine the impact of revenues from areas such as membership dues, special events, net sales, dividends and interest, program service, government grants and public contribution on the organizational revenue generation performance and the strength of these revenue streams (Holman, et al. 2011).

PX or the ratio of Program Service Expenses and the Total Expenses, are also used by not for profit organizations to measure their performance relationships between funds spent for programs in comparison to all expenses, according to Holman et al. (2011), and entities failing to constantly achieve the controversially established 65%, are regarded by their stakeholders are underperforming.

Revenues generated by for profit organizations, emanates from sales of goods and services, investment returns, interest and dividends earned, and when profits are achieved these entities are able to pay shareholders, retain earnings as well as reinvest in their business operations, to facilitate expansions in productions as well as entering more markets to ensure greater profit generation in future periods.

For profit organizations will use financial rations like debt to assets ratio, debt to equity, return on assets, returns on equity, working capital, inventory turnover, quick ratio, total assets turnover, earning per share (EPS) and price earnings ratios (P/E) to establish their financial performance and make decisions concerning their future operations especially investment, market capitalization and dividend payments to shareholders.

They are often able to take sound actions that will ensure their financial management positions remain strong and sustainable, sales goals are achieved, and new goods and services brought on stream based on forecasts,  while not for profits have to rely on their different sources of contributions to successfully service the needs of their customers in the future.

According to Blackbaud (2011), for profit organizations by means of their excellent cash reserves and expected profits, can easily make forecast on financial earnings and generate investor and other stakeholders confidence, while not for profit organizations will be challenged annually due to the fact that uncertainty in the economic and political environment may negatively affect the total revenues received from each source.

Not for profit organizations, in addition to the limitations of their control tools and inability to raise their prices to generate higher levels of revenues, are also restricted by the fact that if they are found to be generating high levels of surplus from their sales and services activities, they may trigger negative responses from for profit and others in the industry, criticizing them for operating outside of their stated missions and mandates, according to Blackbaud (2011).

Conclusions

Both organizations in closing, operate with different motives to meet the needs of their clients in separate operating environment and have advantages and disadvantages that can enhance and diminish  operational activities at the same time, but are  all accountable to authorities like IRS, SEC, NEA, board of directors and shareholders, where applicable in the final analysis.

Not for profit organizations managers does not have to report to shareholders, benefit from exemptions and endowments, are not accountable to external auditors, are protected and insulated and accesses resources from a wider field than for profit organizations.   However, they are faced with strict regulations regarding their stewardship, are susceptible to different degrees of risks when market prices falls, and can lose all their gains from previous periods; should they be found to unethically exercise their fiduciary responsibilities.

For profit organizations managers, despite the greater advantages especially in terms of financial strength, high flexibility to adjust prices upwards and growth and forecasting potentials, have to report to boards of directors as well as shareholders and may be replaced if their performance are not acceptable.

Reference

Blackbaud (2011).Financial Management of Not for Profit Organizations www.blackbaud.com/files/resource/downloads/whitepaper_financialmanagementforNPO.pdf , 11/.08/11

Bowman, W., (2011). Finance Fundamentals for Nonprofits Building Capacity and Sustainability John Wiley & Sons Hoboken, New Jersey

Holman, A.C., Ihrke, D.M., Grasse, N. J., (2011). The Analysis of Key Financial Ratios in Nonprofit Management Center on Philanthropy, University of Indiana www.philantrophy.Iupi.edu , 11/08/11

National Endowment for the Arts (2008). Financial Management Guide for Non-Profit Organizations Office of Inspector General www.nea.gov/about/org/fmgnpo.pdf , 11/08/11

University of Massachusetts Boston (2004). Financial Management of Nonprofit Organizations Level111 www.cpcs.umb.edu/support/studentsupport_book/fin_mgmt_np.htm , 11/08/11

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