Financial Management in Nonprofit Organizations

Executive Summary

Non-profit organizations entail those institutions that focus on offering essential services to society without the goal of making a profit. The organizations mainly rely on grants and donations to achieve their objectives. When it comes to accessing debts, non-profit organizations find it difficult because of a lack of genuine cash flows and collaterals. The organizations use various programs to assess the performance of the staff and their progress. Some of them include incentive programs that measure the overall productivity and also motivate the employees. To portray efficiency, non-profit organizations need to take measures that include the alignment of all financial operations to the overall goals.

For non-profit organizations to be efficient in their operations, they need to rely on reliable sources of funding that include government funding due to lower risks. The organizations also need to consider entering into contractual agreements with the governments as a form of guarantee of funding. In terms of similarities with for-profit organizations, both kinds of organizations require initial funding to initiate their operations. Organizations also need to apply financial techniques of planning and budgeting in their framework for the efficient achievement of their objectives. The major difference in both sets of organizations is the source of funding because the non-profit organizations rely on well-wishers while the profit-oriented enterprises rely on funds from the shareholders. It is recommended for the organizations to consider sourcing their funds from the governments through contractual agreements. The organizations should also consider sourcing more of their funds from the individual contributors due to the ease of accessibility.

Introduction

A non-profit organization refers to an institution whose purpose is to offer specific services without the aim of making profits from the operations (Gras & Mendoza-Abarca, 2014). Different non-profit organizations vary in terms of size, purposes, and type of management. Some of the organizations resemble the structure of government institutions, while others resemble commercial enterprises. Recently, non-profit organizations have become a vital element of economic development and structure in many economies. Most of them have embraced a mode of operations that resembles other businesses. The current paper describes financial management in non-profit organizations intending to offer a comparative platform for the organizations with commercial enterprises.

The Source of Finance

Sources of finance for the organizations should be diversified to reduce the associated risks of having one source. As a result, the non-profit organizations have different sources of funds with grants and contributions being the major ones. Grants refer to the receipts from the well-wishers (Gras & Mendoza-Abarca, 2014). The grants form the highest percentage of the sources of funds and help the organizations to achieve their objectives. Another category is the contribution by corporations that come in the form of cash or goods and services (Wellens & Jegers, 2014). Other contributions can be received from the members on an annual basis. The members’ contributions can be received in the form of discounts on various products.

The non-profit organizations can also source their funds from planned giving. Planned giving refers to a scenario where donors commit to assist their organization in their wills or other forms of documentation that can be proved in a court of law. Lastly, the organizations can acquire funds through holding or participating in special events (Lefroy & Tsarenko, 2014). Such events include marathons, fundraisers, and dinners that help donors and sponsors come together with a collective view of helping the organizations. As shown above, non-profit organizations rely on the goodwill of other organizations and individuals to realize their objectives.

Use of Debt in Non-Profit Organizations

The more recommended source of funds for non-profit organizations is equity rather than debt. Equity is a better source due to the costs of obtaining the debt. The use of debt also has associated rules and regulations introduced by the creditors, thus limiting its usage (Gras & Mendoza-Abarca, 2014). In the contemporary business world, many non-profit organizations, including hospitals, have a lot of debt. Lenders usually have different aims and objectives when they decide to lend money to non-profit organizations. It leads to the different risk profiling of the organizations (Lefroy & Tsarenko, 2014). A non-profit organization can be exposed to a bad risk or good risk, depending on the constraints associated with borrowing.

For non-profit organizations to effectively manage their debts, they must be ready to achieve certain goals. Firstly, the organizations need to ensure that there is backup liquidity to cover any reduction in the revenues (Lefroy & Tsarenko, 2014). The organizations also need to form good relationships with the bank of affiliation to have fewer restrictions associated with the debt. Thirdly, nonprofit organizations need to establish a plan that will get them out of a cash crisis. Lastly, organizations need to be aware that short-term borrowings are risky due to the short repayment period and low-profit returns. It means that they should not over-rely on the funds (Wellens & Jegers, 2014).

Despite the ratios as an important determinant of whether the organization has an ability to pay its future obligations, the non-financial indicators can also dictate whether the organization should receive the debt. Some of the financial indicators include the geographical location of the organization, the consistency of growth, and its reputation (Wellens & Jegers, 2014). It is common for some non-profit organizations to complain about lenders not willing to grant them short-term loans. To some extent, the lenders are usually justified because most non-profit organizations do not have enough cash flow to guarantee the repayment of the debt (Lefroy & Tsarenko, 2014). The banks always prefer all the debtors to repay their debts through their operating cash flows and they also consider it preferable for the collateral to be converted into cash.

The major collaterals in the non-profit organizations include receivables and inventories. The problem of the non-profit institutions is that they do not possess the above assets, leaving the lenders at risk of losing their money. As a result, lenders always have a negative attitude when it comes to lending money to non-profit institutions (Gras & Mendoza-Abarca, 2014). Moreover, if the lenders want to extend the credit, they will need to critically study the financial viability of the organizations in terms of cash flow.

Due to the rise in the perceptions, there can be made three conclusions about non-profit institutions. Firstly, it is evident that non-profit organizations run systems of accounting that are not strong enough and their cash budgeting is based on non-existent resources. Secondly, the sources of funds for these organizations, including the donations, are usually not reliable (Lefroy & Tsarenko, 2014). Lastly, most banks are usually skeptical when it comes to lending money to these institutions because their reputation may be at stake if the organizations fail to pay back the debts. In the commercial businesses that are profit-oriented, it would be very easy for them to acquire credit because their cash flows are usually continuous and they have viable collateral.

Performance Evaluation

The most important method of evaluating the performance of a non-profit organization is the analysis of the organization’s capability to fulfill its objectives and the level of efficiency an organization has in the process of using its funds.

Meeting its Objectives

Many studies have confirmed that an organization’s way of doing things is usually influenced by the type of leadership. The top management needs to show its commitment to achieving the goals of the organizations by word and action. The leaders can only achieve the organization’s goals by establishing a system related to the decision-making model of the leadership and the external forces that affect the organization’s performance (Gross & Neely, 2014). Since the change in the organization’s culture is needed because of the ever-changing business world, the leadership of the non-profit organizations needs to ensure continuous training of its employees (Wellens & Jegers, 2014).

For non-profit organizations to achieve their objectives, there is a need for the alignment of various practices. The first activity the organization needs involves instilling accountability. Accountability can only be achieved through a strong and reliable control system that defines the role and authority of each member of the staff. The next activity is ensuring that the top-level leadership is consistent and efficient to guarantee that the function of managing the financial resources of the organization is performed by a capable group (Wellens & Jegers, 2014). The organization also needs to ensure it creates an environment of cultural change through continuous training of the employees, especially the middle-level managers. The non-profit organization also needs to ensure frequent analysis of its objectives to identify the areas that need improvement (Gross & Neely, 2014). The organizations also need to ensure that all the accounting operations accomplished daily undergo streamlining to ascertain that the unwanted processes are scrapped.

Moreover, the organization needs to ascertain that the fiscal operations are frequently organized to take advantage of any chance that can lead to an increase in the value of the organization. To perform the above activity, the organization needs to ensure that the fiscal functions are consistent and congruent. The establishment of a system that offers a connection between the daily operations of the organization and the financial roles is also important (Wellens & Jegers, 2014). It can only be done by integrating the ledger system with the electronic system to perform an accurate assessment of the various costs in the organization. Technology is also important and an organization should adopt the latest technology to ascertain that the financial operations are in line with the current standards and requirements (Ridder, McCandless Baluch, & Piening, 2012). The organization of the financial data is also important because the users need to have access to information that can be used for their purposes. Therefore, the management of these organizations needs to arrange the financial information that centers on various drivers such as the products and customers. To achieve all of the above goals, the organizations need a competent and able finance team.

Efficiency in the Use of the Contributions

Recently, non-profit organizations have been adopting incentive plans that ascertain proper usage of the contributions from the donors, and at the same time, measure the efficiency of the employees. The first one is managing based on objectives. The plan involves the managers and the staff working together to develop various methods that can be used to evaluate the performance of the employees (Gross & Neely, 2014). As a result, the employees are required to meet the expected standards. Secondly, the organizations need to adopt an awards plan that is related to special achievements. The plan involves rewarding the employees who show outstanding performance.

The organizations also use contests to improve the performance of the employees. Examples of the contests are games and promotions that target the efforts of the staff (Hofmann & McSwain, 2013). The contests are usually based on various aspects of measuring the overall productivity. Such contests facilitate the evaluation of individual performance. Additionally, the non-profit organizations also use the Memorial Employees Retirement Incentive Trust, where the rewards are determined by the savings on the expenses budgeted by the organizations (Ridder et al., 2012). The organizations usually establish a trust where they put the funds for the employees to access them upon retirement. Such activities implemented by the organizations help ensure that the employees are accountable for handling the contributions.

Governance Mechanisms

The contemporary dynamic business world requires non-profit organizations to work closely with the government to expand and protect their financial interests. In the past, most non-profit organizations relied on funding from the government to operate effectively (Ridder et al., 2012). The management of the organizations needs to explore the opportunity of acquiring government funding through contractual agreements to ensure that their operations are stable due to the continuous flow of funds. The emphasis is put on government funding because this source of funding is usually the only fund that the organizations are guaranteed to receive.

However, various challenges usually hamper the cooperation of the organizations and the government. The main challenge is the maintenance of efficient operations in an environment filled with contingencies such as the size of the community being served, the literacy levels of the consumers, and the available social capital (Ridder et al, 2012). For example, the communities that are often diverse are not likely to attract the special attention of the government (Hofmann & McSwain, 2013). Another challenge that is faced by the organization is the possible withdrawal of the funding from the government that hampers the operations of the organization.

Comparison with For-Profit Organizations

In terms of financial management, non-profit and profit-making organizations have certain similarities. Firstly, both types of organizations require money to start and operate. When it comes to operations, cash is a requirement if any organization wants to efficiently achieve its short-term and long-term goals. Secondly, both types of organizations are exposed to certain risks when it comes to the operations within the organizations (Lefroy & Tsarenko, 2014). After starting up the organizations, there is usually no guarantee that the organizations will realize their objectives. Organizations are also subject to change due to the consistent change in the business environment, and they are required to cope with the change through frequent transformation (Hofmann & McSwain, 2013). When it comes to their purpose in the community, the organizations are vital for both the economic and welfare sustenance of the society. They are important because of the critical services they offer and the employment opportunities they provide.

In terms of financial techniques, both types of organizations have a similarity in that they both require to possess the necessary financial techniques. Some of the techniques include planning, the formation of financial forecasts, and the application of cash flows. The above techniques dictate the efficiency of the organizations and also determine whether they can access the external funds. Moreover, the techniques help the organizations attain their goals (Lefroy & Tsarenko, 2014). The organizations also face similar challenges when it comes to implementing the techniques into their operations in a bid to incorporate them into their framework.

As for the differences, one of the major differences is that the focus of for-profit organizations is making profits while non-profit organizations focus on offering essential services to society. The next distinctive feature is the source of their finances (Lefroy & Tsarenko, 2014). A non-profit institution mainly relies on donations and grants from well-wishers to continue their operations, and the sources of the funds do not expect anything in return (Hofmann & McSwain, 2013). On the contrary, for-profit organizations usually acquire funds from shareholders, who usually expect rewards at the end of the financial period in the form of dividends.

Conclusion and Recommendations

In conclusion this management essay, it is clear that the sources of funding for the organizations hamper the chances of the organizations acquiring debt. The major source of finances for the non-profit organizations include grants and contributions, which do not provide the required security of loans. The most recommended form of the capital structure of the organizations is equity because the costs of acquiring debt tend to be higher. Most lenders fail to grant loans to non-profit organizations due to a lack of continuous cash flows. Non-profit organizations have devised several programs that assess the productivity of the employees and their progress in achieving their objectives. The non-profit organizations have some similarities with the profit-oriented enterprises, while also having some differences. The programs help motivate the employees while also ensuring that the organizations monitor their progress in achieving their objectives. Like commercial organizations, for non-profit institutions, the funding from the government is usually reliable, but in some instances, the organizations can experience some challenges.

After considering the above factors, it is recommended that all non-profit organizations should consider investing in assets to ensure that they have collaterals to access external funding. Contractual funding from the governments is also important because it guarantees a continuous inflow of funds. Lastly, the organizations need to consider the usage of individual contributors due to the ease of accessing them.