The financial management of non profit organizations is characterized by several aspects. Unlike other for profit organizations, these organizations can out their operations without much influence from other parties such as the government and other institutions like those that lend. This essay elaborates the financial management of non profits by looking at various aspects such as sources of their funds, the use of debt, performance evaluation and the government mechanisms. A conclusion and recommendations are also given.
Financial Management in Nonprofit Organizations
A successful strategy of raising funds is based on an organization's plan. A good plan is determined by an understanding of sources of funding that can be suitable for a given organization. A plan that can work should also be balanced. Therefore, putting all eggs in a single basket should not be attempted by any organization. For a non profit organization, the first source of funds is grants. This is where foundations, agencies of government or corporations make contributions to an organization. This is meant to enable these organizations manage certain programs or be able to meet various goals that have been defined.
There are certain grants used to either enhance programs that exist or to put new ideas to test. They are called project grants. The second source of funds is corporate contributions. Foundations are created by some foundations which award funds. Also, some use corporate giving programs to award funds directly. A good number of them do this out of their marketing departments, public affairs or community relations. In addition to giving cash, most corporations also contribute goods and services (Hutton and Philips, 2010, p. 218).
Thirdly, there is contribution from individuals. The bigger percentage of private funds that nonprofit organizations receive is represented by what private individuals give. The organization's general expenses or specific activities may be supported by individuals. These contributions can be sought through various ways such as telephone, email, face -to-face or through visiting the website. There are several ways through which individual contributions can be done. First, it can be through annual gifts which entail contributions that are done once in a year. Here, the receiving organization benefits a lot if they are done consistently.
Individual contributions can also be made through major gifts. These may include a large sum of money whose value differs from one organization to another. The third type of individual contribution is done through memberships. This is like annual gifts are done on a yearly basis. The only difference is that a membership contribution is done in exchange of a given service or benefit that the non profit organization gives. This can be in form of a free tote bag or even some discounts on some goods or services (Hutton and Philips, 2010, p. 219). Whereas some non profit organizations identify those who make such contributions as members, others have a formal relationship with their members and enable them to participate in governance.
The fourth kind of individual contribution is through planned giving. This refers to the gifts that nonprofit organizations receive from donors which can be done either through their wills or other documents that are lawful explaining what should take place to their finances or profit during their death. The fifth way is through special events. Organizations generate a lot of income from events that occur during some occasions such as marathons, fund raising events and chicken dinners, among many others.
Use of Debt in Non-Profit Organizations
The efficient capital structure for non profit organizations will be equity rather than debt. This is because the cost of debt is higher compared to the cost of equity. It is a known fact that most hospitals and other nonprofit organizations have debt obligations. This begs the question of how one can explain the presence of the debt. Nonprofit organizations that are encountering equity issues do not have an automatic debt (non-market or market). Based on different reasons, some potential lenders regard some nonprofit organizations as good risk while others regard them as bad risk. Nevertheless, the non-profit organizations that are faced with borrowing constraints are unjustly regarded as bad risk (Jegers, 2008, p. 116-117).
In its attempts to manage debts, a non-profit organization should ensure that it meets some objectives. First, it should make sure that there is a dependable liquidity back up just incase expenses increase or revenue declines. Secondly, the organization should establish a working relationship that is good with its depository bank and try to construct a profit line that is uncommitted even if there are no plans of utilizing the line. Thirdly, the organization should come up with an action plan regarding what should be done if the organization gets itself into a cash crisis. Additionally, the organization should not over-depend short term borrowing that may be arranged (Zietlow and Seidner, 2007, p. 214).
Organizations that provide health care can use third part accounts receivables to borrow funds. Similarly, educational based organizations can use their student receivable accounts to borrow. Therefore, Healthcare and educational organizations are the banks' prime prospects. Although financial ratios are important for organizations that offer educational services, an organization's ability to service future loans can also be determined by non-financial indicators. The future of both demographic and economic visions around the school's region is very important. The other vital aspect is the consistency in the growth of the school's demand for students which is a key determinant of the institution's reputation. Reputation and revenue streams that are diversified give the organization a credit risk that is better to banks, bondholders and several other lenders (Zietlow and Seidner, 2007, p. 219-220).
Non-profit organizations have been heard remarking that they are not often understood by banks and that most banks are not willing to provide them with short term loaning. They also voice that the restrictions governing their loaning services are often a lot. The truth of the matter however is that product selling non profit organizations are in a non-enviable business position in relation to business borrowers. Lending by banks is basically based on cash flow. Banks are essentially cash flow lenders. They wish to be refunded from cash flows that are operating and they even prefer if the short term borrower's collateral can be turned to cash.
First accounts receivable and second inventories are the collateral behind the loans. What is interesting is that these kinds of collateral exist in few non profit making organizations. This therefore leaves banks without any collateral. This situation can therefore end in two different ways. First, banks are afraid to extend loans to many organizations that are non profit making. Secondly, prior to granting a loan request, banks are compelled to understand the organization's sources of operating cash flow and variability.
When perceptions are coupled with these concerns there are three factual outcomes. First, most organizations that are non profit making are known to run on accounting systems that are weak and on practices of cash budgeting that do not exist. Secondly, donations and grants that are in form of soft money are not reliable. Thirdly, most of the banks are quite nervous of their name being maligned following headlines that may describe the closure of some of the non profit organizations as a result of their inability to repay the bank's loans (Zietlow and Seidner, 2007, p. 221-222).
On the other hand, it is easy for profit-making organizations to access loans from banks and other lenders due to their continual cash flow and collateral.
The effective evaluation of a non profit organization's performance can be based on the ability to meet the laid down objectives and the efficiency in the organization's use of its contributions as discussed below.
Meeting the Organization's Objectives
A study on six public and three private based world class financial organizations revealed that an organization's cultural changes were greatly influenced by its leadership. The highest management should show a commitment in putting their words into actions. The leader must make sure that every entity has been impacted by improvement. This should be attained through a controlled system that is well designed and one that connects the decision making of the internal-lines management and reporting related to external performance. To ensure that the needed organizational cultural change has been facilitated and promoted, training that is both innovative and continuous must be provided by the top management. Therefore, to both a non-financial and financial organization that wishes to ensure that its objectives have been achieved, there has been an identification of eleven practices that it can adopt (McKinney, 2004p. 22). These are:
- Ensuring that maximum accountability has been achieved. This can be done by coming up with a control system that is clearly defined and one that connects internal making of decisions with outward reporting regarding management performance. To accomplish this objective, financial reporting and the process of audit as an oversight tool of basic management should be put into use.
- Manifest executive leadership that is open, strong and consistent and one that ensures that the pervasive duty of financial management has been fostered in the entire organization.
- Change the culture of the organization through the use of training as a strategy. This applies mainly to line managers.
- Frequently evaluate how the organization meets its accepted mission, benchmarking the feedback of customers to achievement and compare best practices, taking note of and overcoming gaps in achievement.
- Ensure that daily accounting activities have been streamlined, removing practices that are not efficient, making transaction processes standard and looking into the possibility of external sourcing.
- Frequently organize the fiscal function to increase in value. To ensure that this objective has been met, management must ensure that there is congruency and consistency between the fiscal core function and the management's substantive duty.
- Enhance a way in which the system in management information connects to the finance roles with operations of daily line management. This can be achieved through ensuring that the fiscal reporting control has been supported by integration of the ledger system, by using the electronic system to do accurate measurement of the service and products' costs and by supplying functioning line managers with frequent timely reports on both financial and non-financial details.
- Work at fitting the latest technology into the existing practices so that the system of finance can be in line with the packages that are both commercial and off-the shelf coinciding with laid down and established standards.
- Organize the data on finances to suit the needs of the user. To enhance usefulness, reports must be prepared by management centering on vital drivers like products, customers, services and present fiscal information in a non-complex, understandable and brief manner.
- Put together a finance team with suitable talents and competences that compliment each other.
- Establish a financial organization that ensures that the best talents are attracted and retained. This is achieved through the creation of career path opportunities that are clear, establishing job rotation and career-path development that is multifinancial (McKinney, 2004, p. 23-24).
Efficiency in Use of Contributions
Not for profit organizations have developed several incentive plans that are used to the contributions have been properly utilized, measure the performance of employees. The first plan is management by objectives. It is where the manager and employee function together to come up with some objectives that can be used to evaluate how the employee performs. Those members of staff who participate in formation of the objectives may be required to work hard in ensuring that they meet them.
Secondly, there is special achievement awards plan. Here, employees whose contribution is outstanding in the organization are rewarded. Awards are often done in cash though other non-monetary may include better office furniture, more clerical or technical aid or greater influence on decisions regarding the budget.
Thirdly, the other plan is use of contests. Games, promotions and contests are used in the fostering of employees' efforts. Contests utilize a number of topics like productivity, improvement of quality and methods of cost reduction. The goal of contest is not only to stress individual efforts but also to encourage competition within the organization.
Additionally, there is the MERIT (Memorial Employees Retirement Incentive Trust). Here, the amount rewarded is determined by savings in all the budgeted expenses. The rewards are put in a trust where employees may withdraw during retirement. This plan has five main steps. First, testing of standard efficiency is done to find out controllable expenses as a percentage of the base period's total operating revenue.
Secondly, the efficiency percentage of the current year is obtained from the performance base. Thirdly, application of efficiency percentage got from payroll is used to develop employer's contribution. Fourthly, there is calculation of final amount of contribution. Finally, the ratio of employees' earnings to the participants' total earnings is what determines the contributions of employees (Finkler and Ward, 1999, p. 357).
Currently, most non-profit organizations must engage with the government to enable them not only expand but also protect their fiscal base. Sometimes ago, most of them were founded on the basis of government funding. The board and the executive director should carefully weigh the possibility of accessing funds through contractual arrangements. To continue having their desired survival and stability, opportunities like ones that are accorded through government funding should be explored. The most revenue source for non profits that is considered most stable is government funding. However, issues may arise as a result of the collaboration between the state and non profits (Agard, 2010, p. 533).
Generally, more challenges are faced in the efficient operation between governments and non profits than with profit making firms. The degree of efficiency between the two parties is affected by various contingencies like the community size, consumers' education level and the extent of social capital. For increase populations that are more diverse in their jurisdiction are less likely to be accorded separate services by the government.
Moreover, these organizations have encountered challenges such as fiscal squeeze, withdrawal of government funding to non profit organizations that used to meet the needs of areas like human resources, community development, education and training. Additionally, the government has been inclined to consumer rather than producer subsidies in funding non profits (Renz and Herman, 2010, p. 79-82).
Conclusion and Recommendations
The main sources of funds for non profit organizations are grants, corporate contributions and individual contributions. Equity rather than debt forms their efficient capital structure. Since most lending institutions give their loans on the basis of cash flow and collateral, non profit organizations are not easily considered by them. Non profit organizations have several plans that are used to assess performance and meet their objectives. Like for profit organizations, they can be funded by the government though with some hurdles.
It is hereby recommended that non profits should invest in assets that constitute their collateral to enable them access loans when necessary. They should also form contracts with the government to help them to explore the possibility of being funded. Moreover, they should utilize individual contributions as a source of finance since these methods are many and easily available.