Non-Governmental and For-Profit Organizations - Essay Example

?Executive Summary Financial management is at the core of implementing organizational objectives and goals since finances are the engine of organizational survival. Financial management practices differ in different organizations but common financial management practices are must be adhered. Non-governmental Organizations are set up to offer services or goods to people with the aim of assisting them though capacity building. Financial management practices in NGO’s are different from the operations of For-Profit organizations. For instance, NGO’s source their funds through donations, sponsors or charitable sources. This is different from For-Profit organizations that source their funds from shareholders who are the real owners of these organizations. Organizational structure of NGO’s and For-Profit are a bit similar in the sense that both set of organizations are managed by boards of directors. Financial management entails the processes of budgeting, Taxation and corporate governance. NGO’s typically have financial budgets prepared over the period of the activities they are undertaking. On the other hand, For-Profit organizations have their financial budgets prepared for a period of one financial year. Governments levy taxes on all organizations for the purpose of implementing public project or service provision but with the exemption of NGO’s. According to Brigham (2010, 65), the main difference between NGO’s and For-Profit organizations is the objectives and goals of these organizations. NGO’s are set up to provide charitable goods or services to people without need of making a profit. This major differentiating factor is the reason behind the differences in financial management practices between these organizations. Corporate governance is important in implementing integrity and management of organizational strategies. NGO’s are not particular in enforcing prudent corporate governance practices compared to For-Profit organizations. Introduction Financial accounting and management is essential in any organization because without financial management organizations cannot be sustainable. However, financial management differs in every organization, governments or legal entities. For instance, financial management practices in Non-governmental organizations (NGO’s) and profit organizations are very different. NGO’s are organizations which are not set out to make profits but instead they are meant to provide a service. This is opposed to profitable organizations which are meant to make profits. Organizational Structure The organizational structure of NGO’s is different from that of a profitable organization in that NGO’s are mandated to offer services compared to profit organizations which are meant to make profits. NGO’s are registered or mandated either by governments or special bodies to undertake projects or service delivery to different people. The major difference between NGO’s and profit organizations stems in the ownership structure of the two bodies. NGO’s are owned or operated by a board of directors or a steering committee in some cases; this board of directors is responsible for drawing up the financial strategies for the organization. The board of directors of an NGO are responsible for sourcing funds for the organization through different ways (Brigham 94). In some instances, some NGO’s have adopted the structure of a private company and used this structure to manage their financial operations. Most NGO’s source their funds from governments, churches and donations this is because these organizations act as governments and they only use their funds for capacity building. This is in contrast to profitable companies whereby ownership of these organizations belongs to some individuals. Profitable companies are owned by people known as shareholders; shareholders are responsible for funding the organization to undertake the goals and objectives of these organizations. Public owned organizations are profit organizations which comprise of a many owners in a company which is listed in a stock exchange. Anybody can become a shareholder/owner of a public For-Profit organization which is managed by a board of directors elected by majority of the shareholders. A For-Profit organization sources its funds from shareholders or from money markets or banks through debts in the case of public organizations. NGO’s cannot obtain debt financing for their activities since they are not out to make profits (Shim 97). For-Profit organizations’ owners benefit from the organizations though profits or losses unlike NGO whereby the targeted people benefit from projects or activities of the organization. Financial Management Procedures In the operation of an organization it is inherent for an organization to manage its finance in a prudent manner. NGO’s are mandated to undertake activities for the benefit of the public such as capacity building or feeding the needy. Due to this, NGO’s do not have sales and marketing divisions since these organizations are not supposed to conduct business. This is different to For-Profit organizations which conduct businesses and collect money through sales of their products and services. Among the most important financial procedures in the management of an organization is the process of budgeting. Budgeting is very important and in most cases it is conducted by the finance department for a period of one financial year. Budgeting in an NGO is based on the funds sourced from donors and their budgeting procedures are different depending on the type of the NGO (Shim 118). While in the case of For-Profit organizations, budgeting activities are conducted for a period of one year. For-Profit organizations, budgets are planned on funds availed by shareholders or from borrowed money or retained earnings from the organization’s activities. In the process of financial management, organizations are obliged to pay taxes from the activities they undertake. In most regions and countries, NGO’s are exempt from taxation on the activities they conduct. This is because NGO’s do not generate revenues as compared to For-Profit organizations. For-Profit organizations are liable to pay taxes for the revenues or sales they generate. Employees working for For-Profit organizations are liable to taxation on their salaries as opposed to employees working for NGO are who do not pay any taxes. Rules governing setting up and operation of NGO’s and For-Profit differ in many countries. In most places, For-Profit organizations are required to meet some benchmark requirements in order for these organizations to be licensed. This is in contrast to NGO’s which have fewer legal requirements at the organizational setting up stage (Brigham 101). For-Profit organizations are organised in different tiers such as private and public companies while NGO’s are organised into categories according to the activities they undertake. Organizational Performance Governance issues in an organization are very important since governance determines how an organization is operated. In the operation of different organizations, laws are set to govern the operations and activities of such organizations. NGO’s are governed by the laws drawn by the board of directors or the founders of such an organization. NGO’s also governed by laws in regions where they operate. It noteworthy to note that NGO’s are not governed in the management of their funds and depending on the NGO, financial management is mainly an internal organizational affair (Brigham 82). Audits and financial governance practices are enforced in NGO’s depending on the founders or rules set by the NGO sponsors. For instance, governmental NGO’s such as the United Nations’ financial management is subject to audits and scrutiny from the major donors of funders. This is in contrast to For-Profit organizations which are governed by many laws which set the financial practices for operation of these organizations. Public For-Profit organizations are meant to audit their financial records for the benefit of the shareholders (Shim 116). They are also monitored by laws of operations like in the United States; public companies are regulated by the SEC (Security Exchanges Commission). Performance evaluations are important activities in the management of organizations especially in the assessment of the organizational goals and objectives. Performance evaluations are rarely conducted by NGO’s due to the objectives of some NGO’s. For instance, a human rights’ NGO will find difficult to conduct performance evaluations. Performance evaluations on financial undertaking of most NGO’s is difficult since some of their activities or projects last for a long time or due to uncertain funding for their activities. Performance evaluations on the activities of For-Profit organizations are conducted severally in a financial year and most organizations conduct their evaluations quarterly. Due to the organizational setup of NGO’s, performance evaluations at NGO’s are not stringent and in most cases evaluations are not conducted at all (Shim 34). Financial management practices of For-Profit organizations require these organizations to conduct performance evaluations more often to ensure that shareholders get value for their money. Some organizational operational laws may require For-Profit organizations to conduct performance evaluations more often to ensure corporate integrity in practised and maintained. Conclusion Management of an organization is a delicate task that involves the use of several strategies. Structures and objectives of an organization are operated through several departments in an organization. The finance department is at the heart of an organization because financial management is important in meeting the objective and goals of an organization. NGO’s and For-Profit organizations are different in the operations of their activities particularly in the areas of financial management. Financial management practices are different in the two set of organizations due to differences in the structure, activities and rules governing these organizations. The management of NGO’s and For-Profit organizations might be different but the activities and regulations that govern both set of organizations are dissimilar. NGO’s in most regions or countries they operate in are exempted from taxation unlike For-Profit organizations Works Cited Brigham, Eugene and Ehrhardt, Michael. Financial Management Theory and Practice.Chicago, IL: John Wiley and Sons, 2010. Print. Shim, Jae and Siegel, Joel. Financial Management. Boston, MA: Cengage Learning, 2008. Print. Read More