Financial Management in Nonprofit Organizations - Essay Example

? FINANCIAL MANAGEMENT IN NONPROFIT ORGANIZATIONS goes here] [Your goes here] [Due the paper] Executive Summary This paper was mainly about the differences between financial management systems of for-profit and not-for-profit organizations. The researcher discussed various issues related to the financial systems of both types of organizations. The issues that the researcher discussed included sources of funds, use of debt, and organizational objectives. The researcher made use of online resources and journal articles to find support from literature. The researcher found some key differences between the financial systems of both types of organizations. Those differences were mainly related to the sources of finance and its use by the organizations. The main difference that gives rise to all other differences is the motive of both organizations. The motive of the owners of for-profit organizations is to earn higher amounts of money to bring it in personal use. On the other hand, the motive of the management of not-for-profit organizations is to help people and society in resolving key issues. Such organizations get money to use it for the betterment of society. From the study, the researcher concluded that although there are some key differences between for-profit and not-for-profit organizations regarding sources and use of money, but a large number of for-profit organizations also show corporate social responsibility and spend some part of profit on social causes. The researcher also recommended the management committees of not-for-profit organizations to create and implement a proper check and balance system which should eliminate the chances of corruption by ensuring the use of money for social causes in a transparent manner. Introduction Financial management system of nonprofit organizations is generally different from that of for-profit organizations. However, there is no such difference in structures of both organizations (Hammoudi, 2012). The focus of nonprofit organizations is to spend money on environmental and social issues, whereas the focus of for-profit organizations is to earn money for stakeholders. This difference between for-profit and nonprofit organizations lead to other differences related to financial management systems. In this paper, we will discuss some of the core issues regarding financial management systems of both types of organizations. The issues will include sources of funds, use of debt, and organizational objectives. We will discuss these issues in order to find some differences between working and financial systems of both types of organizations. Sources of Funds Source of funds is one of the main differences between the financial management systems of both types of organizations. Sources of funds refer to the way through which organizations get money to carryout business activities. There are different sources of funds for both types of organizations. For-Profit Organizations Private for-profit organizations get their funds in shape of profits that they get from their business activities. These organizations do businesses related to different industries and get huge figures of revenue every year. Some companies belong to construction, pharmaceutical, and garments industry, whereas some belong to other industries. Apart from receiving funds in form of profits, these companies also get funds from banks in the form of bank loans. These organizations have to pay back the loan to the banks in a given amount of time at agreed interest rates. If they do not do so, they become defaulters. However, in case of nonprofit organizations, there is no such issue because nonprofit organizations do not get loan from anywhere. For-profit organizations manage proper financial statements to know from where they have received funds and to whom they have to pay back the funds. Government organizations, on the other hand, receive funds from federal and provincial governments to run business activities. The profits are sent to the government to use for development purposes. Such organizations also get money in the form of loans from the Federal Reserve Bank. Not-For-Profit Organizations As Kerlin and Pollak (2011) state “nonprofits use commercial income as a replacement for lost government grant and private revenue” (p. 686). Nonprofit organizations get funds from a wide range of sources, such as, individuals, public charities, corporations, federated funds, federal and provincial governments, and foundations. All of these sources provide funds to nonprofit organizations because they trust these organizations and want them to continue their efforts for developing and sustaining a peaceful society for all. A very large percentage of charity to nonprofit organizations comes from individuals who contribute to the working of such organizations from their personal income. Giving charity to poor and unprivileged people is one of the main teachings of almost all religions. People fulfill this responsibility by giving charities to poor people, as well as to nonprofit organizations. Corporations also give money to such organizations to show corporate social responsibility, as well as to gain community respect and exposure. Some organizations related to the field of healthcare, education, and human services receive funds from all types of governments to continue their services. Use of Debt Use of debt also causes differences between for-profit and nonprofit organizations. Use of debt refers to the ways organizations use funds to carry out different types of business activities. There are different uses of funds in both types of organizations. For-Profit Organizations Owners of for-profit organizations use funds to carryout business activities, as well as for personal use. For-profit organizations obtain funds in terms of profits and use them for organizational matters, such as, salaries, business finances, and expansion of business to other markets. Owners of for-profit business and organizations aim to expand their businesses to gain profits. They need to launch comprehensive marketing campaigns to get exposure to their businesses. They need money to accomplish this objective. Moreover, owners of for-profit organizations also use money for their personal matters, such as, to buy property and cars. This is not the case in nonprofit organizations, as they cannot use money for personal causes. Owners of for-profit organizations and businesses also spend some part of their income on social issues to show corporate social responsibility. For example, they give charities to nonprofit organizations and foundations. Along with this, some organizations also use some part of their profits on human services, such as, providing meal to poor people on daily basis and providing financial support to people suffering from environmental hazards. This aspect of use of debt by for-profit organizations is somewhat similar to that of nonprofit organizations as both types of organizations show concern for social and environmental stability. Not-For-Profit Organizations As Weerawardena, McDonald, and Mort (2010) state, “Nonprofit organizations (NPOs) contribute to society through their social value creation” (p. 346). Nonprofit organizations do not work to earn more profits, rather their mission is to accomplish their chartered objective to serve general public (Riddix, 2011). This is the reason why use of debt in case of nonprofit organizations is very different from that of for-profit organizations. Nonprofit organizations use funds for social issues, as well as for human services. There are different types of nonprofit organizations which use their funds in different ways. Some organizations provide food and shelter services to poor and unprivileged people, whereas some organizations provide free of cost educational services to children who cannot afford to get education. Moreover, some organizations also use money for social causes, such as, building awareness among people regarding HIV/AIDS, building awareness regarding ways to deal with different types of diseases, and providing information to people regarding benefits of keeping environment clean and green. As Tatum (2012) states, “Some are structured as organizations that promote public awareness of a certain disease or health condition” (p. 1). Nonprofit organizations need money to accomplish these tasks. Nonprofit organizations also have to provide salaries to employees who work to fulfill the missions of these organizations. From the above comparison, we conclude that corporate social responsibility and salaries of employees are such aspects of use of debt that are present in the money expenditure model of both nonprofit and for-profit organizations. Organizational Objectives Organizational objectives of for-profit and nonprofit organizations are different from each other, which is also a reason behind differences in the financial management systems of both types of organizations. Let us discuss how difference between objectives lead to differences in financial management systems of these organizations. For-Profit Organizations The main objectives of the owners of for-profit organizations include raising money for personal and business uses, expanding business to other markets, gaining competitive advantage, providing high quality products and services to customers to get customer satisfaction, and reaching top rankings in the list of successful businesses. Owners of for-profit organizations aim to increase productivity of their businesses to achieve competitive advantage and market domination. The ultimate cause of achieving all of these objectives is to earn high amounts of profits which owners can use for personal and business purposes. Not-For-Profit Organizations As Tatum (2012) states, “nonprofit organizations are entities that are incorporated in accordance with prevailing laws and are structured to offer some type of support or service to the community” (p. 1). The objectives of nonprofit organizations include helping poor people meet the needs of daily life, providing food and shelter to poor people, providing educational services to the children of poor parents, raising voice against social violence, and keeping environment clean and green. Some nonprofit organizations provide free of cost technical training to unemployed people to help them get skill-based jobs and earn their livings. In some Asian countries, people require a large amount of money for wedding ceremonies. In such countries, some nonprofit organizations work to assist people in performing their wedding services. Some nonprofit organizations work for providing human rights to people in need. In some countries, women are not given equal rights. They are not given the right to vote in elections or the right to do jobs to serve their families. Nonprofit organizations in such countries raise voice to end discrimination against women. Moreover, some nonprofit organizations also work to protect the rights of ethnic and religious minorities. Conclusion Summing it up, financial management systems of nonprofit and for-profit organizations have considerable differences between them. These differences arise mainly because of the difference of the business concept of both organizations. Nonprofit organizations work for social and environmental causes, whereas the aim of for-profit organizations is to earn profits for shareholders. Nonprofit organizations adhere to the requirements of corporate social responsibility because their aim is to deal with the betterment of the society. A large number of for-profit organizations also show corporate social responsibility and spend money for social and environmental causes. However, proper and transparent use of money is still a considerable issue in many nonprofit organizations. We recommend the management committees of not-for-profit organizations to create and implement a proper check and balance system that should be able to eliminate the chances of misuse of funds. References Hammoudi, R. (2012). How to Lead a Nonprofit Organization. Retrieved from http://ezinearticles.com/?How-to-Lead-a-Nonprofit-Organization&id=7110927 Kerlin, J., & Pollak, T. (2011). Nonprofit commercial revenue: a replacement for declining government grants and private contributions? The American Review of Public Administration, 41(6), 686-704. Riddix, M. (2011). The Role Of Nonprofit Organizations. Retrieved from http://ezinearticles.com/?The-Role-Of-Nonprofit-Organizations&id=6512879 Tatum, M. (2012). What Is a Nonprofit Organization? Retrieved from http://www.wisegeek.com/what-is-a-nonprofit-organization.htm Weerawardena, J., McDonald, R., & Mort, G. (2010). Sustainability of nonprofit organizations: an empirical investigation. Journal of World Business, 45(4), 346-356. Read More