Financial Management in Not-for-Profit Organizations - Essay Example

Financial management in not-for-profit organizations Executive summary The achievement or attainment of organizational objectives inany organization is dependent on the management of finances. Therefore, effective strategies aimed at ensuring finances are managed accordingly ought to be put into place. This paper focuses on financial management in nonprofit organizations and subsequently offers a comparison and distinction between the application of financial management techniques in nonprofit and for-profit organizations. In achieving this, this paper focuses on the sources of funds, use of debt, performance evaluation, and governance mechanisms in nonprofit organizations. Due to the soaring or not-for-profit organizations, there has been the need for the implementation of financial management mechanisms to ensure that grants of funds from donors are used for their intended purposes. To ensure this, these organizations ought to create a budget indicating all the activities they intend to do and how much these activities would cost. Subsequently, rules and regulations should be set to govern how funds are used. There are regulatory bodies in every country whose main objective is to assess whether not-for-profit organizations comply with legal and ethical standards related to management. Not-for-profit organizations get their funds from individual donors, institutional donors, and even governments. For-profit organizations, on the other hand, get their funds from investors. In performance evaluation, a tool referred to a balanced scorecard is used to evaluate performance based on clients perspectives, financial perspectives, learning perspective, and also on the basis of internal processes or procedures. One of the recommendations is the adoption of this tool in financial evaluating performance and implement strategies to ensure compliance. Subsequently, it is also important to have a clear vision for the organization in order to ensure funds are used for their intended purposes. . Financial management in nonprofit organizations Introduction To effectively understand and comprehend these issues, it is of significance to define a nonprofit organization as well as a for-profit organization. A for-profit organization can be referred to as a commercial entity of organization. In other words, this main objective is to generate revenue. A nonprofit organization, on the other hand, is an organization established with the main objective of helping the society in general rather than for commercial purposes. In addition, a nonprofit organization is excused from paying levies as opposed to a for-profit organization where all services and commodities are levy. Any funds generated or allocated to nonprofit organizations is pumped back into the organizational activities in a bid to improve on the services offered to the members of the society. In contrast, all funds generated in a for-profit organization are shared among the investors of the business (Zietlow, Hankin and Seidner, 2011). It is also important to consider the fact that nonprofit organizations offer employment to many individuals and offer a range of services to the public. Though a small fee may be charged by the nonprofit organization for its services, all generated revenue is used to improve on the services as well as their delivery systems (Zietlow, Hankin and Seidner, 2011). Therefore, it is imperative that all finances in these organizations ought to managed effectively. Budgeting Budgeting for finances in nonprofit organizations is also a major factor in management. It is important for the organizations management to create a budget indicating how the available resources are to be used and for what reason or purpose. A budget is also important in managing finances in nonprofit organizations as it helps the management to identify loopholes that may impact on how finances are spent. The extent and weight of the budget is dependent on the assets and resources available at the moment. The organizational goals and intents are also important determiners of the size of the budget. Individuals in-charge of the budget planning process ought to consider the fact that precedence must be given to those activities whose main objectives is to capitalize on the assisting those individuals in need within the society ("Financial Management of Not-for-Profit Organizations", 2011). According to Financial Management of Not-for-Profit Organizations (2011), it is also important to set up plans of actions that would ensure that all stakeholders conduct their activities within the budgetary allocations. Strategies should also be put into place to measure or evaluate whether organizational goals are met. A budget to control finances in a nonprofit organization must also be flexible enough to allow and accommodate change. Organizational managers are always involved in activities aimed at transforming or adjusting organizational objectives in order to contain changing situations. With the current technological innovations, it would be important for individuals given the role of planning the budget to consider purchasing a software that could assist them in formulating an all inclusive budget. Rules and guidelines There are universal rules that are used to manage finances in nonprofit organizations. It is imperative for the management to comprehend these rules and other instructions that would help them manage finances effectively. Conducting regular reviews or inventories is important as it helps track how finances are being used. In each and every nonprofit organization, there is a board of individuals with decision making obligations on behalf of the organizations. It is important for every individual in the board to be sentient with the daily running of the organization particularly pertaining to financial matters in order be able to make relevant decisions in an organized and timely manner. It is also important for all individuals involved in the management of finances to understand and comprehend their roles or duties in order to avoid conflicts (Weikart, Chen and Sermier, 2012).. There are also available resources or references managers in nonprofit organizations can use help them manage finances effectively. Such references focus of successful strategies that have been used in the past to manage funds in similar organizations. Sources of funds There is a clear distinction between where nonprofit and for-profit organization derive their funds from. The source of funds for nonprofits organizations is mainly from donors whereas funds are derived from investors in a for-profit organization. However, these two compare in the fact that they have to market themselves effectively in order to acquire funds. Both these organizations are in constant need for readily available finances to support their daily running. At one time, nonprofit organizations depended entirely on grants from the government but this has significantly changed over the recent past. A few decades ago, governments had to cut their spending due to the ever changing dynamics in the global economy. Subsequently, the high demand of services from the public forced nonprofit organizations to look for other sources of funds. In the contemporary world, nonprofit organizations have to market themselves in order to attract donors. Donors institutions, individuals, support from the government, revenue from their own business enterprises, and contributions from volunteers (Weikart, Chen and Sermier, 2012). The use of debt According to Coe (2011), borrowing money is also a source of funding in both nonprofit and for-profit organizations. All reserves in terms of finances ought to be effectively documented and verified. There are funds allocated to nonprofit organizations by donors for use in a specific activity or project, and other finances allocated for the daily running of the organization as well as any other uses that may come up. A debt or fund accounting structure or method should be employed in order to separate or set aside those finances intended for specific purposes as directed by specific donors. Employment of a debt accounting structure or system also ensures that all transactions and other expenses are well documented and accounted for. Donors may need to be updated on how their money is being spent. Performance evaluation Donors and individuals in management positions conduct financial appraisals using financial information in nonprofit organizations. However, using the financial information alone can be misleading and hence there are other techniques used as well. As mentioned earlier, it is the obligation or duty to managers in these nonprofit institutions to run and direct financial matters and provide evidence for perusal to the donors. Managers are also accountable and answerable in reference to how finances are used. This is one of the reasons why accounting is important. Evaluation of performance in nonprofit organizations avails or makes available statistics or data on the competence and organization of expenditure within the organization, funds acquired, increments in profits or returns, as well as the achievements of the variety of courses of action implemented within the organization. These statistics and facts relating to financial use is important to donors and other individuals giving financial help to these organizations as it functions as the basis for making philanthropic or charitable pronouncements. Continuous losses or misuse of funds can discourage donors from making considerable financial contributions and this may lead to the downfall of the organization in the long run (Coe, 2011). A tool referred to as a balanced scorecard has been used since the recent past to evaluate performance in both nonprofit and for-profit organizations. It is imperative to consider the fact that this tool, the balanced scorecard, is employed in financial management processes to evaluate organizational performance in four points of view. These include monetary, clients, internal procedures, and erudition points of view (Finkler et-al, 2011). In the monetary point of view, the tool assesses whether organizational processes have attained the intended purposes or goals i.e. monetary gain. In the clients point of view, the toll assesses whether the clients have been pleased or contented by the processes or actions implemented within the organization. In the point of view of the internal procedures and activities, this the balanced scorecard assesses the internal activities that the organization ought to do extremely well in order to achieve the intended purposes. In the erudition perspective, the organization must have room for changes geared towards attainment of the intended purpose (Finkler et-al, 2012). Governance mechanisms According to Schoning, Noble and Schwab Foundation for Social Entrepreneurship (2012), the number of not-for-profit organizations is the US as well as in other parts of the world is soaring and hence there is the need for improved comprehension of regulatory mechanisms that govern activities within these organizations. Donors also require governing mechanisms put into place to control how their finances are used. Additionally, Schoning, Noble and Schwab Foundation for Social Entrepreneurship (2012) posits that not-for-profit organizations are important institutions in the society that provide services ranging from health, education, and political awareness. Similarly, there are for-profit organizations involved in the provision of analogous services for commercial purposes. Therefore, there is always competition between the two types of organizations in the provision of services. This competition in many cases act as a regulating or controlling mechanism as not-for-profit organizations fear that they might lose their clients if they provide poor service or if they mismanage the donated funds. Many people have in the past argued that nonprofit organizations are incompetently managed apparently evidenced by the numerous cases of mismanagement and scams linked with these organizations. In a bid to address these issues, supervisory bodies including excise authorities have introduced directives, guidelines, or bylaws that ought to be complied with. The salaries of individuals managing these organizations are scrutinized by the relevant bodies in order to prevent overpayments and misuse of available resources (Finkler et-al, 2012). Effective governance of not-for-profit organizations require appropriate strategies or plans of action be put into place. For instance, there ought to be a creation of an audit team involving individuals without any links to the organization. In other words, an audit team should be contracted from outside the organization. Proper records should also be stored properly and grating of any documents be made illegal. Individuals involved in dissemination of programs to the community should be encouraged to report any illegal transactions or activities happening within the organization, and also regulations to govern individual behavior should be implemented (Coe, 2011). Subsequently, operational mechanisms and systems should be structured in a manner that allows the recognition and exposure of inaccuracies, scams, and misappropriation of funds (Refer to Appendix). The level of education, experience, and the skills of individuals in management positions particularly the board is important in ensuring good governance. Effective leaders in not-for-profit organizations must be visionary, industrious, and must have the capacity to involve each and every stakeholder in the daily running of the organization. Other attributes of effective leaders include the ability to recognize the need for change and implement strategies to accommodate the change, be a good example to employees, and have effective communication skills in order to have the capacity to market the organization to potential donors (Weikart, Chen and Sermier, 2012). References "Financial Management of Not-for-Profit Organizations". (2011). Retrieved from https://www.blackbaud.com/files/resources/downloads/WhitePaper_FinancialManage mentForNPO.pdf Coe, C. K. (2011). Nonprofit Financial Management: A Practice Guide. Hoboken, NJ: John Wiley & Sons. Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2012). Financial Management for Public, Helath, and Not-for-Profit Organizations. Upper Saddle River, NJ: Prentice Hall. Schoning, M., Noble, A., & Schwab Foundation for Social Entrepreneurship. (2012). The Governance of Social Enterprises: Managing Your Organization for Success: World Economic Forum. Retrieved from http://www.weforum.org/pdf/schwabfound/newsletter/Draft_CorporateGovernanceSo cialEnterprises.pdf Weikart, L. A., Chen, G., & Sermier, E. (2012). Budgeting and Financial Management for Nonprofit Organizations. New York, NY: CQ Press. Zietlow, J., Hankin, J. A., & Seidner, A. G. (2011). Financial Management for Nonprofit Organizations: Policies and Practices. Hoboken, NJ: Wiley. Appendix Governance principles (Rezaee, n.d) Read More