Financial Management in Nonprofit Organizations - Research Paper Example

In fact, such regulative provisions aim to ensure that the organization’s funds are properly used for the stated purpose. As compared to for-profit organizations, a nonprofit enterprise is not allowed to keep huge amount of surpluses with it. Since a nonprofit organization’s financial management is not liable to take any level of risk, it can operate freely with greater degree of certainty. In contrast, for-profit organizations bear some levels of business risks including debt financing. Generally, both nonprofit organizations and for-profit organizations use the incremental budgeting technique.

Undoubtedly, restricted financial management operations can reduce nonprofit organizations’ probability of failure. Introduction The term financial management simply refers to the process of planning toward the future of an individual or a business organization so as to ensure a positive inflow and outflow of cash. To be more specific, “financial management pertains to the optimal sourcing and utilization of financial resources of a business enterprise”; and the two key processes including resource management and finance operations constitute this process (Sofat & Hiro, 2011, p.20). Theoretical frameworks suggest that the application of financial management techniques in non-profit organizations is entirely different from its application in for-profit organizations.

This paper will discuss the financial management practices in nonprofit organization. It will also compare and contrast the applications of financial management techniques in nonprofit organizations with that of for-profit organizations. Core Concepts of Financial Management Core concepts of financial management encompass capital budgeting, cash management, cost of capital, capital structure planning, and dividend policy. Capital budgeting is a financial tool used to analyze whether an organization’s long term investments like new plants, machinery, research and development projects, and other new products are worth pursuing.

Cash management activities try to maintain an effective balance between inflow and outflow of cash. From the management view point, cost of capital represents the cost of a firm’s funds including debt and equity. The concept of capital structure refers to the way an organization uses particular combinations of ‘equity, debt, and hybrid securities’. Dividend policy refers to a strategic measure that an organization uses to decide the level of returns to be paid to its shareholders. The application of these financial management concepts depends on a number of factors in addition to the size and nature of the organization.

Among them, the firm’s efficacy in applying these concepts is vital in order to exercise a control over the organization’s future cash flows. Therefore, firms usually establish separate finance departments so as to deal with their day to day financial operations. Financial Management in Nonprofit Organizations Unlike for-profit organizations, the p­rimary goal of a nonprofit organization is not shareholder value maximization; instead, it intends to meet specific socially desirable needs.

As Griswold and Jarvis (2011) point out, nonprofit organizations lack financial flexibility as such institutions heavily depend on resource providers that are not engaged in exchange transaction. The resources provided are