Financial Management in Nonprofit Organizations

FINANCIAL MANAGEMENT IN NONPROFIT ORGANISATIONS 12

FinancialManagement in Nonprofit Organizations

FinancialManagement in Nonprofit Organizations

ExecutiveSummary

Nonprofitorganizations(NPOs) may referto theorganizationsthat usesurplus revenuesormoneygrantedby donorssoas to deliverservicesthat area returnnoprofits.Theseorganizationscutacross manyfieldsfrom health,educationandevensecurity.Nonprofitorganizationsareusuallygaugedon their effectiveness of servicedeliveryandachievementof their missions.Since theyrely on moneygrantedby donorsorthegovernment,theytendto assumethattheir effortsleadto successin their missions.Soundmanagementpracticessuchas financialmanagementalsoleadto successof nonprofitorganizations(Wekart, Chen andSermier, 2013). Therefore,thispaperis based on a discussionof financialmanagementin nonprofitorganizationsandtheir comparisonwith for-profit organizations.

Themajorissuesexplainedin thispaperincludethesourceof fundsandhowtheyareusedin nonprofitorganizations.Theperformanceevaluations andgovernance mechanismsusedparticularlyin financialmanagementarediscussed,as well.Thepastresearchshowsthatnonprofitorganizationsexperienceinefficienciesin financialmanagementmorethan thefor-profit organizations.In thatregard,wewill discussthevariouscomponentsthat compriseastrongfinancialmanagementsystem,forexample,budgeting, monitoring andgovernance (Wekart, Chen andSermier, 2013). Since mostnot-for-profit organizationsfocuson deliveringservicesandpayslittleattentionto management,theyendup lackingcashreservesforperiodsof littlerevenue.In thisway,theexpenditureexceedsthemonetarybudgetsplannedbefore leadingto deficitsorfailureof theseorganizations.

Theinefficiencyin financialmanagementcan be solvedby understandingtherealcostsof allprograms,developingrealistbudgets,as wellas monitoringtheuseof funds.However,in orderto implementthesepractices,thenon-profitorganizationsare chargedwith theresponsibilityof developingstrongmanagementsystems,favourableproceduresandgoodchannelsof communicatingfinancialinformation.Investmentin thecoremanagementinfrastructuresof not-for-profitorganizationswill leadto increasedperformanceparticularlyin servicedelivery.Introduction

Asstatedearlier,nonprofitorganizationsrangefrom hospitals,colleges,schools,socialserviceorganizations,professionalserviceorganizations,andsoon.Unlike thefor-profit organizations,thesebodiesdonot reapdirectfinancialbenefitsfrom their clientsinstead,theyimprovethestatusof organizations,livesof people,andthesocietyat large.Thekeyaspectsofstudyingfinancialmanagementin nonprofitorganizationsrevolvearound planning,operations,controllingandgovernance. Planningentailscreatingbudgetplansthat will guidetheoperationsof thebodyin termsof financeandotherexpenses(McCarthy, Shelmon andMattie, 2012).

Incomparisonwith thefor-profit organizations,one can seethatsourcesof fundsin nonprofitorganizationscomesfrom donors,debtsandgrantswhilethefor-profit organizationsgetmoneyfrom their operationsandcapitalmarkets.Short-termgoalsare importantin for-profit organizations,unlike nonprofitorganizations,which mainlyfocuson longtermgoals.Thetwo distincttypesof organisationhavesimilarcharacteristics,forexample,themissionandperformanceevaluation systemsare importantin bothformsof organizations.Sourceof Funds forNPOs

Themostdistinguishingfeaturebetweenfor-profit organizationsandNPOs is thesourcesof fundsandrevenue.Not-for-profit organizationsdepend on financialresourceproviders whoat mosttimesdonot engagein theday-to-dayoperationsof theorganization.Thedonatedresourcesare meantto bedirectedtowards theclientssuchas students,refugeesorpatientswithout expectingfinancialreturns.Usually,theresourcesdonated,which could be money,labour,foodorclothingis meantto satisfytheintendedinterestorpurpose.Thesepurposesareoftenstatedby thedonating bodyortheNPOs missionstatement.It,therefore,meansthatthestaffmembersmust utilizethemoneyas directedby thegrantagencies.

Financialmanagementsystemsbecomecriticalwhenthedonorsfinancialreportsmust matchwith theinternalfundaccounting reports.However,cashmanagementandbudgeting are two importantareasthat enablesuccessof not-for-profit organizations.Thecashflowpatternsmay be difficultto predictbecausetheseorganizationsrely on fundsprovidedby donorswhodonot receivetheservicesdelivered(McCarthy, Shelmon andMattie, 2012). In suchsituations,keepingcashreservesandforecastingthereleaseof donorsandgrantsbecomesverychallenging. Thefinancialmanagers,therefore,focuson controllingtheexpenseswith theuseof budgets.

Itseemsthatfinancialmanagementsystemsheavilyrely on thedonors’decisionandnot theleadersof thenon-profitorganizations.For-profit organizationscan managetheir financeseffectivesince theygetrevenuesfrom theconsumersandshareholders.In addition,theycan forecasttheamountof salesto be madein givenperiod,unlike non-commercial enterprises, which rely on donations.Althoughthefinancialmanagementpracticesare similartobothtypesof organizations,thenot-for-profitorganizationslacktheflexibilityto manageits fundsas thecommercialenterprises does(McCarthy, Shelmon andMattie, 2012).Useof Funds in NPOs

Unacceptableuseof fundsin not-for-profit organizationscan leadto terminationof thesourceof revenueandtheeventualclosureof theorganization.Thefinancialmanagersin NPOs struggleto managethefinancesbecauseof challengesrangingfrom payingbills,servicedelivery,respondingto donorrequests,andsoon.Sometimes,themanagersfocuson crisismanagementandsurvivalsince thefundsare not enoughorbecauseof poorfinancialmanagementsystems.Goodgovernance would focuson developinglong-term strategicfinancialplansthat will guidetheorganizationin theuseof fundsdespite thechallenges.Recentstudiesshowthatplanning,operations,monitoring,andgovernance are someof thecomponentsof a strongandgoodfinancialmanaging system.Planningandoperationsare thekeyelementswhenusingfundsin not-for-profit organizations(Wekart, Chen andSermier, 2013).Planning

Planninginvolvescreationof accurateandrealistbudgetsof themoneythat is to be usedby theorganization.Notethatthecommercialenterprises alsodevelopbudgetsfortheir operations.GoodfinancialanalysisandbudgetsallowtheNPO to usethefundsstrategically duringthegivenperiod.Usually,theorganisationconsidersseveralissuesbefore draftinga budgetplan.Forexample,theyconsiderthesizeandscopeof their programs,thelead-time fordonorsrequested,as wellas, theunforeseenconditions(Wekart, Chen andSermier, 2013). Therecommendedbudgetplanshould accountforthesalariesandwagesof thestaffmembersandsustaintheoperationsof theorganizationuntil otherfundsarereleased.Operations

Theoperationsinvolvecreationof agoodinfrastructurethat helpsin monitoringtheemployeeswhodealwith thefunds.Thisincludestheinformationsystemsandcommunicationchannelsusedto exchangethefinancialinformation.Theelementof operationsis alsocrucialin thecommercialenterprises since itleadsto successof theorganization.Operational researchmethodologies may informtheday-to-day activitiesof NPOs. In thisway,theycan identifythekeyindicatorsof thefinancialstatusof theorganizationandalertthestaffto workon them (Poister, Hall andAristigueta, 2015).PerformanceEvaluations

Theassessmentof howan organizationusesthefundsis crucialin bothformsof organizations.Besides theevaluations,thefinancialmanagersought to ensurethatthesetobjectivesareachievedat theendof a fiscalperiod.Monitoring is thekeyelementin financialmanagementthat involvespreparationof auditreportsandfinancialaccountsthat informthedecision-makingprocess(Poister, Hall andAristigueta, 2015).Monitoring

Theregularreviewof thefinancialperformanceof theNPOs is necessaryinachievingthesetobjectives.Financialaccounting andauditing are commonmanagementpracticesin bothnonprofitorganizationsandfor-profit organizations.Fundaccounting reportsarepreparedat theendof a fiscalperiodin orderto accountforall themoneyspentin theorganization’soperationssuchdeliveryof services(Poister, Hall andAristigueta, 2015). Notethatfinancialreportsarepreparedforindividualprogram,be ityoutheducationprogram,drugabusecampaignprogramorevenpovertyreductionprogram.In thisway,theaccountantsareabletoindicatethemoneyspentonall theprogramsandtheentireorganizationas a whole.

Themostimportantaspectof monitoringthefinancialperformanceof NPOs is by comparingthereportswith theplans.Theso-calledbudget-to-actual reportsforeveryprogramare verycrucialin gaugingtheoverall performanceof theorganization.Asdiscussedearliermanyorganizationsstrugglein monitoring andforecastingthemoneyto be usedby theorganizationin giventime.Goodmethodsshould bedevelopedin capturingthetruecostof theday-to-day operationswithout overstatingorunderstating.In addition,thereportsmust includetheoverheadcostsof theorganizationprogramsas indicatedin thebudgets.Budget-to-actual reportsenablethemanagersto presentthemoneybudgetedfor,andthatmoneyspentforcertainprogramsat specificdateswithin theaccounting period.Thereportsinformthedecision-makingprocessby themanagementboard.

Auditingandfinancialreportsalsohelpin evaluatingtheperformanceof employeesafter a givenfinancialperiod.In financialmanagementof NPOs, itis importantto involveindividualprogrammanagerswhenenquiring financialinformationandanalysisofthereports.In thisway,thefinancialmanagerscan indicatethekeypointswherethefundswerenot spenteffectivelyanddevelopbetterpoliciesandsystemsthat will solvetheproblems.MostNPOs experiencemoreproblemsin communicatingfinancialdata to theleadingmanagementboardthanthe for-profitorganization(McCarthy, Shelmon andMattie, 2012). Financialanalysisthat is based on individualprogramsof NPOs will pointout suchchallengesthat can betargetedby managersin their decision-makingprocess.

Financialaccountingalsohelpsin asset managementandcontrolof expensesin bothnonprofitorganizationsandfor-profit organizations.Asset managementgoalsareachievedthrough identifyingtheamountof moneysavedafter deductingall theexpenses.Thefinancialreportsenablethemanagementto monitortheexpensesandmakedecisionson whetherto buynewassets ornot. Through a criticalanalysisof thereports,theleaderscan predictthefutureoperationsof theNPOs in casemoreprogramsareintroducedordonorsdecideto terminatethefundsgranted.In thisway,itwill be easierto createcashreservesandavoidcreationof deadcapitalthat will not helptheorganizational operations(McCarthy, Shelmon andMattie, 2012).GovernanceMechanisms

Theboardof directorsin anytypeof anorganizationarechargedwiththe responsibilityofoverseeingtheday-to-day operations.Also,theyshould giveguidanceto ensuretheobjectivesareachievedin compliancewith thedonorsandgovernmentrequirements.Motivationandfavourableremunerationof employeesare someof thegoodmanagementpracticesthat leadto successof anyorganization.Themissionremainsthemostimportantfeaturein NPOs, unlike for-profit organizationsthat engagemuchin profit-gaining activitiesratheraccomplishingtheir mission.In otherwords,theboardof governance in NPOs are mission-oriented,andthosein commercialenterprises are profit-oriented. Thegoverningboardconsists of volunteers,unlike commercialenterpriseswherethedirectorsaremadeof paiddirectors.Anot-for-profit organizationmainlycomprisesof manyboardcommitteeswhilea for-profit organizationrelies on fewboardcommitteesin its governance (Tschirhart andBielefeld, 2012).

Thegovernance frameworkusedin an NPO mattersa lotin achievingthegoalsandthemission.Therecommendedgovernanceframeworkfrom thepastresearchisbasedon certainprinciples.Theframeworkisbasedon conformance andperformanceprinciples.Theperformanceprincipleis moreof a forward-looking dimension in thisframeworkwhileconformanceprinciplefocuseson thehistoryof theoperations.There are severalconformanceresponsibilitiesrequiredforthesuccessofthe applicationof thegovernance framework.First,theconformancecomponentrequiresidentificationandmanagementof theoperational risks.Secondly,there should be accuracyin generationof financialinformation.Thirdly, theorganizationshould be ableto preventmoneylaundering, theft,fraudandmisappropriation of funds(Tschirhart andBielefeld, 2012).

Mostperformanceresponsibilitiestendto focuson valuecreation,resourceutilization andstrategiesmadein an organization.Moredetaileddutiesin theperformancecomponentincludeassessmentof theongoingstrategyandidentificationof certainpointsthatthemanagementneedsto makenewdecisionsin responseto thechanges.Applicationof thisgovernance frameworkto financialmanagementof fundsgrantedto nonprofitorganizationswould leadto greatsuccess.First,theNPOs ought to investmuchin financialmanagementsystemsby employingprogrammanagersandotherassistantsthat havedirectcontactwith theclients.Thiswould involvetrainingthestaffmemberson howto communicateandsubmitinformationto themanagementboardin orderto allowfastdecision-making.

Thegovernance frameworkmakestheresponsibilitiesof thefinancialmanagerclearandthusnoconflictsarecreatedwithothermanagers.Forexample,thefinancialmanagementdepartmentought to consultriskmanagerswhendevelopingthebudgetplans.Theyshould alsoensurenofundsorassets are stolenormisappropriatedduring theoperations.In thisway,theywill ensurethatthemoneybudgetedforis efficientlyusedand,at thesametime,thesetobjectivesareachieved.

Anotheraspectof governance is communicationwithin theorganizationandoutside theenterprise.Goodcommunicationchannelswill enablethemanagementcommitteeto submitaccuratedata andinformationto thefunders. Usually,theNPOs operatein differentgeographicallocationsandthusa communicationchannelsuchasthe useof email may be goodfortransferinformationto theheadquarterswithin theshortesttimepossible.Communicationwould aidin performanceresponsibilities,forexample,by identifyingthecriticalprogramsthat requireimmediateadditionof funds.Evaluation of thesuccessof strategiesandhumanresourcesdeployedin servicedeliveryis anotheraspectthat aidsgoodfinancialmanagement.Theseassessmentsallowthemanagersto makedecisionsbased on theactualoperationsandthuscan decidewhetherto changethepoliciesornot andto someextentsave theexpenses(Tschirhart andBielefeld, 2012).Accountability

Non-profitorganizationmanagerstendto focuson accountabilitywhena problemarises.Forexample,themanagersbecomealertwhendonorsandcitizensstartaskingwhethertheir moneyis spentwellornot. Ontheotherhand,themanagementteamoffor-profit organizationsis alwaysaccountablefortheenterpriseoperationssince their aimis to makea profit.In addition,theytracktheperformanceof theemployeesandfollowup on issuessuchas fraudandtheft.Accountabilityhas variouscomponents,which may includetransparency,answerability andcompliance(Hofmann andMcSwain, 2013).

Accountabilityrevolvesaround ensuringwhois responsibleindeliveryof servicesandrequestof fundsfrom donors.Itis importantto trackthecashflowinto theNPO soas to indicatethespecificpoints,in which mistakesoccur.Thequestionsof whoreceivedthedonorfundsandwhodisbursedthemoneyto theprogrammanagersshould haveanswers,which aredocumented.Inthe caseof theftormisappropriation of funds,themanagerscan performinternalassessmentsthat will giveout thedepartmentsthat are responsibleifsuchmistakes(Hofmann andMcSwain, 2013).Conclusion

Thedistinguishingfeaturesbetweenthenonprofitorganizationsandfor-profit organizationsincludethedifferentsourcesof funds,thepurposeandmanagementteams.Theaspectof sourcesof revenueenablesus to understandthenatureof a financialmanagementsystemappliedin profit-gaining enterpriseandnonprofitorganisations.ThefactthatNPOs relyoffundsfrom donorsmakestheir financialsystemsrigidsince theycannot changebudgetsover timeorforecastwhena donorwill releasethefunds.Acommercialenterpriserelies on salesandcapitalmarketsandthusthemanagerscan predictwhatwill happenin thefuture.Budgetplansandmanagementof operationsare essentialinachievingtheobjectivesof bothtypesof organizations.

Theperformanceevaluation involvespreparationof financialreportsthat givesan overviewof themoneyspentin theoperationsover a givenperiod.Comparisonsof thereportswith thebudgetplansenablethemanagementto makeviable decisionsconcerningtheperformanceof humanresources,strategiesandassets deployedinthe deliveryof services.In addition,themanagementcan carryout internalself-assessments that identifythekeypointsthat ledto embezzlementof funds,fraudortheft.Among themanymanagementconcepts,a governance frameworkthat stipulatesconformance andperformanceresponsibilitiesis thebestin buildingastrongfinancialmanagementsystem.

References

Hofmann,M.A. &amp McSwain, D. (2013). Financial disclosure management in thenonprofit sector: A framework for past and future research. Journalof Accounting, 3 (2), 61-87.

McCarthy,J. H., Shelmon, N. E., &amp Mattie, J. A. (2012). Financialand Accounting Guide for Not-for-Profit Organizations.Hoboken: John Wiley &amp Sons.

Poister,T. H., Hall, J. L., &amp Aristigueta, M. P. (2015). Managingand measuring performance in public and nonprofit organizations: Anintegrated approach.

Tschirhart,M., &amp Bielefeld, W. (2012). Managingnonprofit organizations.San Francisco: Jossey-Bass.

Weikart,L. A., Chen, G. G., &amp Sermier, E. (2013). Budgetingand financial management for nonprofit organizations: Using money todrive mission success.Los Angeles: SAGE CQ Press.

Related Posts

© All Right Reserved