FINANCIAL MANAGEMENT IN NON-PROFIT ORGANIZATIONS

Financial Management in Non-profit Organizations

Financial Management in Non-profit Organizations

Introduction

Financial management of not-for-profits is similar to financial management in the commercial sector in many respects; however, certain key differences shift the focus of a not-for-profit financial manager. A for-profit enterprise focuses on profitability and maximizing shareholder value. A not-for-profit organization's primary goal is not to increase shareholder value; rather it is to provide some socially desirable need on an ongoing basis. A not-for-profit generally lacks the financial flexibility of a commercial enterprise because it depends on resource providers that are not engaging in an exchange transaction. The resources provided are directed towards providing goods or services to a client other than the actual resource provider. Thus the not-for-profit must demonstrate its stewardship of donated resources — money donated for a specific purpose must be used for that purpose. That purpose is either specified by the donor or implied in the not-for-profit's stated mission. The management and reporting activities of a not-for-profit must emphasize stewardship for these donated resources. The staff must be able to demonstrate that the dollars were used as directed by the donor. The shift to an emphasis in external financial reports on donor restriction has made the use of fund accounting systems even more critical.

Budgeting and cash management are two areas of financial management that are extremely important exercises for not-for-profit organizations. The organization must pay close attention to whether it has enough cash reserves to continue to provide services to its clientele. Cash flow can be extremely challenging to predict, because an organization relies on revenue from resource providers that do not expect to receive the service provided.

Budget planning issues

The scope and size of a not-for-profit's programs and asset base dictate the complexity of its budgets. In its most complete form, a budget is a compilation of the plans and objectives of management that covers all phases of operations for a specific period of time. If a goal of an organization is to build working capital, it might want to project a budget imbalance of revenues over expenses. However, building too much of a surplus too aggressively might indicate to users of financial statements that the organization is not effectively carrying out its stated purpose. Program priorities should be balanced in an effective budget. The not-for-profit's management must allocate its capabilities and resources to impact the maximum number of the intended audience or beneficiaries. Not-for-profit organizations that charge for their services might not be able to easily increase their prices for their programs. Lead-time for grant requests and multiyear programs must be factored into the budgetary planning process. The financial manager of a not-for-profit must prepare the budget to ensure adequate funds for programs slated to be run over a period of time longer than the average budget cycle. The budget, once adopted, should be used by the staff as a management tool to gauge operational performance. An effective budget should establish criteria that would signal management if a change ...