Financial Management in Nonprofit Organizations

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Table of Contents

Introduction
Financial management
Budgeting
Asset management
Cash flow
Fund accounting
References

Introduction

Financial Management is simply the management of finances in an organization so as to meet all the financial goals of the organization. The key objectives of financial management would be to: create income for the business, generate profits, and provide adequate returns on investments. These key objectives are achieved bearing in mind the risks that the business is taking and the resources invested.

Three key factors are to be considered in the process of financial management: financial Planning, financial decision-making and financial control.

Financial management

Even though financial management of non-profitable organizations is similar to financial management in profit organizations, there are many key highlights that make it different. In a forprofitorganization, the focus is on profitability and maximizing shareholder value.

A non-profitable organization focuses on reducing shareholder value and increasing the likelihood of satisfying the targeted clientele as per the requirements of the organization.Moreover, a non-profitable organization lacks the financial flexibility of a commercial enterprise. It largely depends on donors that do not engage in an exchange transaction (Ruppel, 2007).

Non-profit organizations ought to account for its donated resources. It must be able to show that the donation was utilized for a specific purpose. The purpose of the funds should be stated in the organization’s mission statement or specified by the donor. In a non-profitable organization, there is a strong emphasison externalfinancial reports on donor restriction. As a result the uses of fund accounting systems have been made even more critical.

In profitable organizations, the main focus is ensuring that the overall benefits of the stakeholders are capitalized. Simply translated, this means aiming to achieve the maximum profit possible for the organization. A profitable organization has various stake holders. These stake holders include: share-holders, fund lenders, employees, customers, suppliers, and the government. In order to attain the maximum profit possible, the profitable organization has to first find a balance between the needs of these stake holders and the organization.

If all operations of the organization are to run smoothly then there has to be a proper balance and clear definition of the long term and short term objectives and opportunities. In the process of setting the short term goals and opportunities it is important to evaluate all possibilities that may jeopardize the long term sustainability of the company. Should the organization manage to balance all these factors, the end result will be maximizing the shareholder value (McKinney, 2004).

Budgeting

Budgeting and cash management are two areas of financial management that serve significant roles in non-profitable organizations. The organization has a duty of ascertaining that there is adequate cash back up that will enable it to continue offering services to its customers. However in a profitable organization, the pursuit of such needs could be detrimental to the shareholders. This is because the funds that go into satisfying customers could be utilized in other areas of the business that need to be improved.

Cash flow in a non-profitable organization can prove to be quite a challenge. The organization largely depends on funds from donors. These donors donate their resources without expecting to receive the service provided by the non-profit organization. For this reason, expenses in the non-profitable organization have to be controlled.

In a profitable organization, stake holders expect their needs to be met and therefore, the organization has to maintain a steady cash flow. Just like the non-profitable organization, funds may be depleted. However, the organization does not rely on resources from donors; rather their resources are determined by how well the business performs. The wealth of the shareholder is based on the current value of the organization’s future cash flows (Atkinson, Kaplan &Young, 2004).

Budgets are an organization’s functioning plan for a financial period. They influence the board’s and staff’s decisions regarding how the organization will fulfill its objectives. The management in both profitable and non-profitable organizations usually decides which programs will commence in every up-coming financial period. Resources are then allocatedaccordingly in order to make sure that the programs are successful.

The budget dictates how the resources will be allocated and in which area they will be best utilized. A budget also shows staff performance gives staff goals that they should achieve within a certain period. Programexpenditures should be recorded in a timely and organized manner so as to make management’s work easier when reporting their service efforts and achievements to the donors.

The scope and size of a profit and a non-profitable organization dictate the complexity of its budget. The budget normally constitutes some plans together with objectives that “management hopes to cover through all phases of operations” over a certain period of time.

However, in a non-profit organization, when the surplus accrued is too much and the process through which it was accrued raises questions, this might indicate a problem that the organizationis not effectively carrying out its mission and fulfilling the donor’s wishes.

The organization has to balance priorities in an effectivebudget beginning from the most important to the least important. In a profitable organization, surplus prevents the organization form going into debt. The company will be able to reduce all costly interest repayments and puts the company on a sounder financial footing.

In a non-profitable organization, allocation of resources is done in such a manner that the number of the intended audience or beneficiaries is satisfied. Unlike in the profitable organizations, the non-profitable organizations may not be able to make prices higher for their programs if they should decide to charge.Similar to profitable organizations, grant requests and multiyear programs in non-profitable organizations must be considered during planning process of the budgetary.

Once a budget has been agreed upon and set, it should be utilized by the staff as a management guide to judgewhether operational performance has improved or there are areas that need to be adjusted. A good budget should outline the criteria that would alert management if a change is required or if acourse of action should be improved or adjusted. A budget should be updated as new situations come upso as to monitor the overall performance of the organization.

Conditions that may not have been anticipated may arise and this means that the budget should be adjusted accordingly so as to respondto any of those conditions. Staff and management should be accountable for budgeting; any responsibilities should be attributed to those that can ensure that the goals of the company are achieved. If those that are carrying out the company’s mission are unaware of their participation in helping to realize the company’s goals, then the usefulness of a budget is reduced.

Asset management

Asset management in a non-profitableorganization should be managed according to the going concern perspective which takes upthe view that there’s no restriction on the organization’s mere survival and sustenance.

The organization has to assume the responsibility of ensuring that there is adequate financial backup available to finance all current operations. The main objective of the organization is to “maintain a balance between available assets and growing assets”. The organization is to pay back its debts at the right time as well as be able to “meet other fiscal obligations”.

Cash flow

After the budget is developed, both the profit and no-profit organization need to focus on financing current operations by utilizing current funds, and maximizing available and obtainable resources to enhance return on the resources or capital. This mainly presupposes the analysis of benefits and costs of different sources.

Cash is a vital resource for both profit and non-profitable organizations. To sustain fiscal capability, an organization must have enough monetary funds to pay its bills. Financial statements can be used to “report an excess of revenues over expenses”. However, this should not mean that there is money in the bank. In both organizations, seasonal fluctuations also have a significant impact on regular cash flow. The amount of cash flowing in and out typically fluctuates throughout the year.

Therefore there is an increased emphasis on the significance of the budgeting process. This is because commitments must be observed on a consistent basis. The organization must therefore plan ahead for those periods when the amount of funds flowing in is less than cash flowing out.

One way that the profit and non-profit organizations solve the issue of cash flow is through postponing expenditures or accelerating constituent billings (Gross,McCarthy&Shelmon, 2005). Annual operating and capital budgets should be authorized so that they can be converted into cash flowbudgets.

This will verify the availability of resources and to indicate times of minimal cash flow. Theprocess usually involves approximating when collections on year-end receivables will occur. This is done by “calculating the normal time lag between invoicing for services and the actual receipt of cash”.

This should be done according to the expenditure of cash and the month the payment is due. Expected capital, sales of assets, expenditures, debt repayment, borrowing and any other financing transactions should be factored in. A model cash flow budget is one way of maintaining a minimum cash level.

Both the profitable and non-profitable organizations plan from the first day to work on accumulating adequate capital back up that will sustain the organization’s operating expenses for the upcoming several months. Whenextra cash reserves have accrued, the organization must plan for provisional cash investments totake full advantage of the return on those funds.

The money should be kept in insured along with interest bearing accounts so as to make best use of an organization’s profit on its cash. Small period savings of surplus money should be selected to balance growth of interest accumulated with backup access to the investedcash. Some of the available options are treasury bills, money market accounts and certificates of deposit (Zietlow, Hankin & Seidner, 2007).

If the cash reserves surpass the amount required for one operating cycle, long term investments require to be appraised. Investment guidelines must evaluate the permitted level of risk between the organization’s resources and the expected returns. Both the profit and non-profit organizations ensure that any equity or balance investments chosen depend on the board’s writteninvestment guidelines and procedures.

For instance, if the non-profitable organization is a trustee on a charitable trust, then it is the responsibility of the organization togrow and become the overall recipient and capitalizes while still effectively managing the funds of the trust as anylevelheaded investor would.

Fund accounting

When it comes to accounting for funds, under common law, the non-profitable organization is obligated to its donors to use gifts for the intention for which the funds are allocated. Many organizations have been able to attain this by setting aside restricted gifts. Restricted gifts are sometimes associated with additionalaccounting expenses. Grant expenses frequently entail specialized records to granting agencies. Fund accounting is a unique way of recording funds whose use by the organization may be restricted by donors or by the law.

In a non-profitable and profitable organization, each fund should include a self-balancing set of asset, net asset, liability, expense accounts as well as revenue. All the fund balances and net assetsshould be indicated on thefinancial statement. In addition, they should be categorized as unrestricted, temporarily restricted andpermanently restricted net assets. The temporarily restricted and permanently restricted are based on the existence and type of donor-imposed restrictions.

In profit and non-profitable organizations, a fund accounting system enables any organization to set aside financial funds and differentiate between those “funds that are immediately available for current operations and those funds intended for use as specified by the donor or stakeholders”. In addition, a fund accounting system provides an audit trail that is useful in indicating whether the money spent has been spent for its rightful purpose and whether it was utilized correctly.

The amount of funds received and paid out between fund groups are not obligated to be part of organizational liabilities or assets. A financial statement of position is useful in arranging and labeling all inter fund items so as to reduce their amounts when once they are displayed in the form of total liabilities or assets within the organization.

References

Atkinson, A.A, Kaplan, S. R, Young, M. S. (2004). Management accounting. Pearson Prentice Hall.

Gross, J. M, McCarthy, H. J, Shelmon, E. N. (2005) Financial and Accounting Guide for Not-For-Profit Organizations. Canada: John& Wiley Sons.

McKinney, B. J. (2004). Effective financial management in public and nonprofit agencies.Oxford University Press.

Ruppel, W. (2007).Not for Profit Accounting Made Easy. Canada: John& Wiley Sons.

Zietlow, J, Hankin, A.J, Seidner, G. A.(2007). Financial Management for Nonprofit Organizations: Policies and Practices. New Jersey: Routlegde Publishers

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