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Financial Management in Non-Profit Organizations
Financial management of not-for-profits is comparable to financial management in the commercial sector in a lot of respects; but, certain key variations shift the focus of a not-for-profit financial manager. A for-profit company focuses on prosperity and capitalizing on shareholder value. A not-for-profit organization's main goal is not to augment shareholder value; rather it is to offer some socially attractive need on a continuing basis. Budgeting and cash management are two parts of financial management that are very important exercises for not-for-profit organizations. The company must pay close attention to whether it has sufficient cash reserves to go on to providing services to its clientele. Cash flow can be tremendously challenging to forecast, because an organization relies on income from resource providers that do not anticipate receiving the service provided.
Non-profit leaders and managers have to build up at least basic skills in financial management. Expecting others in the company to manage finances is clearly asking for problems. Basic skills in financial management start in the serious areas of cash management and bookkeeping, which should be done in accordance with certain financial controls to guarantee truthfulness in the bookkeeping process.
The management and guard of financial resources must be a concern for all non-profit organizations, from the smallest all-volunteer group to a large, national organization. Without sufficient financial resources, an association is not capable to attain its mission and may not endure. Financial resources or assets can be categorized into three buckets, money, goods, and services. One key to regulating financial management risks is the development and utilization of effectual internal controls. All nonprofits have to have policies and procedures in order to manage the access to and use of its financial resources (See Appendix for definitions).
Financial management of not-for-profits is comparable to financial management in the commercial sector in a lot of respects; but, certain key variations shift the focus of a not-for-profit financial manager. A for-profit company focuses on prosperity and capitalizing on shareholder value. A not-for-profit organization's main goal is not to augment shareholder value; rather it is to offer some socially attractive need on a continuing basis. A not-for-profit usually lacks the monetary flexibility of a commercial endeavor because it depends on resource providers that are not employing an exchange deal. The resources provided are aimed at providing goods or services to a customer other than the actual resource supplier. Therefore the not-for-profit must show its stewardship of donated resources, like money donated for a precise purpose must be utilized for that purpose, and only that purpose. That purpose is either set by the donor or implied in the not-for-profit's stated mission. The management and reporting actions of a not-for-profit must highlight stewardship for these donated resources. The employees must be able to show that the dollars were utilized as directed by the donor. The shift to an importance in external financial reports on donor constraint has made the use of fund accounting systems even more vital (Financial Management of Not-for-Profit Organizations, 2011).
Budgeting and cash management are two parts of financial management that are very important exercises for not-for-profit organizations. The company must pay close attention to whether it has sufficient cash reserves to go on to providing services to its clientele. Cash flow can be tremendously challenging to forecast, because an organization relies on income from resource providers that do not anticipate receiving the service provided. In fact, an augment in demand for a not-for-profit's services can lead to a management crisis. It is hard to predict contribution revenue in a consistent manner from year to year. For that reason, the control of expenses is an area of amplified emphasis. Budgeting therefore becomes a serious activity for a not-for-profit (Financial Management of Not-for-Profit Organizations, 2011).
Non-profit leaders and managers have to build up at least basic skills in financial management. Expecting others in the company to manage finances is clearly asking for problems. Basic skills in financial management start in the serious areas of cash management and bookkeeping, which should be done in accordance with certain financial controls to guarantee truthfulness in the bookkeeping process. New leaders and managers should soon go on to learn how to produce financial statements and analyze those statements to really understand the financial situation of the business. "Financial analysis shows the "reality" of the situation of a business -- seen as such; financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business" (All about Financial Management in Nonprofits, n.d.).
The leaders and staff of non-profit organizations must make sure that accounting records and financial statements are precise and comply with regulatory requirements. For an administrator of a non-profit organization, managing the company's finances is particularly demanding. A non-profit organization's income sources are often subject to changes in both financial forces and political environment. Yet, it has to vie for labor and additional inputs just like any other company. Precise recording and dependable reporting of financial information are the requirements for financial management. Public answerability also necessitates a high amount of correctness and dependability of financial data. The financial statements of a non-profit organization supply a functional overview of the organization's economic health. Financial management involves both planning and implementation. A non-profit manager will need to be able to examine and understand historical and current financial information in order to organize financial plans that will make certain operations of an organization are competent and effectual (All about Financial Management in Nonprofits, n.d.).
The fundamental difference between a for-profit business and a non-profit industry is the profit. For-profits are permitted to realize a profit, non-profits aren't. Non-profits can make a profit, which is called a surplus, but they have to invest it back into the organization. For-profits can take the profit and allocate it to their shareholders, owners, or anyone else they'd like (Why non-profit pricing, 2010). Budgets are the organization's working plan for a fiscal period. They articulate, in financial terms, the board's and staff's choices concerning how the organization will accomplish its stated purpose. The board and staff decide what programs will be taken on for the impending fiscal year. The staff then distributes resources to make sure that those programs are delivered. The budget charts a course for apportioning and maximizing the use of resources. "Ideally it also identifies any financial problems that could arise in the coming year. In addition, the budget should provide indicators for gauging staff performance and give staff goals to reach and steps to achieve them. Methodical tracking and classification of program expenditures enhance management's ability to report on service efforts and accomplishments" (Financial Management of Not-for-Profit Organizations, 2011).
The monetary metrics and incentives are radically dissimilar between for-profit and nonprofit organizations. The income statement, earnings per share (EPS), and growth in market capitalization are all extensively focused performance metrics and significant components of long and short-term decision-making performance assessment and reimbursement in the for-profit world. There are literally no similarities for these items in the nonprofit arena. There's no ceremony of tracking stock price on a constant basis on PC screens in the nonprofit world. There is a need for-profit monetary skills on the nonprofit board, but the individuals have to be responsive to the dissimilar nuances in financial reporting and to the function of finance in the nonprofit. For instance, two financial metrics, free cash flow and revenue growth, are also very pertinent to the nonprofit world. A significant supplementary source of funds for the nonprofit world is charity in its diverse appearances of yearly giving, capital campaigns, and intended giving. "Cash flow is king and annual giving and capital gifts are often critical to financial viability" (Epstein & McFarlan, 2011).
In addition, the accounting structure of nonprofits differs from that of for-profits. For instance, nonprofits don't normally apply standard accrual accounting ideas. As an alternative, they use fund accounting. For those companies that have an endowment, momentous pressures exist on the board to administer it efficiently and have a fitting rate of withdrawal. Finally, debt and its servicing condition are vital issues for those nonprofits that have use of the public debt market. Because of monetary reporting metrics, the for-profit world tends to have a burly short-term performance focus. Meeting the quarterly earnings targets, the yearly earnings goal, and the steady drumming of the stock price all drive a short-term direction. Additionally, the pace of the nonprofit couldn't be more diverse. The heart of its monetary activities is the yearly budget, its estimate of revenues, and the hard choices it has to make about a variety of costs. Monthly reviews center on success in meeting cost and income targets where variances against budget are examined constantly. The reality, though, is that pessimistic variances just don't have the same impact on internal and external views of performance as a missed EPS number does for the…[continue]
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