Financial Management in Nonprofit Organizations Essay Example

gifts made once a year. Consistent annual gifts greatly benefit the receiving organization.

Individuals can make contributions through major gifts of varying value to an organization. Another form of individual contribution is through memberships, which are similar to annual gifts given annually.

The difference is that a membership contribution is given in exchange for a service or benefit provided by the non-profit organization. This service or benefit can be something like receiving a complimentary tote bag or getting discounts on specific goods or services (Hutton and Philips, 2010, p. 219). Some non-profit organizations may call those who contribute as members, while others establish a formal relationship with their members, allowing them to participate in governance activities.

There are two main ways for individuals to contribute to nonprofit organizations: planned giving and special events. Planned giving involves donors making gifts through their wills or other legal documents, specifying what should happen to their finances or profits after their death. Special events, such as marathons, fundraising events, and chicken dinners, also generate significant income for organizations.

Use of Debt in Non-Profit Organizations

Equity is the preferred capital structure for nonprofit organizations, rather than taking on debt.

Debt in hospitals and nonprofit organizations is higher than equity. This raises the question of why there is debt. Nonprofit organizations with equity issues do not automatically have debt. Different lenders perceive some nonprofits as good risk while others see them as bad risk. However, nonprofits with borrowing constraints are unfairly seen as bad risk (Jegers, 2008, p.).

According to the text (116-117), a non-profit organization needs to achieve certain objectives in order to effectively manage its debts. First and foremost, it should ensure that there is a

reliable liquidity backup in case expenses rise or revenue declines. Secondly, the organization should build a strong relationship with its depository bank and strive to establish an uncommitted profit line, even if there are no immediate plans to utilize it.

In addition to creating an action plan for potential cash crises, organizations should avoid relying too heavily on short-term borrowing arrangements (Zietlow and Seidner, 2007, p. 214). Healthcare organizations can utilize third-party accounts receivables for borrowing, while educational institutions can use student receivable accounts. As a result, banks consider healthcare and educational organizations as their primary targets.

Although financial ratios are crucial for educational organizations, the ability to secure future loans can also be assessed through non-financial indicators. The future demographic and economic outlook within the school's region holds significant importance. Equally important is the consistent growth in student demand, which directly impacts the institution's reputation. A diversified revenue stream and a strong reputation enhance the organization's creditworthiness to various lenders such as banks and bondholders (Zietlow and Seidner, 2007, p. 219-220). Non-profit organizations often find banks reluctant to provide them with short-term loans, as they feel banks struggle to comprehend their unique circumstances.

Despite the fact that product selling non profit organizations often face numerous restrictions in their loaning services, the truth is that they are in a challenging business position when it comes to business borrowers. Banks, on the other hand, primarily focus on cash flow when lending as they are essentially cash flow lenders.

They want to be refunded from operating cash flows and prefer if the short term borrower's collateral can be converted into cash. The loans are backed by accounts receivable and inventories. It

is noteworthy that few nonprofit organizations have these types of collateral, leaving banks with no collateral. As a result, this situation can result in two outcomes: banks being hesitant to lend to many nonprofit organizations.

Furthermore, banks are mandated to assess the organization's cash flow and variability prior to approving a loan request. These considerations are compounded by perceptions about the organization. This leads to three factual outcomes. Firstly, many non-profit organizations have weak accounting systems and lack cash budgeting practices. Secondly, donations and grants in the form of soft money cannot be relied upon. Lastly, banks are concerned about negative publicity if non-profit organizations fail to repay their loans and consequently close down (Zietlow and Seidner, 2007, p. ).

221-222). On the other hand, profit-making organizations have easy access to loans from banks and other lenders due to their continuous cash flow and collateral.

Performance Evaluation

The performance evaluation of a non-profit organization can be determined by its ability to achieve goals and effectively utilize donations.

Meeting the Organization's Objectives

A study conducted on six public and three private internationally recognized financial organizations found that leadership has a significant impact on cultural shifts within an organization.

The highest management should demonstrate a commitment to translating their words into actions. The leader needs to ensure that every aspect of the organization has been influenced by improvement. This can be achieved by implementing a controlled and well-designed system that connects the decision-making of internal-line management with external performance reporting. To facilitate and promote the necessary cultural change within the organization, innovative and continuous training must be provided by top management. As a result, both non-financial and financial organizations that seek to achieve their

objectives have identified eleven practices they can adopt (McKinney, 2004p. 22).

Ensuring maximum accountability can be achieved by implementing a clearly defined control system that connects internal decision-making with outward management performance reporting. To accomplish this, financial reporting and auditing should be utilized as oversight tools for basic management. Furthermore, strong and consistent executive leadership should be manifested to foster the pervasive duty of financial management throughout the organization. Additionally, training can be employed as a strategy to change the organizational culture.

This paragraph mainly applies to line managers. It is important for line managers to regularly assess how well the organization is meeting its mission. This can be done by comparing customer feedback to goals and best practices, and addressing any gaps in achievement. It is also necessary to streamline daily accounting activities, eliminating inefficient practices and standardizing transaction processes. Additionally, line managers should consider the possibility of outsourcing certain tasks. Regularly reorganizing and improving the fiscal function can also add value to the organization. In order to ensure this objective is met, management must ensure that there is alignment between the fiscal core function and the management's responsibilities. Furthermore, it is important to establish a connection between the management information system and the finance roles within daily line management operations.

To achieve this, it is important to ensure that the fiscal reporting control is supported by integrating the ledger system. Additionally, the electronic system should be used to accurately measure the costs of services and products. Furthermore, functioning line managers should be provided with frequent and timely reports on both financial and non-financial details. The latest technology should be incorporated into existing practices to align the

finance system with commercial and off-the-shelf packages that meet established standards. The data on finances should be organized to meet user needs. Reports should be prepared by management, focusing on key drivers such as products, customers, and services, and presented in a concise and understandable manner. Finally, a finance team should be assembled with complementary talents and competences.

Establish a financial organization that focuses on attracting and retaining top talents. This can be accomplished by creating clear career path opportunities, implementing job rotation, and facilitating multifinancial career-path development (McKinney, 2004, p. 23-24).

Efficiency in Use of Contributions

Not-for-profit organizations have implemented various incentive plans to ensure proper utilization of contributions and measure employee performance. One such plan is management by objectives.

The manager and employee work together to establish objectives for evaluating employee performance. Staff members involved in forming the objectives may need to work hard to meet them. Additionally, there is a special achievement awards plan in place to reward employees who make exceptional contributions. Rewards can be given in cash or other non-monetary forms such as improved office furniture, increased clerical or technical support, or more influence in budget decisions. Another plan involves the use of contests.

Games, promotions, and contests are employed to promote employees' efforts, utilizing various topics such as productivity, quality improvement, and cost reduction methods. The main objective of these contests is not only to emphasize individual endeavors but also to foster competition within the organization. Furthermore, there is the MERIT (Memorial Employees Retirement Incentive Trust).

The amount rewarded in this plan is determined by the savings in all budgeted expenses. The rewards are placed in a trust that employees can withdraw

from during retirement. This plan consists of five main steps. First, testing the standard efficiency is conducted to determine the controllable expenses as a percentage of the total operating revenue from the base period. Second, the efficiency percentage of the current year is obtained from the performance base. Third, the efficiency percentage obtained from payroll is applied to develop the employer's contribution.

Fourthly, it is crucial to determine the ultimate amount of contribution. According to Finkler and Ward (1999, p. 357), employees' contributions are determined based on the ratio of their earnings to the total earnings of the participants.

Government Mechanisms

Currently, non-profit organizations must work together with the government in order to expand and protect their financial foundation.

In previous times, non-profit organizations heavily relied on government funding as their primary financial support. To ensure their sustainability and stability, it is essential for the board and executive director to explore alternative funding options like contractual agreements. Although government funding is commonly perceived as a dependable revenue source for non-profits, collaborations between the state and non-profit sectors can present potential difficulties (Agard, 2010, p.

Effective collaboration between governments and non-profit organizations in the context of for-profit companies usually presents more challenges (533). The efficiency of these collaborations is affected by various factors such as community size, consumer education level, and social capital. In larger and more diverse populations, governments are less likely to provide separate services.

Non-profit organizations have encountered challenges such as financial limitations and the termination of government funding from previously supportive non-profit organizations. These organizations provided services in various fields, including human resources, community development, education, and training. Moreover, the government has demonstrated a preference for providing

funds to non-profit organizations through consumer subsidies instead of producer subsidies (Renz and Herman, 2010, p. 79-82).

To sum up:

The primary sources of funding for non-profit organizations are grants, corporate contributions, and individual donations. Their capital structure relies on equity rather than debt.

Non-profit organizations often face difficulties in obtaining loans from lending institutions due to the emphasis on cash flow and collateral during evaluation. However, these organizations have their own strategies for assessing performance and accomplishing goals. Just like for-profit entities, non-profits may receive financial assistance from the government despite potential obstacles. To overcome this challenge, it is recommended that non-profits invest in assets that can be used as collateral, simplifying the process of acquiring loans when necessary. Moreover, entering into contractual agreements with the government can help non-profits explore funding opportunities.

Furthermore, it is important to utilize individual contributions as a source of finance because there are numerous methods that are easily accessible.