Free «Financial Management in Nonprofit Organizations» Essay Sample

The not for profit organizations are those organization that are formed to provide essential services and goods to people in the society. There exist non-profit making firms in various sectors of the economy. These could be in education, religion, health care, environment and its conservation, governance and law as well as social services such as provision of relief. Some of the worldwide known non-profit organizations include Oxfam, USAID, UKAID, among others. Their services are of utmost importance to the community because they do what the profit making bodies cannot because by the nature of their services they do not get money by providing their services to the community members. These organization raise funds mainly from grants and donations from the well wishers who may be individuals, other not for profit organizations as well as profit making organization. Nonprofit making bodies use their funds in the execution of the mandates for which they were formed. They have specific sources of funds which are somewhat limited and equally they have specific ways and means of using the funds since this is determined by the reason of their existence (Brigham, 1980).



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When it comes to profit making organizations, they are formed to undertake business operations with the aim of making profit and distribute this profit to the shareholders in form of dividends. Owing to the fact that they earn profits and distribute them, then they are prone to receive funds from many sources and use them in a number of ways. As indicated earlier, these two categories of organizations have differences and similarities. They have difference unto their reasons of existence, sources of funds, use of funds as well as how they use these funds and also on how they prepare their statement of financial position. Equally important is that they have similarities when it comes to the issues of performance evaluation, governance, human resource management as well as formation of strategic alliances with other organizations.


Non- profit making organizations are those organizations that are formed with a sole aim of providing essential services in the society mostly without charging fees. These organizations exist in various sectors such as education, environment, education, governance and social services. These organizations are distinct from profit making concerns because they do not distribute their profits to the existing shareholders in form of dividends. The excess funds that they get out of their operations they endeavor to use them back to offer their services to the members of the public. They normally do not charge fees from people they render services to and they obtain much of their income from grants and donations which they use to meet their day to day operational expenses. In financial management principles and practices there exist similarities and differences between the profit and non-profit making organizations. This analysis starts by looking at significant differences between these two distinct categories of the organizations, (Malamut, 2008).

Reasons for existence

The first point of consideration is indeed the rationale behind which each organization thrives. The not for profit organizations, as stated above, normally derive their funds from the grants and donations in order to carry out their services that are instrumental to the society in terms of providing relief, food, shelter, rescue, environmental conservation and provision of medical help to the victims of various natural and man influenced disasters. Profit making organizations are formed to produce and offer goods and services with the sole aim of making profits and/or surplus. It should be noted that profit making concerns engage themselves in production of goods and services that have a high demand by consumers, and which in case of failure close their operations. They obtain funding from owners and shareholders and must distribute profit to them (Drucker, 1989).

Source of funds

The nonprofit organizations obtain their funds basically from the grants and donations of the well wishers who can be governments, individuals and other non-profit making organizations as well as profit making concerns. It is the function of the heads of these organizations to network and solicited these funding from the above sources because most of them are not willing to donate because there are no returns on the funds advanced to them. Fortunately, nowadays corporate social responsibility has been emphasized enough, even by the government, forcing many corporate bodies to give a lot to non- profit making bodies. When it comes to the profit making bodies they obtain their funds from numerous sources. This is apparently because the funding invested has returns in form of dividends and interests on the borrowings.

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The principle source of funds for profit making organizations is the owners. These are the people who come up with the idea of starting the business and, thus, have major shares of the organization. These people can obtain funding from their personal savings or approach financial and non-financial institutions for money. The other source of funds can be via going public when the company issuing its stocks and makes them available to the members of the public on stock exchange and in this way the company is able to raise money for its activities, such as expansion of its operations.

Also a company can take a loan which is actualized in two ways, first, as cash money from financial or non-financial institution, whereby it is required to pay the debt on the loan the interest. The other way is to inform of issuing corporate bonds whereby the company obligates to pay the bond holders their principal amount after the expiration of bonds plus regular interest payments.

The other way can be the venture financing. This is when the venture capital funds avail funds to companies with huge potential for growth and profitability and they finance it up to 80% and take up shares in it which they may sell to owners when the company stabilizes. The venture capital funds normally prefer businesses that are technologically oriented.

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Mergers and acquisitions are techniques of great importance for any business origination which is not able to compete effectively with other competitors. A merger is when the two businesses of equal economic might associate to form a big enterprise and benefit from the economies of scale and synergistic effects. This is normally by gaining a major market share and a high price of its stocks in the stock market. Acquisition is when a large firm takes over the operations of a small firm in the same industry.

Exploitation of funds

This is another principal area of difference between profit and notprofit organizations. As opposed to profit making organizations, they use their money, first of all, to remunerate their staff team in order to motivate them. They also use their funds to expand their operations by opening new product lines through acquisition of new machineries and equipment; to open new branches and operations in other areas and regions. Non-profit making organizations use their funds mainly by providing essential goods and services to the people, and the activities that they were established to undertake. These organizations are very careful in the way they handle their finances because they have limited sources of finance. Secondly, it is of great importance for the donors and well wishers to see that their grants are used effectively and efficiently for the purpose that they were intended if they have to carry out continued provision of grants and donations.

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Management of financial records

This is a very critical area of differences between the two types of organizations. In the preparation of financial statements, the profit making bodies have strict rules and regulations to adhere to. They have to prepare them in conformity to generally accepted accounting standards and practices. This is because there are many stakeholders who have varying important interests in the business. For instance, the government would want the statements of income to show the true picture of the business performance for the purpose of taxation and prevention of shareholders fraud. The shareholders have interests in the business reporting that the business can pay them the return on their invested funds in the form of fair dividends on their shareholdings. Their financial statements have to be audited thoroughly by government auditors to ensure transparency and accountability. When it comes to nonprofit organizations, their financial reports are also audited but they have not so much pressure and expectation since are mostly to satisfy the donors and well wishers that their funds are properly exploited by the organization. It should be noted that, there are established accounting and reporting standards for the non-profit organizations to ensure uniformity in the way financial reports are prepared.

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Above, there are some of the striking differences between the profit making and non-profit making concerns in some of the critical areas. However, these organizations also have a lot of similarities in the way they operate. The analysis below focuses on some of the areas where both operate on very similar principles. 

I. Strategic alliances

This refers to a situation when the organization forms partnership with other organization regardless of whether they operate under similar circumstances our not. Circumstances here mean that a profit making concern making partnership with non-profit organization, and the vice versa. Non-profit making organizations do form alliances with other non-profit making concerns so that they can be able to provide qualitative and enhanced services to the wider society and thus improve the welfare and standards of living of people. This cooperation ensures efficiency and effectiveness in carrying out their mandates because to them they don’t operate under competitive circumstances. In the same vein business organizations also do form alliances with non-profit concerns for various reasons. They can coordinate with them with the purpose of further corporate social responsibility because it is the nonprofit bodies that deal with society related issues. The partnership can also be on scientific and research areas such as those between them and institutions of higher education which provide technical and academic knowledge to the profit making bodies on how they can improve efficiency and effectiveness in their production and operational activities. These alliances have become very common since organizations have woken up to the fact that they cannot operate well without the assistance of others.

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2. Performance evaluation

Performance evaluation is very critical to both profit and non-profit making organization. Not for profit concerns have to measure the impact of their activities on the society. This is essential because they exist to serve the society. These organizations always measure their performance against the set objectives or goals. This is because they have to meet the expectations of various stakeholders, especially the shareholders. Performance evaluation is a vital exercise and it enables the stakeholders to keep the management under control to enable them to deliver on their job expectations and specification. Evaluation enables an organization to identify a gap in its activities and, thus, identify the opportunities and weaknesses in preparation of financial statements. The business has to evaluate its activities in relation to the performance of the economy in general.

3. Human resource management

Management of human resource is of utmost importance to the business. Each and every organization has to maintain a well motivated work force if it wants to achieve its vision. The employees are responsible for carrying out the vision of the business. The employees have to be fairly remunerated in order to be highly effective and efficient in their work areas. The management has also to ensure that they provide safety and security on their work places. The security is in terms of physical and job security. Job security is assuring the employees that they have a future in the organization, whereas the physical security concerns fear of injury and liability while carrying out their day to day activities in the organization (Gitman, 2003).

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4. Corporate governance

This is a very sensitive issue especially in the developing world. It consists of responsibility of the board of directors to the organization. The board members must be properly constituted taking into account gender issue. They must perform their duties and responsibilities faithfully for the benefit of organization and stakeholders. In profit making concerns the board has limited shareholding to control their influence in the management of the organization. They have a duty to conduct the affairs of the business with a reasonable acumen to prevent the firm from losses emanating from their ignorance and lack of business acumen. In any organization the board has the task to ensure that they direct the organization towards achieving its vision by providing visionary leadership.

The board is the policy formulating organ of an organization, it comes up with the policies that the executive directors, especially the chief executive officer implements for the organization to achieve its objectives. It provides oversight of the way the operations of the business are done and are responsible for evaluating the performance of the managing director because it is he/she who is responsible for the day to day running of the organization. The board also does own self evaluation to determine its strength and weaknesses as a governing authority and whose performance determines the performance of the whole business. If it does not fulfill its duties properly and efficiently, it means that the business will also be inefficient, and if the board is effective, this transforms into successful organization.

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In terms of financial management, there exist similarities between the profit and not-for profit organizations. There also exist some acute differences because of the expectations of each category of stakeholder from the organization. Nonprofit making bodies have different objectives to accomplish to its stakeholders. These objectives are social, economic or political but the most important goal is being ethical to the society.


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