Financial Management in Nonprofit Organizations - Assignment Example

Topic: Financial Management in Nonprofit Organizations Executive summary Financial management entails more than just keeping accounting records as it is an important component of management of organizations, which should not be considered as a separate task that is left to the treasurer or financial staff. In financial management, various activities take place including financial resources being planned, organized, controlled and monitored so that the objectives of the organization may be achieved. Effective financial management may only be achieved if the organization has a solid plan, which in this case is a collection of objectives and actions that will assist in achieving the objectives that have been developed, agreed and evaluated through policies. Solid financial management obligates the organization to take part in long-term strategic planning as well as short-term operations planning and should become part of the organizations continuous process of planning. A solid financial management is important in assisting organizations to ensure they use their resources in an effective and efficient manner in order to achieve and fulfill the commitments that have been identified by the stakeholders. It also assists the organization to have more accountability to its donor, as well as well as other stakeholders, which will increase the respect and confidence of the agencies that fund it, its partners along with its beneficiaries. Lastly, it can assist the organization to gain a competitive advantage in regards to increasingly scarce resources, which will be important when preparing for long-term financial sustainability. Financial management is seen as an important path that should be taken by all organizations in their pursuit for success. The aim of this paper is to provide an insightful account of applying financial management approaches to non-profit organizations while comparing with for-profit firms regardless of the fact that the strategic management approaches for both organizations are the same. Nonetheless, a non-profit firm typically functions in a monopolistic setting that provides commodities with low measurability while being reliant on external financial sources. The non-profit industry is experiencing growth and this creates a need to appreciate its efficiency with governance being vital to the stakeholders, donors and tax authorities among others. Introduction A non-profit firm is an organization that is exempted from taxes that is created with the main aim of providing services to the public without making profits. In order to be classified as a non-profit firm, an organization is supposed to be categorized as being religious, charitable, educational or scientific in nature (Heyman, 2011). Non-profit organizations do not distribute their surplus funds to the stakeholders or owners, instead, their excess funds are typically reinvested while seeking to achieve and meet the mission and objectives of the firm. Leaders of non-profit organizations have to acquire a basic skillsets in financial management as expecting other employees in the organization to deal with this the tasks of managing finances is tantamount to seeking trouble for the organization. As far as financial management is concerned, basic skills begin in the critical areas of cash management as well as bookkeeping that should be carried out in adherence to specific financial controls to make sure the bookkeeping process is done with integrity. Managers and leaders of these organizations should also learn to generate financial statements and have an ability to analyze the statements in order to get an understanding of the financial condition of the firm. Financial analysis indicates the reality of the business environment and this makes it one of the most critical practices in management. Leaders of non-profit organizations bring a lot of experience in financial management to their jobs, but a huge majority of them has limited expertise in this area regardless being aware that solid financial management is connected to every aspect of the non-profit organization and its success. Characteristics of healthy non-profit firms Non-profit firms are obligated to conduct themselves as responsible stewards in the management of their finances (Dietlin, 2010). This implies that the firm should act in adherence to all legal financial regulations while complying with sound accounting principles that result in dependable financial information. The management board is supposed to facilitate the employees to make sure of fiscal accountability and develop trust in the public. The organization should also be able to use its financial resources to accomplish its mission effectively and efficiently through establishment of clear practices and policies that will regularly monitor the use of funds. Financially healthy non-profit organizations should have sufficient income that will ensure stable programming as well as an internal source of cash in the even that a shortfall is experienced. They should also take part on income-based, instead of budget-based expenditures through developing practical income projections, identifying realistic costs of service delivery and considering the prevailing market conditions. During the times when they experience deficits, non-profit organizations should have accumulated surpluses that will be adequate to deal with the deficit. Non-profit organizations should come up with an operating reserve for its financial growth along with cash shortages, while the board should bold themselves accountable for financial stability of the firm. Financial management in non-profit organizations Majority of the boards of management of non-profit organizations are aware that they are supposed to be attentive to the financial management practices of their firms. Nonetheless, numerous boards cannot decide between micro managing the executive director and making assumptions, as they are afraid of entering territories that are out of their depths. The interest of boards of management in managing non-profit organizations has been emphasized in the recent years by the usually publicized and real worry of the personal liability of the directors, growing attention from numerous funders as well as financial scandals that have become common in both for-profit and non-profit organizations (Coe, 2011). With this in mind, the financial oversight role of the boards of management should not necessarily take over the governance of the organization while the directors do not need to turn a blind eye for fear of the unknown. Not all the managements of non-profit organizations are required to provide the same attention to financial issues of the firm as the interest of the management will increase and decline based on the circumstances of the organization and the degree of development. Interest increases when the organization is still new and recruiting staff, when there is considerable change in the funding and in the event that there is some form of impropriety. During situations like this, financial issues may dominate the agendas of board meeting even though this is not supposed to be the norm under normal circumstances. In most cases, financial oversight becomes a challenge when it changes from micro-managing issues to authorizing them. This can take place simply from changes in the characters, partialities as well as styles of leadership of the leaders of the day. Unconsciously, lack of trust by the employees and other stakeholders in the management is implied when the leaders of the organization become too focused on their role of financial oversight. Through developing a basis of four comparatively simple aspects, the management and leaders of non-profit organizations can better conduct financial management while increasing the chances of providing strategic interventions. These aspects include the development of financial management policies, budgeting, yearly audits and evaluation of the management and leadership of the non-profit organization. Financial management policy In non-profit organizations, the operational policies are the instructions of the board to the leadership of the organization. Therefore, a financial management policy provides the foundation of the role of the boards in guiding the financial management endeavors of the firm. It is also critical in increasing the comfort level of the board and safeguarding the firm. For agencies that have already been established and are already in operation with contentious leaderships, policies at the board level do not have to be long (Zietlow, Hankin & Seidner, 2011). Rather, they should include a number of aspects that outline the responsibilities of the leaders in making sure the financial practices are appropriate. In non-profit organizations, financial controls entail record keeping, management of cash flows along with various checks and balances needed for methodical scrutiny linked to all financial transactions. Non-profit organizations should have a collection of acceptable accounting practices to handle and record revenues the organization receives, make bank deposits, pay invoices on time, invoice the services it gives as well as issue payroll and submit employees’ deductions and taxes. On the other hand, budgets are fundamentally revenue and expense statements, which look forward instead of backward and are used as a financial plan for the organization. The leadership of non-profit organizations should make the decision on the type and degree of detail they need the budget to cover. The financial management policies of the organization should guide the leaders on how they will take responsibility for preparation of the budget, how they can get approval for it and how it can be employed to guide financial aspects in the entire fiscal year while being compared to the predicted results. Budgets from one year to another are supposed to be organized on the same basis so that the organization can have an ability to make comparisons. The policies should instruct the leadership to come up with revised budgets for review and approval in the event that considerable changes are expected. Additionally, it is supposed to show the degree of authority of company’s leadership has in adjusting the budgeted amounts between programs without having to wait for the approval of the board in order to make the changes. Financial management policies should also specify the authority of the non-profit organizations’ leadership in regards to signing agreements and or switching banking relations. Numerous boards prefer giving the managers of the organization some degree of authority to enter into agreements as long as they are not extremely large. In the cases where contracts are bigger and can expose the organization to substantial risk, then the agreements will need the approval and signature of the boards of management (Finkler, 2013). This is more evident in contracts that involve governments or when foundations seek to provide grants to the organization. Further, financial management policies should specify the responsibility of the executive manager in reporting of the financial performance of the organization to the stakeholders, how often this reporting should take place as well as the amount of detail the stakeholders need in regards to financial statements and key indicators. Budgeting Budgets are fundamentally the revenue and expense statements which look forward instead of backwards and the budget approval is the main financial management decision of the stakeholders at any given time thus it should be the main focus of the manager when it comes to reporting to the stakeholders (Weikart, Chen & Sermier, 2013). The financial oversight of the stakeholders should generally entail review of the budget performance of the organization for any indications of problems or opportunities. Budget reports do not have to take place every month, as quarterly financial reports are sufficient for numerous organizations, which operate in predictable financial settings. Complicated non-profit organizations with various initiatives or core activities prefer considering budgets that are broken down with the main areas of expense being salaries and wages. Though making several of the programs separate from each other, the stakeholders are likely to have better insight of the allocation of financial resources in relation to priorities. In the creation and approval of the budget, the stakeholders may need the leadership of the organization to avail a list of the main purchases or other expenses that are not routine which are anticipated in budget year. Even though a board is supposed to give approval for these adjustments to the budget in case the financial environment of the company changes in a dramatic way , if there is an existent financial management policy, it become easier for the board to consider and make a sound decision. Furthermore, the financial management practices of the non-profit organizations should be scrutinized through independent audits. This is because the report of the auditor is the best method of assuring stakeholders that the organization is involved in good financial activities. Additionally, an audit committee can be appointed so that it can provide information of the dealings of the organization with the auditors. Core financial indicators Majority of the non-profit organizations along with their stakeholders have concerns that are supposed to be monitored regularly by the organizations’ leadership as well as its board of management. These concerns typically include cash flow issues and whether the predicted revenue will be received on time to allow the organization to meet its expenses, and distribution of revenue sources and whether he sources are adequately diverse to provide flexibility and security. Other concerns include raising funds for revenues meant to financing expense ratios and overhead, which is the fraction of the revenue meant for delivery of programs to the clients of the organization verses the fraction allocated for infrastructure and administration. There has been a lot of debate; particularly from financial donors concerning the degree of overhead that is permissible in non-profit firms especially charities. Low overhead may be risky and the non-profits that do not have an adequate infrastructural investment may find themselves in constant precarious positions. Furthermore, some of the non-profits that are currently in operation are considering social accounting as this will develop a report mechanism, which will outline the advantages that accumulate to the community as a result of their activities not only in regard to their mission but also through employing volunteers. Conclusion The main aim of non-profit organizations is to enhance the good of the greater public. Nonetheless, firms require a substantial sum of working capital in order to be successful together with a good accountants, and financial management (Pynes, 2011). Accounting in the organization deals with the payable and the receivables in the organization while operations deals with the inventory as well as financial management of the firm. Financial management further determines the manner in which funds are utilized on fixed assets and the preparation of dividend strategies that correspond to the goals of the company. In a non-profit organization, financial funding is typically solicited public and private funding in order to assist the organization to meet its goals. Therefore, fore these form of organization, preparation of budgets along with management of cash are crucial aspects. This aspects are amplified by overextension of stewardship obligations of a non-profits which accept financial donations in order to meet their set out objectives from the public. The management of these organizations experience some challenges when dealing with the sources of revenue for their firms since they can be unpredictable switches as a consequence of political or economic dynamics. Through financial accounting, these organizations can be able to deal with payables and receivables of the organization through the combination of conventional accounting principles with other current standards. This approach may make it difficult for for-profit organizations to monitor their finances at a particular time and period in order to make sure its limited goals are achieved. However, the use of fund accounting structure by non-profit firms in their management allows them to address two fundamental aspects of financial management and the ability to demonstrated stewardship of the capital donated to them. References Coe, C. (2011). Nonprofit financial management. Hoboken, NJ: Wiley. Dietlin, L. (2010). Transformational philanthropy. Sudbury, Mass.: Jones and Bartlett Publishers. Finkler, S. (2013). Financial management for public, health, and not-for-profit organizations. Boston: Pearson Education. Heyman, D. (2011). Nonprofit management 101. San Francisco, CA: Jossey-Bass. Pynes, J. (2011). Effective Nonprofit Management. Armonk, New York: M.E. Sharpe, Inc. Weikart, L., Chen, G., & Sermier, E. (2013). Budgeting and financial management for nonprofit organizations. Los Angeles: SAGE ; CQ Press. Zietlow, J., Hankin, J., & Seidner, A. (2011). Financial Management for Nonprofit Organizations. New York, NY: John Wiley & Sons. Read More