Financial management is an organization management mechanism that is very essential to every organization whether profit based or non-profit based. The two kind of organization obtain their funds from different sources and they also have different ways of utilizing their obtained funds. However, they all require proper management and budgeting of their funds to ensure that they cater for the intended purpose. Financial management in profit based organization is basically meant to ensure effective learning of the organization, tracking of returns from different operations and determining the organization financial performance. However, in non-profit organization, financial management is basically done to ensure effective utilization of the obtained funds to ensure proper accountability to the donors (Bolton & Mehran, 2006). This paper focuses on comparing and contrasting financial management strategies for non-profit and profit based organizations.
Financial management involves controlling, directing, organizing and planning the financial activities that include fund utilization and procurement of an organization. It involves employing general principles of management to the organization financial resources. Financial management in for profit organization is based on three elements. They include investment, dividend decision and financial decision. Investment decision involves deciding on to make a current asset or fixed asset investment. Financial decision involves establishing ways of raising funds based on the investment. Here the financial managers decide on the source, financing period, financing cost and future returns. Dividend decision regards the decision taken regarding distribution of the profit. The organization net profit is divided into shareholders dividend and profits retained.
However, the situation is different is a bit different in the non-profit organization. They basically focus on two financial elements that include the project to be undertaken and the source of financing. Therefore, the non-profit making organization decide on the best project to undertake to solve the problem at hand or to improve the life of the intended group. Once that is done, the organization evaluates the possible cost of the project. This is then followed by defining the possible sources of funds to ensure that the project is accomplished. In this case, the organization does not focus on the profit made or the asset returns. Their investment is not based on the level of the returns but on the benefit it will bring to the community or group in question (Kotloff & Burd, 2012).
Sources of Funds
Profit making organizations are more flexible when it come into deciding on where get their funds. Some of the most possible choices include utilizing the organization net income to make investment. A profit organization can also manage more funds by equity where the company sells its shares to the public to raise enough funds to make future investment. It can also get a loan either short-term or long-term loan based on the company’s financial need or the security it can manage to present to the bank or any other financial institution. For profit company can also acquire funds from friends, family members or liquidation of an asset.
On the contrary, non-profit organizations experience a hard time to raise its finances. This is because, non-profit organization do not have a wide range of sources to take to get its finances from. Some of the possible sources include donation from well wishers. This is always the major source of income for non-profit organizations. These organizations either develop websites where they give information of what they do the projects they have and money they need to complete the projects. They then give a page where people can donate. Another option involves writing a proposal focusing on a certain for-profit organization, government or individuals seeking for some funds through that proposal. The third source of funds includes the non-conventional sources that comprises of micro-insurance, micro-finance and micro-enterprises. Although these organizations can also take loans, they may experience challenge in the repayment of these loans. Basically, huge loan may require big collateral which this organization may not have. Moreover, big loans are associated with huge interest which may be hard to pay bearing in mind that these organizations are not involved in any money generating activity. In this regard, such organization does not consider taking loan as one of the most possible option of funding their operations (Kotloff & Burd, 2012).
Non-profit organization can raise fund through equity financing. Investor-owned companies contain two equity financing sources. These sources include offerings from new stock proceedings and retained earnings. On the other hand, not-for profit organizations do and can retain earnings though they cannot sell stoke to obtain equity capital. However, they can obtain equity capital via charitable contributions. In this case firms and individuals are encouraged to contribute to not-for-profit organizations for a number of reasons which include concerns for others well-being.
Performance evaluation in profit making organization is basically measured with the revenue generated, and the net income earned by an organization. Increase in the organization revenue is an indication of growth and increase of the organization market shares in the industry. It also implies that the company has increased its competitiveness in the market. Increase in the net income of an organization is a clear indication that the company has enhanced its internal operations and thus, it is able to minimize the operation cost. This contributes in increasing the net income of a company (Bolton & Mehran, 2006).
Performance evaluation in non-profit organization is basically based on how effective an organization is in observing the budget. A well performing non-profit organization sticks to its budget and thus to what it can afford. This minimizes debts and it also ensures effective running of an organization. The organization performance is also measured by the project efficiency. This is the measure of the amount used in the project as compared to the total amount spent in an organization. Finally, the organization performance is also measured based on the organization efficiency in raising funds. A well performing organization should always be able to raise a certain set minimum value in every month which will help the organization to satisfy its budget with taking debts. In this regard, an organization which is full of financial uncertainties cannot be considered to be a well performing organization (Swlearning, 2001).
Non-Profit Organization Governance and Financial Management
A non-profit organization can ensure effective performance by ensuring effective management of available funds. This can be ensured by applying four element of financial oversight. This ensures that the organization has fully adopted the best and manages management strategies. These four elements include developing policy for financial management, the budget, annual audit, and the executive director evaluation. The policies of operation are the instructions of the board to the executive director. The policy of financial management gives the cornerstone of the role of the board in directing the organization practices of financial management. It is also essential in raising the extensive level of comfort and the organization protection. The most effective policy document for a well established organization should be at least two pages long, outlining the responsibility of the executive director for guaranteeing sound financial practices based on the a number of aspects which include assets protection and decisions of purchasing, record keeping and reporting, contracts, budgeting, and financial controls (Swlearning, 2001).
The second oversight element is budgeting. Budget is the expense and revenue statement which focus on the future. The organization should always ensure that any written budget has been scrutinized by the board of director. Their main role is to evaluate the budget and make adjustment where necessary to improve its efficiency. They are also responsible of approving the budget. Budget is the most essential tool in financial management in a non-profit making organization (MacDonald, 2011). Therefore, proper scrutiny would be necessary to maintain effective performance of the organization’s operations. The financial management department needs to keep a close look of the budget while spending the provided funds to ensure that they stick to the budget. In addition, the budget executors need to report back to the committee after every one month. This is done to evaluate if the executors remain within the budget.
Audit involve the scrutinizing the practices of the financial management to identify any mismanagement of fund if it occurred. This is mostly conducted in larger and mid-sized organizations. The audit evaluation is normally done on yearly basis. Audit normally involves auditing cost and thus, it can only be done by those organizations that can manage an extra cost to streamline their financial operations. According to MacDonald (2011), an audit report acts as a primary means of guaranteeing excellent financial practices.
The last financial oversight element is the evaluation of the executive directors. The formal executive director’s assessment or evaluation can as well play a role in augmenting the comfort level of the board with regard to practices of financial management in an organization. Basically, the audit will comprise of essential independent evidence the presence of enough financial controls which are executive responsibility. On the other hand the report of the financial executive director to the board has the evidence that some other policy aspects are being adhered to. The executive director should therefore be in a position to produce all possible evidence and be able to answer all possible questions regarding the anything in the organization financial management policy (MacDonald, 2011).
Financial Accountability in Non-Profit Organization
Non-profit organizations highly depend on donor to finance its operations. In this regard it is very important for these organizations to demonstrate a sense of responsibility and commitment. One way to do this is by ensuring financial accountability for all the money the organization acquired from all possible sources. This include description of the project, quotation the amount needed , quotation on the amount gathered and its level of accomplishment in the project and noting of the remaining amount to complete the project. This accountability also demonstrates a sense of transparency and thus, it plays a major role in winning donors trust. In this regard, non-profit organizations should consider developing good financial reporting techniques as a way of attracting more funds into the organization (Swlearning, 2001).
Effective financial management is the key to the successful operation of an organization and a base to organization growth and expansion. A non-profit based organization with effective financial management ensures that it minimizes debts and works within the budget. This ensures that the organization can manage to work with what they get. However despites of this ability, this organization should also ensure efficiency in generating of enough finances or minimum amount of finances to be able to cater for the most essential financial requirements of an organization. The organization should choose its projects wisely based on the projected financial ability. In addition, the organization financial management team should then come up with new strategies to enhance funds rising so as to be able to manage all its operation. Effective financial management in an organization gives satisfaction to the organization donors and thus, boosting their spirit to support the organization even further. Thus effective financial management is very necessary in a non-profit organization.