Financial Management in a Nonprofit Organization
Introduction
In the same way that for-profit organizations have been going through numerous and radical changes in their financial management styles, nonprofit organizations are in the process of adjusting their financial management approaches and other key approaches to management (Smith, Bucklin and Associates, 2000). This has been catalyzed by increasing competition for dwindling pool of funds, extremely high public scrutiny, stricter federal and state regulations, intense direct involvement of the board of governors into the affairs of the nonprofits, tighter budgets among others. The need for transformation in the nonprofit organizations sector is thus a result of pressure from both the internal and the external environments in which they operate in the contemporary society (Smith, Bucklin and Associates, 2000).
With this kind of a business environment, it has become-- more than ever before-- important and urgent for nonprofits to adopt leaner and bottom-lined driven operations, similar to their profit making counterparts. There are many issues that need to be revisited in the financial management of nonprofit organizations so that they can be able to thrive in a highly competitive and rapidly changing business world (Smith, Bucklin and Associates, 2000). Among other authors, Smith, Bucklin Associates (2000) provide a detailed and comprehensive analysis for effective financial management for nonprofits, which will be discussed in this paper.
Financial management in a non profit making organization
In a non profit making organization, financial management is the system that is applied in taking in, monitoring, spending, and accounting for the organizations funds. Proper financial management entails accountability and control of funds in and out of the system (The Enterprise Foundation, 2008). There are different components included in the nonprofit financial management system, which include procurement, cash management and records maintenance. The standards of financial management requires the organization to set up effective and efficient accountability and control for all the funds expended and received, in addition to maintaining procedures that define cash management functions and the allowable costs. The degree of effectiveness on accountability and controls usually reflect the operating style and philosophy of the management (The Enterprise Foundation, 2008).
The financial management process in a nonprofit organization
The following are the major issues contained in the financial management strategy of an organization
Managing multiple funds the financial management system of a nonprofit organization uses the fund accounting approach. Management of multiple funds ensures that the donations and grants are maintained appropriately. In addition, it provides thorough information on expenses and assists in ensuring insights on managerial operations.
Tracking costs costs are tracked using spreadsheets which provide recorded details of the special gifts, grants, programs and endowments that the organization has received. This is a unique feature in the financial management for nonprofit firms since it allows the user to perform complex nonprofit distributions, eliminate the error-prone spreadsheets and create generate disparate financial statements for all the different programs being administered (The Enterprise Foundation, 2008).
Budgeting the contemporary nonprofit financial management system utilizes the modern fund accounting software that help in saving the time consumed in manipulation of multiple budget set-ups. They are also useful in eliminating the need for entering voluminous information from the past years. The nonprofit organizations are thus allowed to make appropriate changes on the financial statements beginning from the previous years budget within a short time (The Enterprise Foundation, 2008).
Reporting it is a statutory obligation the nonprofit financial management system follows the FASB 117 reporting requirements which usually dictate that the financial statements related to the organizations financial position and the cash flow to be made separate. The executive directors, donors, board of members and the funders also require such information as and whenever demanded (The Enterprise Foundation, 2008).
Fiscal Policies and Procedures Manual The board establishes and authorizes the procedures that are followed in managing the finances. It is the responsibility of the board and the chief executive to make all possible efforts in ensuring that the procedures of managing finances comply with the procedures in the fiscal policies and procedures manual(The Enterprise Foundation, 2008).
Fund development and marketing
The key issue in raising funds for nonprofits is to ensure that the board of directors is highly participative in the process the board should be directly involved in both the planning and execution of organizational fund raising. It is the role of the board to come up with the goals of fundraising so that such goals will be in correspondence with the resources required to accomplish the organizational strategic goals as outlined in the strategic plan. This is because the fundraising goals for a nonprofit ought to be the means of achieving the strategic objectives as far as financial resources are concerned (Smith, Bucklin and Associates, 2000)
The fund raising plan always delegates funding responsibilities amongst the members of the board so that each member is charged with a specific area for funding. This ensures that some of the some sources of funds do not become irritated or overwhelmed due to repeated solicitations. Without the delegation of funding responsibilities, it is also likely that some of the potential sources of funds will not be allocated representatives which limit the total funds that the organization is able to gather from its donors and sponsors (McNamara, 2009).
According to Smith, Bucklin Associates (2000), the most significant feature of fundraising is excellent public relations this entails ensuring that the community in which the organization thrives has a complete positive and strong relationship with the organization. This is can be achieved through two methods first, the organization must be actively involved in CSR (Corporate Social Responsibility), so that it gains a good reputation from the general public. Secondly, the must employ a team of public relations officers who are charged with the responsibility of ensuring that all the requests, complains and suggestions from the members of the community are handled promptly and professionally (Smith, Bucklin Associates 2000).
In addition, establishing an organizational structure that will be used in implementing the fund raising plan is also crucial. The structure should be established in such way that every team and committee in the organization is assigned an active role in the financial sourcing procedure. This can be achieved by delegating duties as outlined in the table below (Smith, Bucklin Associates 2000).
CommitteeteamRole in financial sourcingBoard executive committeeEstablish goals and priorities and endorse the planOutreachmarketing committeeIdentify likely donors and organize efforts to support fundraisingFundraising committeeLead in the development and execution of the fundraising plan and approaching the donorsVolunteers coordinatorCoordination of volunteer activities, inclusive of the identification of areas where volunteers will assist, recruitment of volunteers, making sure that volunteers are recognized and effectiveInformation processingAllocating staff to establish and maintain the fundraising databaseAccountingBookkeeping processes of the money raised through fundraising in the accounting systemDonations processingProcessing of the donations such as checks, updates on fundraising database and sending notes of appreciationSource data Smith, Bucklin Associates (2000)
The identification of the major sources of raising financing activities is very crucial to a nonprofit because it determines the kinds and value of financial resources it will be able to generate for its activities. With the current competition for fundraising sources among the nonprofits Smith, Bucklin Associates (2000) advices nonprofits to constantly carry out a detailed analysis of the available donors by evaluating the advantages and disadvantages of engaging with each of them as described in the table below. This will assist the nonprofit to choose the most viable means of raising funds (Smith, Bucklin Associates, 2000).
SourceAdvantages
DisadvantagesIndividuals . biggest source of giving constant source one can make Once a donor, also a sponsor Volunteers are an excellent supply expensive to establish, little return per unit difficult to generate if not through broad-based service appeal uncertain for the inexpert Need major support from the organizations volunteers and boardLarge-Family Foundations Source of huge sums of money reachable, professional staff lucid guidelines, procedure Board volunteers can assist, Start-up funding only long process More hard to access via personal influence Proposals might be longerCommunity Foundations greatly like huge-family foundations Staff might be sufficient Hosts foundations within other foundations a large amount money is assigned, particular fundsSmall-Family Foundations can fund ongoing expenses individual influence with board members assists Hard to contact, no specialized staff regularly not huge sums of money Without individual influence, might not be possibleLarge Corporations may be source of huge sums Often reachable, expert staff might be attached to volunteer participation . cumbersome to get staff have to be contained by their guidelines Not prone to donate if not headquartered in the vicinity
Often require board representationSmall Corporations Very casual approach Money can be ongoing individual connections will suffice . little amounts of money thin range of interest individual contacts are principalFederated
Funds .stable source of reasonably huge sums of money Clear procedure..normally cannot be a start-up business Very long access process extremely time consumingGovernment .huge sums of money feasible procedure is set, clear Political influence helps can be source of constant money Application processes may be long, tiresome Unused monies might be returned hard record keepingChurches frequently seeking group projects In-kind services very likely Source data Smith, Bucklin Associates (2000)
Financial management for smaller nonprofits
For the smaller nonprofit organization operating with a budget of 100, 000 or less Smith, Bucklin and Associates (2000) recommends that they should embark a financial management plan using internal solicitations from the members of the board and the staff, if it is a chartered on membership base. Using the table above for analyzing the viability of the probable donors, the organization ought to look out for the sources which will offer huge contributions since it requires large initial sums of money to cater for internal expenses before it can generate a pool of reliable and loyal donors and sponsors. Internal funding from the board members is advocated for in the initial stages because it usually takes time for probable donors to gain confidence on the organization.
Using funds effectively in a non profit
Nonprofit organizations usually raise funds for the purposes of giving back to the society and promoting a better, healthier and ideal community. However, through the activities of the organizations, enough funds must be raised to cover all the programming activities, salaries of the management and staff as well as the daily operating expenses. Thus, a financial management strategic plan is very useful in ensuring that money is allocated properly to each and every role.
After all the expenses have been catered for, the excess or the budget surplus should always be invested. Just like the for profit organizations, non profits are allowed to invest in bonds, shares and securities in other companies as well as setting up profit generating enterprises that should only be utilized for funding the organization in issues such as expansion but not for the profitability of the management(Smith Bucklin And Associates, 2000). An impressive financial management plan in a nonprofit is one of the strongest intangible assets of the organization when donors are impressed and satisfied with the way in which funds are utilized, they are less likely to stop donating and what is more, increase on the total sums donated to the organization (Smith Bucklin And Associates, 2000).
The purpose of a Strategic marketing plan in financial management
Smith, Bucklin and associates (2000), advocates for an effective and strategic marketing plan it is key to the survival of the organization as well as proper financial management for nonprofits as they continue facing tough times. The strategic marketing plan should entail issues involved with creating and maintaining a good and lasting relationship between the public, staff and the donors of the organization. Smith, Bucklin and Associates (2000) equate the relationship between donors and nonprofits to that of the for-profit with the customers or clients. However, it is difficult to separate public relations role and marketing role in a nonprofit organization since the marketing committee must first establish a strong public relations strategy before endeavoring towards a strategic marketing strategy. All the same, the strategic marketing plan should always aim at capturing the strongest, most reliable and enterprising donors mainly possible through proper and effective utilization and management of the already solicited funds (Smith, Bucklin and Associates, 2000).
The government and nonprofit financial management
The relationship that subsists between nonprofit organizations and the government can be perceived as exchanges full of paradoxes, giving and getting, conflicting and cooperating, frustrating and invigorating. This is because, the exchanges between the government and the nonprofits usually account for a third of the total expenses incurred by the organization. This can be explained in twofold to begin with, the government is one of the key donors of most nonprofit making organizations it also assists the organizations to achieve their goals through exempting them from taxes, charities and special mailing services. However, on the other hand, the government expects the same organization to go through rigorous and expensive (in terms of time and money) processes of legalizing fundraising activities and restrict the minimum operating capital for them (Lane, 2010). Consequently, nonprofits should minimize the level of interaction with the government since it can be seen as a non-productive give-and-take scenario (Smith, Bucklin and Associates, 2000).
The place of the nonprofit employee in financial management
There is a tendency in most contemporary nonprofit organization to treat their employees as nonprofit employees. In so doing, the management and board of these organizations usually expect to compensate the staff in relatively low terms as compared to their profit making counterparts. This is a gross misconception that should not be applied in the financial management of this organization, for the reason that they expect their staff to demonstrate equal standards of competence and professionalism as any other employee (Smith, Bucklin and associates, 2000). Therefore the compensation of employees ought to be one of key budgetary issues in the financial management plan of an organization it should comprise of fair and market price monthly salaries for employees in addition to employment benefits, allowances and retirement plans (McNamara, 2009).
Challenges of financial management in a nonprofit
Raising money is tough but knowing what to do with that money once you have it can even be tougher. And with competition for every dollar at an-all time high, you cant risk donor confidence through poor financial management. Black Baud, (n. d)
Despite the fact that nonprofit organizations are not in business to make profit, they still have loads of businesses to manage. The nonprofit organizations usually face unique challenges ranging from strict accountability and reporting requirements, spending, forecasting and daily budgeting. The management for nonprofit organizations uses financial management in the development of effective management and control skills. For the nonprofit firms financial management begins from the vital cash management issues (Black Baud, n. d).
The financial management for nonprofit organizations is very different from that of for-profit organizations comparing the financial management of the two types of organization is just like comparing an egg with a golf ballexternally, they appear similar are very different internally. Thus, trying to make the financial management strategy of a nonprofit organization work for the profit organization or the vice versa is just like trying to make an omelet using a golf ballit just cant work. This implies that the nonprofits have to establish their own unique methods of financial management, which are not as flexible as those used by the profit making organizations (Black Baud, n. d).
Conclusion
It is evident from the issues discussed in this paper that financial management represents one of the major functions of a nonprofit that ought to be handled with reasonable expertise and care. As a result of rapid changes in the industry which has resulted to a change in the funding of most nonprofits, it has become critical to establish a sound and stable strategic plan for managing enterprise funds. As such, it is recommended that any nonprofit that aims at maintaining competence, efficiency and effectiveness to ensure that the issues which have been discussed in this paper are implemented and corrective measures taken where necessary.
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