Running Head: Financial Management in Non-Profit Organizations 1

Financial Management in Non-Profit Organizations

Kevin M. Carter

University of Maryland University College

MGMT 640
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Executive Summary

With any type of organization, profit or non-profit, financial management means more

than just keeping up with accounting records. It is an extremely important part of the

organizations management and is not a single task assigned to the finance office or the Treasurer.

Financial management has four steps that are key to it being successful. They are planning,

organizing, controlling and monitoring financial resources which lead to the achievement of

organizational objectives. You can ensure successful financial management with effective

planning. An effective plan would include having objectives identified along with coordinated

policies, strategies, tactics and actions to achieve the organizations objectives. Also having both

short and long-term strategic planning also leads to sound financial management.

This paper will show ways to achieve a non-profit organizations successful financial

management. The information in this essay will list ways that non-profit organizations can

benefit from firm financial management. With a good financial management, a non-profit

organization can make effective and efficient use of resources, achieve objectives and fulfill

commitments to their stakeholders, earn and keep the trust of donors and other stakeholders, gain

the respect and confidence of funding agencies, partners and beneficiaries and prepare for long-

term financial sustainability. 

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Prior to doing this paper, I did not know much about non-profit organizations (NPO)

except that the National Football League is one (which recently gave this status up). It was not

surprising to read that nonprofit organizations main goal is to aid people and places in society

(Blackbaud, 2011). When you Google or research NPOs, you see businesses like the Red Cross,

The United Way, The Salvation Army and more. I have actually been a beneficiary of the Red

Cross while stationed overseas and needing to rush home due to a serious illness and death in my

family. Based on the high prices of airline tickets to/from overseas, the Red Cross helped offset

the cost. Theirs and others mission is usually trying to help and contribute to the community or

lessening the impact of a deficiency. A NPO usually does not have the same strong financial

flexibility of its bigger brother, a for-profit organization. This is mainly due to it depending on

resource providers that are not engaged in a commercial transaction (Blackbaud, 2011). With

most of the resources being provided from donors to provided goods or services tied to a specific

purpose, the NPO must show reasons that those funds are used solely for that purpose

(Blackbaud). The purpose is either specified by the donor or implied in the nonprofit’s mission

and management must report accurately the use of the funds (Blackbaud).

NPOs are by no means looked at as a money-making venture. But like any other

organization, it is still vital for every NPO to adhere to specific guidelines when it comes to the

financial management of the organization. One of the biggest hurdles that nonprofits face is

raising money. Creating a framework to bring in funds to nonprofits is a challenge and nonprofits

must be careful not to make their funding models too general or too specific (Blackbaud). The

most popular or routine way that nonprofits raise money is through fundraising. There are other

types of funding that comes to nonprofits and this often depends on which type of nonprofit

organization it goes to. Nonprofits can get funds from the government or federal agencies or the
Running Head: Financial Management in Non-Profit Organizations 4

private sector. Private sector donations usually come by way of grants and awards from

foundations. Raising money to operate is critical to run a business especially when you look at

both for-profit and nonprofit companies are corporations (Parrino and Kidwell, 2009). They both

have stakeholders, operate under governing boards, find ways to raise capital and use financial

reporting and accounting systems to evaluate their performance. Since a corporation operates to

make profits, it must maintain financial records to explain how it performs in accordance with

GAAP guidelines (Parrino & Kidwell). Nonprofits also look for ways to bring about revenues,

which is good except that most of the time, those revenue dollars are used for routine operational

expenses such as salaries, rentals space and other administrative costs. The basic accounting

system should include the following components: chart of accounts, general ledger, budget,

reporting and documentation system, and appropriate internal controls (Parrino and Kidwell).

Before making a decision on what is needed to make up its accounting system, an

organization must first decide which is the best option to use; a cash-based or accrual-based

system. If using a cash-based system, revenues are recorded only when they are received and

expenses recorded only when they are paid (Blackbaud). On the other hand, in an accrual-based

system, revenues and expenses are recorded when they are first earned or incurred, regardless of

when money is actually exchanged (Blackbaud). Most experts recommend using an accounting

system which is accrual-based, mainly because most organization usually apply for foundation or

government funds, which is usually the most form most used by accounting professionals.

Having a chart of accounts is very important to the financial success of a non-profit

organization. It is a detailed listing of all of the accounts, or records of each business transaction,

of an organization. The lack of or inability to keep track of the income and expenses will

certainly cause not only problems for the organization, but possibly the end of it. Tracking and
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accounting for monies received from the federal government and other donors is important.

Nonprofits are subject to strict reporting requirements due to receiving these funds. Additionally,

staff must be able to prove that a donor’s money was used as directed (Blackbaud). Some

required documents to help in reporting and documenting are:

 Balance Sheet/Statement of Financial Position: This document is filled out at

the end of each period and lists the organization’s assets (current, fixed, and net) and liabilities

(current and long-term).

 Income Statement/Statement of Activities: This is a report of the organization’s

revenues, expenses, and change in net assets over a fiscal year. The income statement will denote

whether the organization realized a profit or incurred a loss for the period.

 Statement of Cash Flows: This report is usually prepared by an auditor at the

request of the organization. It provides information on the flow of cash in and out of the

organization.
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Below is a copy of the 2014 Financial Statement for the Red Cross
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In my latter years serving in the military and working in the Pentagon, I was thrust into

learning about what all goes into the DoD Budget, but how it takes previous years of projecting

and meticulous accounting of current years in order for it to be successful. The same goes for

NPOs. An NPO should start its budget process at least two to three months before the beginning

of the fiscal year. It should also solicit the input of staff (finance officials and non-finance staff),

board members, and the executive director. Though the inputs of many are gathered, it is still the

overall responsibility of the NPO board finance committee to build and execute the budget.

The budget process should typically go in this order:

 Review the previous year’s results. It is good to look and what the cost per unit of

service was

 Develop new goals and objectives for the coming year.

 Estimate the cost of the new objectives based on the previous year’s results. It is

important to keep in mind the indirect costs (incidental costs not closely attached to programs

and goals, i.e., administrative costs) along with direct costs (closely associated with the program

– i.e., staff salaries) and to adjust any costs that will be changing in the coming year.

 Budget projected income. Estimate revenues, including grants, donations, etc.

 Compare the projected revenue with the projected expenses. The organization

may decide that it is appropriate to incur a deficit or realize a surplus for the year instead of

breaking completely even.

 The board must approve the budget and continue to review it on a monthly basis.

Some NPOs may or may not decide to obtain an audited financial statement depending on

the size and revenue of the organization, as well as the board’s expertise regarding financial

management. (Parrino and Kidwell). These statements can range from more or less expensive
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and/or comprehensive. An organization should obtain an audited financial statement if it is

applying for government funds. One very important thing to remember is that making sure that

the organization’s financial management is operating properly. It is the responsibility of each

person in the organization, not just the accounting department. Many corporations have a chain

of command type of organizational structure which includes these various function areas.

Though it may contain different parts, it is interconnected and works together to fulfill the

mission or plan. This includes the finance, marketing, production and human resources. Financial

managers must consider the financial strategy of the accounting or treasury function when

making decisions (Parrino & Kidwell). Financial duties should be segregated so that no one staff

member handles any transaction entirely on their own from start to finish. For example, different

members may sign checks, authorize payments, record transactions, or reconcile bank

statements. This may be more difficult for a very small organization. If this is the case, a staff

member may sign the checks for transactions and a board member (such as the treasurer) may

review the statements and checks on a monthly basis.

Some areas of interest when researching about non-profit organizations are:

SOURCES OF FUNDS

A nonprofit organization is not limited to income from their customers. The other source

of income is most commonly from third-party individuals who donate funds (Thordarsen, 2015).

The income for a NPO generally comes from three different sources:

(a) dues, fees, and services

(b) private donations

(c) government and contract grants

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There is not always a direct link between service provided and streams of income. Thus

customer or client use of service or products may not reflect their satisfaction with the service or

product. It is reasonable to conclude that this lack of connection between income and service

may be a contributing factor to the difficulty in demonstrating NPO effectiveness (Thordarsen).

As mentioned above, in addition to private donations, the government represents a

significant source of funding for nonprofit organizations (NPOs) (Berber et al, 2011) Some past

research has shown that governmental support for nonprofit organizations is more likely to be

given to those who they look at as “efficient” organizations rather than those it looks to be

“inefficient” organizations. Extensive research has shown that public perception of a non-profit’s

efficiency in raising and then using funds for the ultimate goal heavily influences attitude and

likelihood to donate (Berber)

USE OF DEBT

The term debt is defined as money borrowed from a third party, to be paid back either

short term, within a year, or long term, or beyond a one-year term. To some, debt is mainly used

in a negative way, but for NPO’s, it used as a tool. Debt can be used as a tool to finance

facilities growth and change (Thordarsen). NPO’s use debt and financial tools like mortgages

and bonds which are more common in today’s nonprofit sector (Building, 2012). More and more

NPO’s are finding a growing willingness to consider debt as a useful tool in presentations to their

nonprofit board members and managers. Some NPO’s today are using debt to take advantage of

lower-interest rate mortgages or bonds while leaving capital invested in the markets with the

hope of achieving a higher rate of return (Building).

PERFORMANCE EVALUATION
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Non-profit organizations are using performance evaluations to find key areas targeted for

improvement. Some of the evaluations use models or surveys to assess performance (Walker et

al, 2015). The surveys conducted have produced models to show opinions in management, NPO

make-up, management practices, etc. Results of the NPO’s performance evaluations have

reported better performance in the outcome areas. Overall, organizations in the customized

learning organizations exhibited greater improvements in more areas addressed.

Performance evaluation is important for a nonprofit organization. Many funders or

donors want to know how they money has been spent and make sure it was used as directed.

Nonprofits will use an independent public accounting firm to prepare financial statements which

are similar to for-profit companies. Their reports will be presented to the board of directors. They

will provide a statement of financial position, statement of activities, a statement of functional

expenses and a statement of cash flows (Averkamp, 2011). The statement of cash flows is the

same for both for-profit and nonprofit companies. The statement of financial position is similar

to a balance sheet. It details an organization’s assets and liabilities, when the assets turn to cash

and when liabilities have to be paid (Averkamp). A statement of functional expenses reports

expenses by their function and by the nature or type of the expense and a statement of activities

shows the amount of revenue and expenses according to changes in net assets (Averkamp)

GOVERNANCE

A big difference in for-profit organizations and non-profit organizations is that the for-

profit companies usually order a comprehensive business analysis and after their completion

adopt a recommended methodology, including related processes, metrics, documents and

assessment rules. These procedures are not feasible for NPOs, which have too specific

requirements and don’t have the finances for hiring a consulting firm. Instead of a long-lasting
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and expensive way to collect data, NPO’s use a form of governance structure (Sedlakova et al,

2013). With this type, an NPO is capable to maximize its successfulness in its performance. With

governance structure, NPOs are able to produce desired social value in a focused and efficient

way. They can define and establish internally effective processes, and identify/fulfil

undiscovered customer’s needs. These measures help NPO’s to fight within an increasingly

competitiveness business world.

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Conclusion

To many, to include myself, when they hear the term non-profit organization, they focus

on the hyphenated word when they should pay more attention to the non-hyphenated word.

When anyone hears non-profit, they believe the organization makes no money or all work is free.

This is much like an attorney doing pro-bono law firm. You may not be charged as a client, but

the lawyer and all their paralegals and assistants get paid from someone. A non-profit

organization is just that…an organization. It has employees who get paid, offices that they work

in and need furnishing, etc. They might be non-profit, but they not non-spending.

This paper has shown that there are many similarities on how a non-profit organization

and for-profit organization is run, yet they are different when looked at in the corporate world.

To stay operating, you HAVE to take care of your finances, and to do that you must manage

them…well.
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References

Averkamp, H. (2011). Nonprofit (not-for-profit) accounting. AccountingSource. Retrieved from

http://www.accountingsource.com/nonprofit-accounting/index4.html

Berber, P., Brockett, P. L., Cooper, W. W., Golden, L. L., & Parker, B. R. (2011). Efficiency in

fundraising and distributions to cause-related social profit enterprises. Socio-Economic

Planning Sciences, 451-9. doi:10.1016/j.seps.2010.07.007

http://www.accountingsource.com/nonprofit-accounting/index4.html

Blackbaud, Inc. Financial Management of Not-for-Profit Organizations (2011, October).

Retrieved from:

http://www.blackbaud.com/files/resources/downloads/WhitePaper_FinancialManagement

ForNPO.pdf

Building Stronger Nonprofits Through Better Financial Management: Early Efforts in 26 Youth-

Serving Organizations. (2012).

Parrino, R., Kidwell, D. (2009). Fundamentals of Corporate Finance. John Wiley & Sons, Inc.

New Jersey.

Primoff, W. (2012). Fiduciary financial Management in Nonprofit Organizations. CPA

Journal, 82(11), 48-57.

Sedlakova, J., Voracek, J., Pudil, P., & Somol, P. (2013). Dynamic Modelling of Governance in

Non-Profit Organizations: Case of Community Social Services. Proceedings Of The

International Conference On Management, Leadership & Governance, 297.

Thordarson, T. B. (2015). Use of funds in a nonprofit organization as predictor of organizational

effectiveness and efficiency. Dissertation Abstracts International Section A, 75,

Tysiac, K. (2015). Strategic planning for NFPs. Journal Of Accountancy, 220(5), 22.

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Walker, K., Grossman, J., Andrews, K., Carrington, N., Rojas, A., MDRC, & Child, T. (2015).

The Skills to Pay the Bills: An Evaluation of an Effort to Help Nonprofits Manage Their

Finances. Mdrc,