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A nonprofit organization1 is defined as an organization that does not have owners who profit when revenues exceed expenses. A nonprofit organization operates in the interests of society. It does not participate in the equity markets since it has no shareholders. The sources of funds for nonprofit organizations are contributions, grants, and operating surplus. The activities of a nonprofit organization uphold the organizations stated mission, which describes the nature of its contribution to society; profits do not form a part of its mission. Most nonprofit organizations provide services. They are run professionally, by managers who develop objectives, strategies and budgets. Performance reviews are conducted for the employees and they are suitably rewarded. Controlling employees, systems and processes in a nonprofit organization is different from controlling them in profit seeking organizations.
Atmosphere of Scarcity
There are factual and perceptual components to scarcity in nonprofit organizations. Most nonprofit leaders are severely constrained by lack of resources. In addition, many nonprofit organizations rely on altruism. As a result, they often have underdeveloped infrastructures.
Participation of Volunteers
Many nonprofit organizations rely on the active participation of volunteers. Members of the Board of Directors are normally not paid for their work, and individuals contribute considerable time and effort in delivering services and providing administrative support. The contribution that volunteers make to the nonprofit sector is significant; indeed without volunteerism, many needed social services would not be available to the public. However, volunteers usually have to juggle multiple commitments, and the relative priority they assign to their volunteer job may have to be balanced with their paid job, family responsibilities, and other volunteer commitments. Board meetings are therefore often held in the evenings or on weekends. Finally, there may be resentment on the part of certain volunteers that some people are being paid for work that they are doing for free, and the feeling that everyone should be volunteering.
Absence of profit measure. This makes performance evaluation difficult. Separate tax and legal status. Nonprofit organizations are exempted from taxation and there are no shareholders. Most nonprofit organizations provide services rather than products. It is difficult to measure the quality and quantity of service. Fragmented governance due to numerous sources of influence. Excessive constraints in terms of usage of funds. Differences in senior management. Traditionally nonprofit organizations have had poor management controls because the management consisted of professionals like teachers, priests, doctors, etc. These professionals tended to give greater importance to professional goals and did not give requisite value to managerial skills.
Rewards
Generally, employees working in profit seeking organizations get better compensation and rewards when compared to employees in nonprofit organizations. In nonprofit organizations, employees feel rewarded when they achieve the goals which form a part of the mission statement of the organization. For example, employees of a nonprofit organization that is working towards preventing the spread of AIDS will feel rewarded when the rate at which the disease is spreading decreases. As financial rewards are negligible in nonprofit organizations, achieving the goals in the mission statement keeps employees motivated. However, there are exceptions to this generalization. In certain nonprofit organizations like universities and research organizations, employee compensation is better than in private sector companies.
Performance Measurement
Measuring performance of nonprofit organizations is difficult and arduous because most nonprofit organizations provide services which are measured in qualitative terms rather than quantitative terms. Without a quantifiable performance indicator, it is difficult: to measure organizational performance in light of the overall goals and to use results control at the broad organizational level;
to analyze the benefits of alternative courses of action to decentralize the organization and hold sub-unit managers responsible for specific areas of performance; and to compare the performance of sub-units which are performing dissimilar activities. It has been observed that many nonprofit organizations, irrespective of their mission, scope and needs, design three types of performance metrics. They are: Success in mobilizing resources Effectiveness of staff on the job Progress in fulfilling the mission The way these metrics can be applied differs from organization to organization. For example, for a museum, the performance of its staff will be rated on basis of the number of people who visited the museum. Of these three metrics, the first two are easy to develop but measuring the success of a nonprofit organization in terms of the achievement of its mission, is difficult.
Fund Accounting
Fund accounting is an accounting system used by many nonprofit organizations. In this system, accounts are kept separately for several funds, each of which is self-balancing, with the sum of debit balances equaling the sum of credit balances. Most nonprofit organizations have: (1) a general fund or operating fund, which corresponds to the set of operating accounts; (2) a plant fund and an endowment fund, which account for contributed capital assets and equities and (3) a variety of other funds for special purposes.
Control in service organizations is different from control in manufacturing organizations due to the following reasons: Absence of inventory buffer Difficulty in controlling quality Multi Unit organization Manufacturing organizations maintain an inventory of goods in order to tackle sales fluctuations in future. This does not hold true for service organizations. They cannot store their services. For example, the airplane seat, hotel room, or the service of professionals like lawyers, physicians cannot be stored. Moreover, many service organizations have a fixed cost in the short run which cannot be reduced. For example, a hotel cannot reduce its fixed costs by closing down some of its rooms. Thus, service organizations have to match their current capacity with demand. Organizations match their current capacity with demand in two ways. The first way is to stimulate demand in the off peak seasons by increasing marketing activities and decreasing prices. For example the airlines and hotels offer heavy discounts during the off-season to increase demand. Secondly, companies can also try to right-size their workforce according to the anticipated demand. The products of a manufacturing company should be inspected for quality before they are released in the market, but this cannot be done in case of a service organization's products. The quality of the products offered by service organizations cannot be judged until it is rendered to the customer. Also, the judgments regarding the quality of the product are often subjective. The management of a restaurant may judge the quality of the food and approve of it, but customer satisfaction also depends on how the food is served. Service organizations operate through many small units set-up in different locations. These units act as individual profit centers for the service organizations. Fast-food companies, gasoline stations and auto rental companies are some of the examples of such service organizations. The units of a service organization are either wholly owned or franchised. Most of these units are similar in size and operations and hence provide a basis for analyzing budgets and evaluating performance. The information generated from such an analysis can be used to distinguish the high performing units from the low performing units.
Small size Most professional organizations are relatively small in size and operate in a single location, with the exception of some law and accounting firms. Senior management personally monitors and motivates their subordinates. This brings down the need for sophisticated control systems. Even though professional organizations are small, they still need to prepare budgets, compare the budgeted and actual performance, and compensate employees on the basis of their performance. Labor intensiveness Professional organizations are labor intensive, and they employ individuals who are specialists in respective fields. Professionals who are also managers prefer working independently rather than in teams. Professionals are the most valuable asset of an organization. Due to this, some management thinkers advocate the idea that these professionals should be valued highly and their value highly included in the company's balance sheet. A system called human resource accounting was developed by Likert for valuing the professionals but very few companies used it. Different objectives and goals The goal of a manufacturing organization is to earn a satisfactory return on the assets it employed. As most assets are tangible, they appear in the balance sheet. In professional organizations, as most assets assume the form of the employees' skills it is difficult for the company to set for itself a goal in terms of returns on assets employed. The financial goal of professional organizations is to provide satisfactory compensation to its employees. Another goal of professional service organizations is to increase their sizes and networks. Difficulty in measuring output The output of manufacturing organizations can be measured in terms of units, tons, gallons, etc. but this method cannot be applied to professional organizations. For example, the output of a physician, can be measured in terms of number of patients treated, but one cannot measure whether the service provided by the physician satisfied the patient. In some cases, the revenues earned indicate the measure of output, but only in terms of quantity. In a professional service organization, the non-repetitive nature of work compounds the problem of measuring output. Since no two professionals work in the same way, it is difficult to set standards in terms of the time spent for a task and the way in which the task is performed. Different marketing strategy In manufacturing companies, production and marketing activities are clearly demarcated. But no such demarcation is done in professional organizations. These organizations do not market themselves openly. It is done through the use of articles, personal and professional contacts, speeches etc. An auditing firm may market itself through the articles written by its auditors (on contemporary issues) or through the marketing activities done by professionals who spend much of their time working for clients. Thus, it becomes difficult to identify a single employee who is responsible for promoting the organization.
Pricing Most professional firms determine the price of their services in a traditional manner. If the professional service offered is dependent on time, then the fee is fixed on the basis of time spent on the service. Investment banking is an exception to this. In case of investment banking, the service charge is determined on the basis of monetary size of the securities issue. Prices of services offered differ from profession to profession. The prices are high for accountants and physicians compared to research scientists, for instance. Strategic planning and budgeting Manufacturing organizations have better strategic planning systems when compared to professional organizations of similar size. One of the main reasons for this could be that professional organizations do not need such a system. Strategic planning is important for manufacturing organizations because any commitment relating to the procurement of plant and equipment does effect its capacity and expenditures for years, and such effects are irreversible. In professional organizations, the main assets are people and changes in the size and composition of the staff are irreversible and easier to make. The strategic plan of a professional organization is not as comprehensive as that of a manufacturing organization. It is mainly a long range staffing plan and does not cover other functions. Control of operations Scheduling the working hours of employees is one of the most important aspects of controlling the operations in professional organizations. The billed time ratio, that is the ratio of hours billed to total professional hours available, should be analyzed thoroughly. Idle time should be minimized and appropriate rates should be used for billing engagements.
Principles of Management Control Systems
Performance measurement and appraisal In professional organizations, it is easy to analyze the performance of employees at the top most and the lowest hierarchical level, but it is difficult to analyze the performance of employees who are placed somewhere between the two extremes. The main reason for this is the absence of objective criteria for performance appraisal. But there are exceptions to this too. For example, the performance of an investment analyst can be appraised by comparing his recommendations and the market behavior of securities. In many cases, performance appraisal depends on human judgment. An employees performance may be judged by his superiors, peers, subordinates and clients. Professional organizations use a formal performance appraisal system numerical ratings of specified performance attributes. These ratings are used as deciding factors for wage hikes and promotions.