Professional Documents
Culture Documents
May 2007
The non-profit industry is one of the largest and growing industries in the world.
“According to the NCCS Table Wizard, there are currently nearly 1.4 million nonprofit
organizations in the United States.”1 This organizational form has been influential in
battling global and domestic issues, such as poverty alleviation, human rights abuses,
human trafficking, funding for other non-profits, and educating children. The formation
of a non-profit in the United States usually includes preparing by-laws, articles of
incorporation, and filing state and federal forms including tax forms from the Internal
Revenue Service (IRS). The governing body of a non-profit, usually the Board of
Directors are responsible for mapping the mission and objectives of the organization and
ensuring that the organization’s direction is progressive. The executive committee
usually includes the chief executive officer, vice president, secretary-general, treasurer,
financial controller, chief operating officer, and volunteer manager. One of the most
important departments or committees of a non-profit organization is the funding
committee, which is responsible for acquiring funds for the organization’s projects and
programs. Since a non-profit organization does not engage in sales, the primary source of
financing comes from funding and donor sources. The funding committee or department
usually includes the treasurer, financial controller, funding researcher, proposal writer,
and program directors. This team usually works cohesively in developing program
budgets, locating donors, writing funding proposals, and channeling funds to the
organization. In the past, some of the financial activities of a non-profit organization
were being outsourced due to the scant information available at the time and the
1
Foundation Center. http://foundationcenter.org/getstarted/faqs/html/howmany.html
complexity of non-profit financial management. However, with the growing emergence
of this form of entity, financial management has shifted towards internal operations.
Budgeting
Non-profit organizations usually plan and implement programs and projects that
meet the objectives of the organization. This is normally the core of operations.
Financial management is one of the most important parts of the strategic planning
process, particularly in the aspects of budgeting and financing of these projects and
programs. Non-profits seek funding from pledges, donors, and member subscription fees
in order to finance programs. It is likely that funding will be the key operational activity
throughout the existence of the non-profit. Management, when determining the extent of
the program or project, ensures that budgets are accurate enough to account for each
expense, so that adequate or excess funding will be requested from financing sources.
Budgeting in non-profit organizations is similar to non-profits. Some components of the
budget include variable costs, fixed costs, and mixed costs. Variable costs are those that
vary directly with the relative increases and decreases of activities. Examples of these
include costs for food, fuel, and utilities. Fixed costs are those that are constant despite
the increase or decrease of activity. Examples of fixed costs include rent, salaries,
venues, and office expenses. Mixed costs are the combination of fixed and variable
costs. Two budget systems that non-profit organizations use include the static and
flexible budgets. A static budget is created for one level of activity with the assured
notion that activities or costs will not change. Flexible budgets on the other hand, are
created for an infinite level of activities.3 In carrying out effective forecasting, financial
managers and the funding committee must ensure that sufficient funding is received to
finance all expenses.
2
www.legalfilings.com
3
Nonprofit World; May/Jun89, Vol. 7 Issue 3, p29-34, 6p
adjusting general ledger accounts, and preparing financial statements.4 Financial
reporting is one of the most important and critical determinants of the likelihood of
receiving funding from donor, public, and private entities. If the financial management is
ineffective, then the financial statements will be filled with errors and inconsistencies,
which is an automatic assurance that funding sources will reject any request for funds.
Most donor agencies normally request the program budget, as well as the financial
history of the organization. This is normally were non-profits tend to fail in the venture
for funds, as without an effective and accurate financial report, it is unlikely that requests
for funds will be accepted. Without funds it is most likely that programs and projects
will have to be cut from the strategic plans of non-profits.
Four key areas that non-profit and for-profit entities differ include accounting for
contributions, capitalizing and depreciating assets, use of cash and modified cash basis
accounting, and functional expense classification. In the area of accounting for
contributions, tax-deductible contributions received from donors are what distinguish
non-profits from for-profits. Non-profits receive contributions in the form of pledges,
donations, membership dues, fundraising events, and donor funding, while for-profits
acquire sales, loans, and investments. There is also requirement that non-profits follow
reporting guidelines to contributing entities before, during, and after contributions are
received. This must be recorded properly into journals and inserted to the proper ledger
account, in order to display it accurately in financial statements. The Form 990 is also
required by the IRS to be filed annually by non-profits that are tax-exempt with annual
receipts exceeding $25,000. In regard to capitalizing and depreciating assets, while all
business entities are required to record depreciation of assets, some assets such as
museum collections, historical buildings, and library books are an exception to the rule
for non-profit organizations. As stated earlier, another difference is that most new and
4
http://www.allianceonline.org/FAQ/financial_management/what_are_elements_of.faq
5
Keown, Arthur. Financial Management: principles and applications. 10th edition. Pearson Prentice Hall,
2004
small non-profit organizations have the capacity to use cash instead of accrual based
accounting. A fourth difference between the two is that non-profit reports expenses as
functional expense classifications, which include two types, program services, and
supporting activities. Supporting services normally include such activities as
management and fundraising activities. Though few, these differences are critical in
making decisions and planning strategically. An override of these differences can cause a
non-profit organization to provide inefficient financial statements, break state and federal
tax laws, create unrealistic goals and objectives, and lose valuable funds. This is why it
is important to have a sound financial management integrated into the general
management of the organization, and a financial manager who is in line with the mission
of the organization.
Conclusion
References:
How many nonprofit organizations are there in the United States? Foundation Center.
Retrieved May 2007. http://foundationcenter.org/getstarted/faqs/html/howmany.html
Frequently Asked Questions. Alliance for Nonprofit Management. Retrieved May 2007.
http://www.allianceonline.org/FAQ/financial_management/what_are_elements_of.faq