Chapter 1:
Introduction
Financial Management for Nonprofit
Organizations: Policies and Practices
Zietlow/Hankin/Seidner
© 2007, John Wiley & Sons. All rights reserved worldwide.
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Learning objectives:
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Define nonprofit organization
Describe the primary characteristics that
distinguish nonprofits from businesses
Define key nonprofit terms
Distinguish between policy and procedure
Explain and defend the primary financial
objective of noncommercial nonprofit
Discuss the survey evidence regarding
primary financial objective of nonprofits
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1.1 Nonprofit Organizations
Defined
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Nonprofit = organization allowed to make a profit but
prohibited from distributing profit to those in control
Most nonprofits are 501(c)(3) Corporations – “charitable,” taxexempt, may receive tax-deductible donations (religious,
education, social welfare, private foundations)
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Put the mission first
No stock, no payout to “owners” of net revenue
No direct control by outsiders (including donors)
Not steward to shareholders, so pursue and fund the mission,
not concerned about stock price
Articles of Incorporation (Charter)
and Bylaws (Operating Rules – trustees,
meetings, reports)
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Three Emphases in our
Treatment
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Distinct and integrated decision-making emphasis
on achieving a liquidity target as the primary
financial objective
Establishing the right financial policies
Defining current “state of the art” in nonprofit
financial management practice, including in many
cases “best practices”
The “Nonprofit Financial Management Golden
Triangle:”
Primary Objective, Policy, and Practice
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1.1 Nonprofit Organizations:
Vital Statistics (#1 of 2)
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Nonprofits in U.S. account for…*
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7.5% of GDP
9% of all paid employees
6% of all organizations
$665 billion in revenue (38% from private dues
and services, 31% from government grants and
contracts, 20% from private contributions, and
11% “other”—primarily
investments-related)
Source: Johns Hopkins Institute for Policy Studies, Independent Sector,
and the Urban Institute
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1.1 Nonprofit Organizations:
Vital Statistics (#2 of 2)
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About 2/3 of all nonprofit sector revenue in
U.S. is earned by health care and
education organizations
About 35% of all private contributions in the
U.S. go to religious organizations
(congregations and other religious entities)
Source: Johns Hopkins Institute for Policy Studies, Independent Sector,
and the Urban Institute
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1.2 Nonprofit Organizations:
Characteristics
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(a) Organizational Mission
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For a business, make money for the owners/shareholders
For a nonprofit, serve a broad public purpose, no “private
inurement”
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“Any unjust enrichment of a private individual, whether out of
gross or net earnings, may constitute inurement. See People
of God Community v. Commissioner, 75 T.C. 127
(1980)…any transaction between an organization and a
private individual in which the individual appears to receive a
disproportionate share of the benefits of the
exchange relative to the charity served
presents an inurement issue.”
[Source: http://www.irs.gov/pub/irs-tege/eotopicc90.pdf]
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1.2 Nonprofit Organizations:
Characteristics
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(b) Organizational Structure* - roles and
responsibilities of board, committees, staff;
partly linked to type of organization
*IRS statistics, FY 2005 (updates Exhibit 1.2, p. 5)
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1.3 Language of the
Nonprofit Organization
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Officer of Corporation is legal representative of the board:
president, vice-president (and/or treasurer), secretary
Secretary is board officer responsible for agendas, minutes
and other board
business documents
Treasurer is the one tasked with (and held responsible for)
being the chief financial officer of a nonprofit, but larger
nonprofits have staff person doing the CFO role and duties
Chief Financial Officer (CFO) is the staff member most
responsible for financial analysis and decision-making; in
smaller organizations without finance staff this role may be
jointly assumed by the CEO and the bookkeeper
or board treasurer.
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1.3 Language of the
Nonprofit Organization
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Board has a fiduciary role and acts as a
steward of the organization’s assets
Fiduciary is one legally bound to oversee
another’s affairs, using same standards as
would use if it was fiduciary’s own assets
Stewardship means holding something in
trust for another
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Our Two Focuses
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Financial Policies
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Financial Practices
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1.4 Financial Policies
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Definition: set of guidelines, laws, rules, or
principles for how day-to-day business
should be performed; guiding principles on
how organization does certain things
Examples: investment policy, internal
control policy, debt policy
Not same as procedures: “steps or actions
to comply with a certain policy”
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1.5 Financial Practices
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What is the “state of the art” regarding:
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Primary financial objective
Organization of the finance function w/i organization
Use of technology in treasury area
Cash and liquidity management
Budgeting
Forecasting and financial ratio analysis
Capital project evaluation
Accountability and internal controls
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1.6 Principal Financial Objective:
Not Same as a Business (#1 & #2)
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Difference from Business #1:*
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Business: Maximize Stock Price
Nonprofit: No Single Success Indicator Number
Difference from Business #2:
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Business: Price Services, Sales = Success
Nonprofit: No Price, Revenues ≠ Services
* Conceded: some nonprofits are commercial nonprofits,
really more like businesses than most other nonprofits
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1.6 Principal Financial Objective:
Not Same as a Business (#3 & #4)
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Difference from Business #3:
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Business: Know Identity of Customers, Owners
Nonprofit: Donors or Clients = Customers?
Society or Founders = Owners?
Difference from Business #4:
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Business: Cash Position Related to Timing of Inventory,
Credit Sale, and Credit Payment Flows
Nonprofit: Often Start with Cash Stockpile, Disburse
Cash, Await Donations or Reimbursement
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1.6 Principal Financial
Objective:
Survey Evidence
Percent
Responding:
Financial Objective
35.7%
Break even (revenue = expense)
21.4%
Maintain target level of cash reserves,
financial flexibility
14.3%
Maximize cash flow
7.1%
Minimize costs
7.1%
Maximize net revenue
7.1%
Maximize net donations
7.1%
Make a small surplus
0.0%
Avoid financial risk
Source: 2002 Survey of member organizations of the
Evangelical Fellowship of Missions Association (EFMA)
Related
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1.6 Principal Financial Objective:
Does it only apply to
“Purely Financial Decisions?”
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Richard Wacht:
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For purely financial decisions, objective should
be “cost minimization, subject to the absolute
constraint of maintaining organizational liquidity
and solvency over time”
For other decisions, consider program and
mission aspects primarily
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1.6 Principal Financial
Objective:
Achieve Liquidity Target
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Strive to reach an “approximate liquidity target
over time” (see Appendix 1A)
Keys: Manage Cash Flow and Cash Position
Related sub-objectives (William Hopkins):
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Cost effectiveness
Financial accountability
Cash flow maximization and protection
Maintain liquidity to assure organization’s future
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1.6 Principal Financial
Objective:
Achieve Liquidity Target
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Cash flow refers to the difference between cash inflows and
cash outflows in a given period.
Cash position is the amount of amount of cash and nearcash investments held by the organization.
Liquidity management includes forecasting, and managing
cash flow and the cash position, and ideally should include
setting and managing toward a preferred cash position, or
liquidity target.
A liquidity target includes the elements of the cash position,
including unrestricted short-term investments, along with
unused short-term borrowing capacity.
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An organization may have a pre-approved line of credit with
a bank, some of which has not been borrowed or
“taken down” at present.
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Conclusion
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A nonprofit organization’s primary financial
objective is to achieve its liquidity target. Stated
more broadly, it should ensure that financial
resources are available when needed (timing), as
needed (amount), and at reasonable cost (costeffectiveness), and that once mobilized, these
resources are protected from impairment and
spent according to mission and
donor purposes.
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