The Application of Financial Management in nonprofit and for-profit Organizations
The financial management in nonprofit organizations is similar to the one carried out in for-profit organizations; nonetheless, there are a number of key differences on the financial management of nonprofit organizations as explained below.
Fund accounting
A key difference between the two is the focus of the organizations. In for-profit organizations, the financial manager is more concerned with profitability and maximizing the value of the shareholders. In a nonprofit organization, the primary goals is to satisfy a particular need for the target society on an ongoing basis (Seidner, Zietlow, & Hankin, 2013). Nonprofit organizations do not have the financial flexibility seen in other commercial enterprises since they are not involved in exchange transaction. For-profit organizations are free to use their resources in any way that maximizes shareholder value. This is unlike nonprofit organizations which must show stewardship in the use of resources most of which are donated resources. Thus in the latter, resources are used as per the wishes of the donors.
Reporting
Nonprofit organizations employ different reporting methods and statements compared to for-profit organizations. In for-profit organizations, the main aim is to turn a profit. As such, it is necessary to provide a Balance Statement that gives information about the organization’s equity as well as company stock. For-profit organizations are also required to provide an income statement showing the company’s profits, losses, expenses, and any revenues. Nonprofit organizations are not required to prepare a Balance Statement since they are not profit oriented. Instead, they are supposed to prepare a Statement of Financial Position which shows the net assets of the organization. In addition, nonprofit organizations do not prepare an Income Statement like in for-profit organizations, but rather prepare a Statement of Activities which shows the various activities’ revenues and their expenses (Seidner, Zietlow, & Hankin, 2013).
Related: Introduction to Strategic Management
Taxation
In most cases, the government does not require nonprofit organizations to pay income taxes. However, they may at times be required to pay sales tax or real estate tax. Nonetheless, the funds nonprofit organizations receive may be subject to taxation. For-profit organizations are required to pay income taxes to the government.
Budgeting
Budgeting in nonprofit organizations is often a complex undertaking. It is guided by the mission and goals of the organization (Jean-François, 2015). In these organizations, constant budget modifications must be made in order to deal with overlapping categories. Budgets in nonprofit organizations show the objectives and plans outlined by the management and covers different phases of operations. In some situations, the nonprofit organizations may be driven by the need to create working capital. In this case, the nonprofit organization aims at having a budget imbalance in terms of revenues exceeding expenses. However, the nonprofit organization may not be too aggressive in building the surplus since this may create the impression that it has deviated from its core purpose of established mission. In for-profit organizations, budgeting may not be complex. This is because there are projected income inflows and outflows which make the undertaking much easier.
Asset management
Asset management in nonprofit organizations takes the going concern perspective. As such, there is the assumption that the organization has an indefinite future. The management must ensure that the liquid assets of the organization are sufficient to cater for current operations. After the budget development, nonprofit organizations seek to balance the financing of current operations and the pool of available liquid funds. In for-profit organizations, liquidity problems can be solved by borrowing funds (Jean-François, 2015).
References
Jean-François, E. (2015). Financial sustainability for nonprofit organizations. New York, NY: Springer Publishing Company.
Seidner, A. G., Zietlow, J., & Hankin, J. A. (2013). Financial management for nonprofit organizations: Policies and practices. Hoboken, N.J: Wiley.
