This paper seeks to examine the financial management relationship between non-profit and for-profit organizations. A recent surge to push non-profit organizations to behave in a more business-like manner has resulted in an evaluation of the financial management practices. This paper examines a few of the similarities and differences amongst the two organizational types in relation to source of funding, performance evaluation measures, and governing mechanisms. The analysis of non-profit organizations leads to an understanding that many of the same methods used in examining for-profit organizations are suitable. However, it is important to take into consideration that the goal of a non-profit organization is the overall mission. Therefore, the evaluation should be based upon this fact.
The Small Business Encyclopedia defines a non-profit organization (NPO) as an institution with a purpose directed at assisting individuals and groups without regard for turning a profit (Nonprofit, n.d.). They are classified as any organization whose charter explicitly prohibits the distribution of profits to members. Moreover, non-profit organizations must demonstrate that they provide a public benefit (Moxham, 2009). Not all non-profits are charitable organizations. NPOs cover many areas of expertise including churches, hospitals, and the arts to name a few. Recently, there has been a push for non-profit organizations to behave more business-like (Moxham, 2009). Because of the organizational structure, the financial management of NPOs must be examined in order to achieve this objective. There are many similarities in relation to financial management that exist between for-profit and non-profit organizations. However, there are some differences between the financial management of for-profit and NPOs that require a different approach. These similarities and differences are explained in their source of funds, performance evaluation measures, and corporate governing structure.
Sources of Funds
The source of funding for non-profit and for-profit organizations is closely related to the goal of the organization. The main goal of a for-profit organization is to maximize shareholder capital. The shareholders, in turn, are willing to provide equity to support the firm’s mission. The firm will take the financing from shareholders and invest in opportunities that will increase the firm’s future cash flows. A portion of this cash flow is returned to the stockholders in the form of dividends and stock options (Bauer, Richardson, & Collins, 2009).
The survival of non-profit organizations, however, is based on their ability to obtain resources. The main source of equity for non-profit organizations is charitable donations. This is also supplemented by grants, contracts for service and the sale of goods (Carroll & Stater, 2008). Whereas most for-profit organizations are evaluated on the basis of their ability to maximize shareholder capital, non-profit organizations are often evaluated on the relationship between contributions and expenses. This relationship will indicate to potential contributors the amount of funds that will be used to meet the mission of the organization. Because of this, it is important that non-profit managers seek out opportunities that will reduce administrative costs and increase the social return of stakeholders. Unlike for-profits, NPO cash flows as the result of operations are recycled back into the organization to further the group’s mission (Bauer, Richardson, & Collins, 2009).
Although each organization relies on a different equity source, both can be affected by the economic downturn. A recession or economic decline can result in the shortage of financing for both firms. Investors and contributors may not have the capital available to supplement the organizations efforts. In addition, the risk to investors may be too high to guarantee a return on their investment. A for-profit...
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