Financial Management in Nonprofit Organizations

Financial Management in Nonprofit Organizations

Introduction

Not-for-profit-organizations, also called non-profit organizations, are the institutions of the “third sector.” This third sector comprises organizations that cannot be ascribed to the government (public) or to the market (private) sectors. For this reason, not-for-profit organizations are also referred to as nongovernmental or nonmarket organizations. Not-for-profit organizations do not strive for the maximization of profits. The sufficient financial goal is a balanced budget. As a consequence, maximization of revenues and minimization of expenses is pursued only to the point of a balanced budget. Hence, financial efforts of the not-for-profit organizations are restricted.

To incorporate, a nonprofit organization must first develop articles of incorporation, which provide a legal description of the organization and also assign power to the board of directors. The articles of incorporation are filed at the secretary of state's office. Most nonprofit organizations will engage professional legal counsel to guide this process, which results in an additional cost to the incorporation process. This paper explores the financial management in nonprofit organizations and presents an analysis of financial management application techniques in nonprofit and for-profit organizations.

Business Development and Financing Structure of Nonprofit Organizations

Nonprofit organizations grew rapidly in the 1970s and 1980s. Between 1975 and 1990, revenues at nonprofit organizations increased 227%, a rate more than four times the pace of the overall U.S. economy (Gulant et al., 2008). The nonprofit sector's share of the nation's gross domestic product, or GDP (the total output of goods and services produced within a nation's borders), increased to 10% in 1990 from 6% in 1975. Nonprofits now employ 10% of the U.S. work force--7.8 million people--according to the Census Bureau (Hopkins, 2009). While a few decades ago most of a typical nonprofit's revenues came from annual membership dues or donations, today's nonprofits are generating substantial income from business ventures. Nonprofits now sell greeting cards, T-shirts, insurance and pain relievers. They operate travel services and health clubs. An increasing number are profiting from lucrative licensing agreements in which a nonprofit's name and seal of approval is lent to a company's product (Bowman & Fremont, 2006). As nonprofits have diversified, an outcry has gone up from tax-paying, for-profit businesses that compete with them. Many say that nonprofits' tax-exempt status gives them an unfair competitive edge. Because nonprofits avoid taxes, critics argue, they can offer similar but higher-quality products at lower prices (Burke, 2008).

The nonprofit orientation goes along with the non-distribution constraint, which denotes that the organization is not allowed to distribute the profit among the members. This is a second reason why not-for-profit organizations “might be expected to be less vigilant in eliminating unnecessary expense than are their for-profit counterparts. Nonprofits, however, defend their right to earn money from commercial ventures, such as the sale of member mailing lists and corporate logos (McNamara, 2000). They say that as long as they devote these moneys to their organization's tax-exempt purpose, they operate well within the law (Piche, 2009).

Washington, D.C. lawyer Holly Schadler recently helped the Sierra Club, an environmental ...