FINANCIAL MANAGEMENT IN NONPROFIT ORGANIZATIONS

Financial Management in Nonprofit Organizations

Financial Management in Nonprofit Organizations

Introduction

Non-profit organizations are referred to as any entity that functions like a normal business but does not look for monetary or financial gain, instead these organizations work for the well being or welfare of the society. Examples are churches, community service organizations schools etc. Non profit organizations often provide goods and services to consumers while they pursue other rewards such as striving towards the welfare of the society by improving educational standards, seeing the sick become well, and helping those in need. Many are legally incorporated to take advantage of the unlimited life feature such as private welfare groups, adoption agencies, and youth or civic clubs. (Malcolm, 2004).

Organizations such as Hospitals, Fraternal Organizations, Civic Organizations, Universities and collages, Performing Arts Organizations, Labor Unions, Political Parties, Professional Associations, Other Cultural Institutions, Religious Organizations, Research and Scientific Organizations, Social and Country Clubs, Private Elementary and Secondary School, Zoological and Botanical Associations, Private and Community Foundations and Professional Unions.

According to IRS, Non-profit organizations are those entities that are eligible to generate revenues but are not allowed to disseminate their revenues or profits to those in control of the organizations. Another interesting feature of these non-profit organizations is that, in specific cases, they may not be required to pay state business income taxes or federal income taxes. This feature is the most differentiating factor between profit and non profit organizations. On the other hand, profit organizations are required to distribute their profits to partners or share holders (in case of public or private limited company) and are also required to pay both state business income taxes and federal income taxes. Moreover, non-profit (tax- exempt organizations) may also be free from other types of taxes such as sales tax, property tax, and use tax etc (Parker, 2003). In the following section, we will examine the contrasting features (such as sources of funds, use of debt, governance mechanism etc.) of both profit and non-profit organizations.

Discussion & Analysis

Organizations are established either to earn a profit or to render services through welfare activities. The concerns established with the aims of earning profit are called trading or profit making organizations. Sole trading concerns, partnership firms and joint stock companies are examples of trading concerns. On the other hand, the concerns established with the aims of rendering services are called non- trading or non-profit making organizations. These organizations are created for the promotion of arts, culture, games and sports, fine arts, hospitals, schools etc. Different types of clubs, societies, hospitals, libraries, community based schools, missionary organizations; colleges etc. are examples of non-trading concerns (Zietlow, 2007).

Following are the features of non-profit organization:

The objective of non-trading concern is to provide services to its members or society or target groups.

Non-trading concern, basically, relies on donated money and fees received from the members.

Books of accounts are prepared and maintained to provide information regarding the receipt and utilization of the donated money.

Non-trading concern does not distribute the surplus money to its member ...