Financial Management for Nonprofit Organizations

Policies and Practices

John Zietlow, Jo Ann Hankin, Alan Seidner, Tim O'Brien

• Publisher: Wiley
• Year: 2018
• ISBN:
  9781119382591
• Edition: 3
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

Essential tools and guidance for effective nonprofit financial management

Financial Management for Nonprofit Organizations provides students, professionals, and board members with a comprehensive reference for the field. Identifying key objectives and exploring current practices, this book offers practical guidance on all major aspects of nonprofit financial management. As nonprofit organizations fall under ever-increasing scrutiny and accountability, this book provides the essential knowledge and tools professional need to maintain a strong financial management system while serving the organization's stated mission. Financial management, cash flow, and financial sustainability are perennial issues, and this book highlights the concepts, skills, and tools that help organizations address those issues. Clear guidance on analytics, reporting, investing, risk management, and more comprise a singular reference that nonprofit finance and accounting professionals and board members should keep within arm's reach.

Updated to reflect the post-recession reality and outlook for nonprofits, this new edition includes new examples, expanded tax-exempt financing material, and recession analysis that informs strategy going forward.

• Articulate the proper primary financial objective, target liquidity, and how it ensures financial health and sustainability
• Understand nonprofit financial practices, processes, and objectives
• Manage your organization's resources in the context of its mission
• Delve into smart investing and risk management best practices

• Manage liquidity, reporting, cash and operating budgets, debt and other liabilities, IP, legal risk, internal controls and more
• Craft appropriate financial policies

Although the U.S. economy has recovered, recovery has not addressed the systemic and perpetual funding challenges nonprofits face year after year. Despite positive indicators, many organizations remain hampered by pursuit of the wrong primary financial objective, insufficient funding and a lack of investment in long-term sustainability; in this climate, financial managers must stay up-to-date with the latest tools, practices, and regulations in order to serve their organization's interests. Financial Management for Nonprofit Organizations provides clear, in-depth reference and strategy for navigating the expanding financial management function.

CHAPTER 1
UNDERSTANDING NONPROFIT ORGANIZATION FINANCES

1. 1.1 THE IMPACT OF THE GREAT RECESSION
2. 1.2 DEFINITION OF NONPROFIT ORGANIZATIONS
   1. (a) 501(C)(3) Corporations
   2. (b) Bylaws and Articles of Incorporation
3. 1.3 CHARACTERISTICS OF NONPROFIT ORGANIZATIONS
   1. (a) Organizational Mission
   2. (b) Organizational Structure
4. 1.4 UNDERSTANDING THE LANGUAGE OF THE NONPROFIT ORGANIZATION
5. 1.5 FINANCIAL POLICIES
6. 1.6 FINANCIAL PRACTICES
7. 1.7 PRIMARY FINANCIAL OBJECTIVE
   1. (a) Differences Between Businesses and Donative Nonprofits
   2. (b) Survey Evidence on the Primary Financial Objective
   3. (c) Financial Objective for Purely Financial Decisions
   4. (d) Recommended Primary Financial Objective: Appropriate Liquidity Target
8. 1.8 CONCLUSION
9. APPENDIX 1A: THE LILLY STUDY FINDINGS

Nonprofits include a wide variety of organizations. They are ubiquitous and are part of the fabric of most communities in the United States with a wide array of missions, such as local neighborhood associations, social service agencies, churches, hospitals, and private colleges and universities. These organizations differ from companies in the private sector and government agencies in the public sector in that many of them exist to provide services that cannot or will not be provided solely by the other sectors. Nonprofits also play a unique role in our economy.

Their missions are diverse and offer complexity beyond the scope of this book. While diverse, they have common characteristics such as the fact that they are voluntary and cannot distribute surplus. They also present challenges in terms of financial management and literacy. The intent of this book is to provide insights into the financial management of these organizations, how they differ from the other sectors, and how their finances are governed and managed. It is, in essence, about financial leadership in nonprofit organizations. Proficient financial management enables and enhances mission achievement.

The National Center for Charitable Statistics (NCCS) publishes Facts about Nonprofits:

• There are 1.57 million tax-exempt organizations of which over 1.1 million are public charities (2017).
• In 2013, public charities reported $1.73 trillion in total revenue and $1.63 trillion in total expenses.
• In 2013, public charities reported over $3 trillion in total assets.
• Charitable contributions from individuals, corporations, foundations, and bequests in 2014 were $358.4 billion (an increase of 7.1 percent over 2013).¹

In a report issued by The Moody's Foundation in 2012, financial literacy in nonprofit managers is increasing, but there is still much room for improvement.

As organizations deal with the fluctuations in their sources of funding, having an understanding of the need for financial flexibility has taken on increased significance, and financially literate managers can help their organizations craft sound strategies and objectives that will keep their organizations not only afloat, but thriving during temporary economic declines (Moody's 2012, 38).²

The number of registered charitable organizations has exploded from roughly 300,000 in 1970 to 1,599,471 in 2016. There are many more small organizations and churches that are not registered. One-half of the nonprofit sector's revenue goes to the largest 15 percent of these organizations, some of which are large hospitals and universities. Faced with growing missions and shrinking resources, many organizations have relied more on for-profit activities, such as issuing credit cards with their logos and selling their mailing lists to advertising firms in order to augment their revenues. Most of these same organizations have overlooked the potential of better financial management to enhance revenues from better investment management and faster cash collections or reduce costs from better negotiations with banks and other vendors and process reengineering.

1.1 THE IMPACT OF THE GREAT RECESSION

The Urban Institute and NCCS published a research paper in 2014 on how the “Great Recession” (2008–2012) impacted the nonprofit sector. The study examined the closure rates of nonprofit agencies for two time frames. The baseline timeframe was from 2004 to 2008 and the recession time frame from 2008 to 2012. They looked at closure rates across several subsectors: arts and culture; education; environment; health; human services; international affairs; public and societal benefit; and others. Some conclusions of this study:

• In all subsectors, organizational closure was more prevalent during the recession period than during the baseline period.
• In both time periods and across all subsectors, smaller organizations (revenues of between $50,000 and $99,999) were most vulnerable to closure.
• The largest increase in closure rates was in international organizations, while human services experienced the least increase.
• In addition to higher closure rates, the recession is also associated with loss of revenue among smaller nonprofits. Eight percent of all organizations with $50,000 to $99,999 in revenue in 2004 had revenue fall below $50,000 in 2008. That share jumped to 11 percent for the 2008 12-month period.³
• While this study did not directly state that organizations without sufficient liquidity did not do well, it could be considered a safe assumptions that in an era when revenues and liquidity were constrained, many did not survive.

In 2012, Baruch College (CUNY) conducted research in six cities to determine how the economic challenges of the great recession affected nonprofit organization. Researchers found that corporate donations, government grants, and inv...