The financial management strategies in NPOs are concerned with managing an organization's assets, liabilities, revenues, profitability and cash flow. Strategic financial management goes a step further in ensuring that the organization remains on track to attain its short-term and long-term goals, while maximizing value for its shareholders.
Financial management of NPOs includes managerial activity which is concerned with the planning and controlling of the firm's financial resources. Planning, directing, monitoring, organizing and controlling of the monetary resources of an organization.
There are 3 important decisions involved in NPOs which are:
1. Financing or where money is obtained from.
2. Investing or where funds are allocated.
3. Dividend or how much to distribute and what to retain.
The problem statement of my research report is:
“Financial strategies of Non Profit Organizations are similar or different to those followed in Commercial Organizations”
What are the financial objectives of non-profit organizations?
What strategies are common between NPOs and commercial organizations?
What strategies are different between NPOs and commercial organizations?
What is the degree of overlap between the financial management strategies of NPOs and commercial organizations?
HYPOTHESES:
H0: Financial Management Strategies of NPOs are different to those of commercial organizations.
Hl: Financial Management Strategies of NPOs are similar to those of commercial organizations.
H2: Finance operations of NPOs are different to those of commercial organizations.
H3: Finance operations of NPOs are similar to those of commercial organizations.
The Accounting system of commercial organization is to record the financial consequences of organizational activities. This covers any activity undertaken by or on behalf of an organization that results in a financial Obligation or benefit. Three elements Of Accounting are identified:
Accounting convention Transaction process:
Commercial organization’s transaction processing involves the recording and settlement of financial transactions arising from organizational activities. Cash obligations, payments and receipts are coded and recorded, usually through a double-entry bookkeeping system including standard ledgers of debtors, creditors, cash book and general. The invoices of commercial organizations makes in single currency.
Income:
Income of Commercial organizations based on selling of goods and services while nonprofit organizations get income/fund from donors.
Expenditure:
Commercial organizations bear all expenses by their self .Expenses are paid from the income.
Currency Account:
The accounts of commercial organization are recording in single country’s currency.
The Accounting system of commercial organization is to record the financial consequences of organizational activities. This covers any activity undertaken by or on behalf of an organization that results in a financial Obligation or benefit. Three elements Of Accounting are identified:
Accounting convention Transaction process:
Commercial organization’s transaction processing involves the recording and settlement of financial transactions arising from organizational activities. Cash obligations, payments and receipts are coded and recorded, usually through a double-entry bookkeeping system including standard ledgers of debtors, creditors, cash book and general. The invoices of commercial organizations makes in single currency.
Income:
Income of Commercial organizations based on selling of goods and services while nonprofit organizations get income/fund from donors.
Expenditure:
Commercial organizations bear all expenses by their self .Expenses are paid from the income.
Currency Account:
The accounts of commercial organization are recording in single country’s currency.
Accounting & reporting:
The aggregations of financial transactions of commercial organization in general ledgers together with any required accounting adjustments enable the production of trial balances based on charts of accounts. The trial balances in turn enable the production of basic accounts in the form of profit and loss Statements n and balance Sheets. The double-entry system provides a central unifying process and global standard for accounting.
Financial control:
Financial controls are required by commercial organization to ensure the protection of assets and to ensure that all financial transactions are accurately recorded and reported.
2. FUNDING AGREEMENT:
The purpose of funding activities in commercial organizations is to inform and engage with investor and funder both current and potential to obtain and maintain the necessary financial resource for the organization. Engagement includes the provision of information relationship building and negotiation. The provision of information enables investor and funder to appraise performance, actual and projected, in relation to their financial interest in the organization. This information is addition to that which is publicly available through regulatory disclosures.
The activity studies may possess mixed stake holdings and/or hold hybrid financial Instruments. This show a split between investor relations and debt financing as detailed in which summarizes the evidence.
Funders include those providing loans, asset finance, grants etc. Some institutions add a layer of complexity but do not impact the core issues.
INVESTORS:
Investors are those who provide moneyfundfinance to commercial organization. Investor relations are largely concerned with equity investors including individuals, fund management institutions, hedge funds and private equity organizations. Their objective is generally to achieve a financial return. Criterion for guiding their investment decisions include the potential for growth in shareholder value relative to the riskiness of the investment; the level of running returns achievable through dividends, and gains achieved through an exit.
Accordingly, their interests are met by providing guidance on the financial prospects of the organization, how plans will be achieved and the risks involved. The level of information equity investors can obtain will be determined by the extent and nature of their equity holding and their relationship with the organization and other shareholders.
For example, a majority shareholder of a private company is likely to have full access to all available internal information; the information access of a shareholder in a quoted company will be determined by listings requirements
DEBT FINANCING
Those providing debt finance covered by the practitioner studies are in broad terms commercial
Lenders (e.g., banks). Their focus is to ensure that their loans plus interest and fees are repaid, either from operating cash flow or from the liquidation of collateral. Thus, their requirements are met if an organization remains, generates sufficient cash to meet repayment requirement and ensures that any security provided retains its value and remains unencumbered. Finance activities include negotiating with debt funders who are aiming to protect their position by negotiating terms and lending covenants that set minimum performance criteria, which, if met, are intended to ensure repayment.
Typically, a flow of information will be agreed (e.g., monthly accounts, covenant results) which will allow the funder to confirm compliance on an ongoing basis and to take action to recover funds in the event of the agreed terms and criteria not being met in the solvency of the organization to ensure its continuity.
3. CASH MANAGEMENT AND DISBURSEMENTS:
CASH MANAGEMENT:
Cash management of commercial organization is a set of strategies or techniques a company uses to collect track and invest money. Normally commercial organizations invest to improve the quality of their goods and services to make more profit. Although cash by definition refers only to paper or coin money, in cash management, companies usually also work with cash equivalents such as checks. This is becoming increasingly common as the money system becomes more abstract, using electronic methods.
Commercial organization uses a wide variety of techniques in cash management. One of the simplest is checkbook or account balancing, also known as reconciliation. Investing in stock and other securities is also part of financial management strategies for many businesses. Many organizations use software programs to automate how the business collects funds from clients. Agencies routinely use other methods such as Internet services, armored car services, automated clearing houses, controlled disbursement, lockboxes, positive pay and reverse positive pay, cash concentration and balance reporting.
Commercial organizations may collect funds dropped off at their location, by mail, or electronically. For payments received in person or in the mail, an institution may use either its own processing center or a lockbox. In a lockbox system, an institution collects payments through one or more locations and transfers available funds to a concentration bank as discussed below. A processor (i.e., bank or any third party) receives mail at a specified lockbox address, processes the remittances, and deposits them in the commercial organization's account. The economic benefit of using a lockbox is a trade-off between reducing collection float and paying fees to a lockbox processor over and above internal processing costs. Institutions can also collect payments electronically via wire transfer or an automated clearinghouse (ACH) system. Wire transfers are used for large dollar payments when speed and finality are important. Electronic payments through the ACH are less expensive than wire transfers, but payment instructions must be submitted to the bank 1 or 2 days prior to settlement. The primary advantages of an electronic collection system are the reduction in float and processing costs.
DISBURSEMENT:
A cash disbursement in commercial organization is typically a payment for goods or services. Companies will experience numerous disbursements as they run operations. To handle these frequent payments, accountants will often set up a cash disbursement system. This involves a repeatable process to ensure prompt payment and a secured environment for tracking cash expenditures.
Purchase Order
• Many commercial organizations require the use of purchase orders to start the cash disbursement process. Managers or employees who desire goods for their department must fill out the requisite documents. A purchase order details the vendor's name, quantity, description and cost of goods and a short reason for the item's necessity. Purchase orders often have multiple copies. One stays with the originator, another goes to management and a third to the accounting department.
Approval Process
• Cash disbursements typically require the approval of a manager. Commercial organizations may set dollar/rupees limits to allow small purchases. This prevents bogging down a department by completely limiting the cash disbursement system. Large disbursements will result in managerial review of the purchase order requesting goods or services. Accountants will typically not act on an unauthorized purchase order. Management authorization is a necessary control to prevent the waste of a company's capital.
Cash Disbursements Journal
• Accountants record all cash disbursements in a specific journal. This allows for reference at later times when reviewing or reconciling disbursements with purchase orders. Accountants will only record transactions involving cash in this journal. Journal entries will include the date, brief description and dollar/rupees amount relating to the disbursement. The other account is typically an expense or asset account in the general ledger.
Reconciliation
• Commercial organizations often require reconciliation between the cash disbursements journal and their bank account. This reconciliation will ensure all payments made clear the bank and none remain outstanding. Accountants prepare a short report that will list all disbursements currently outstanding. These include checks not received by vendors or other parties. Research is often necessary to determine why payments never reach their destination. Accountants continue this report each accounting period to ensure the disbursement journal balances each period.