Financial Management in Nonprofit Organizations Essay - 3

Financial Management in Nonprofit Organizations - Essay Example Another important difference in the financial management of the two types of organizations is the constraint of non distribution. Nonprofit organizations cannot distribute the profit generated to the owners. Nonprofit organizations do not have any owners. Thus the people who fund the organizations do not necessarily gain any kind of control over the firm. The nonprofit organizations have board just like profit making organizations. Although there is one major difference, that the boards of the nonprofit organizations are self appointed. Thus the board members are not accountable to the shareholders. There is considerable debate in these two matters, one is the bringing in accountability in the actions of the board members and other one is granting the investors with the rights to control the firm. It is advisable that the board members be held accountable for the actions taken, since this will help to bring in controllability and responsibility in the actions. The second recommendati on is to grant the investors who provide the firm with specific and important investments, the right to control the firm to some extent. Introduction The mode of operations for a nonprofit organization is markedly different than that of a profit making organization. ... he topics which are chosen for further discussion are difference in the sources of fund, difference in the use of debt, difference in the evaluation of the performance and the difference in the mechanism of governance in the nonprofits. Sources of fund In case of debt financing a nonprofit organization organization has options to raise funds from grants, debts, overdraft and line of credit. Whereas an organization that works for the generation of profit are allowed to raise funds from the operations and financial capital markets. The concept is very simple, the net income is income left after deducting all kind of expenses from the total revenue is utilized in two ways, either it is given away to the investors or is utilized for the purpose of the business (Stephen, 2012). A nonprofit organization organization can only retain the profit for its business purposes and cannot distribute profit to the equity holders. Thus it is not able to finance using equity shares and thus it is barre d from raising money from the capital market. Unlike a FP organization, a nonprofit organization organization sets short term goals and objectives. This is the same reason for which the debts are used in a different way in both the organizations. A for profit organization may use short term debt for both long term as well as short term purposes. For example the for profit organization which is in need of $ 10 million, can resort to short term financing of $ 2.5 million in four equal installments (Stigler, 2011). The cost of financing through such short term borrowing will be considerably more, producing a debt burden over the organization. For profit organization can still manage to pay for the interest as well as the principal due to the fact that they enjoy a steady flow of cash