Not for Profit objectives
Their mission permeates the way they do business
Primary goal is NOT shareholder wealth
- A not-for-profit organisation’s primary goal is not to increase shareholder value; rather it is to provide some socially desirable need on an ongoing basis.
- A not-for-profit generally lacks the financial flexibility of a commercial enterprise because it depends on resource providers who often gain no tangible benefit themselves.
Stewardship of resources given to it is more important
Thus the not-for- profit must demonstrate its stewardship of donated resources — money donated for a specific purpose must be used for that purpose.
That purpose is either specified by the donor or implied in the not-for-profit’s stated mission.
Budgeting and cash management is very Important
Budgeting and cash management are two areas of financial management that are extremely important exercises for not-for-profit organisations.
The organisation must pay close attention to whether it has enough cash reserves to continue to provide services to its clientele.
Cashflow and funding is unpredictable
Cash flow can be extremely challenging to predict, because an organisation relies on revenue from resource providers that do not expect to receive the service provided.
In fact, an increase in demand for a not-for-profit’s services can lead to a management crisis.
Funding is therefore a key objective.
Objectives hard to quantify
The non financial objectives are often more important in not for profit organisations.
However, they are harder to quantify
eg Quality of care
Value for money as an NFP objective
Economy – Buy goods at minimum cost (still paying attention to quality)
Efficiency – Use these goods to maximise output
Effectiveness – Use these goods to achieves objectives
Another way of looking at these is:
Economy – ‘doing things at a low price’
Efficiency – ‘doing things the right way’
Effectiveness – ‘doing the right things’
A final way of looking at these is as input – process – output
Inputs – Economy – get as cheap as possible given quality
Process – Efficiency – perform the process as efficiently as possible
Outputs – Effectiveness – These match the objectives set
Input driven – Try to get as much out given limited inputs e.g. library
Output driven – Maintaining standards even when output changes eg Prison service
Question
Compare and contrast the financial objectives of a stock exchange listed company and the financial objectives of a not-for-profit organisation such as a large charity.
Answer:
A key financial objective for a stock exchange listed company is to maximise the wealth of shareholders. This objective is usually replaced by the objective of maximising the company’s share price, since maximising the market value of the company represents the maximum capital gain over a given period. The need for dividends can be met by recognising that share prices can be seen as the sum of the present values of future dividends.
Maximising the company’s share price is the same as maximising the equity market value of the company, since equity market value (market capitalisation) is equal to number of issued shares multiplied by share price. Maximising equity market value can be achieved by maximising net corporate cash income and the expected growth in that income, while minimising the corporate cost of capital. Listed companies therefore have maximising net cash income as a key financial objective.
Not-for-profit (NFP) organisations seek to provide services to the public and this requires cash income. Maximising net cash income is therefore a key financial objective for NFP organisations as well as listed companies. A large charity seeks to raise as much funds as possible in order to achieve its charitable objectives, which are non-financial in nature.
Both listed companies and NFP organisations need to control the use of cash within a given financial period, and both types of organisations therefore use budgets. Another key financial objective for both organisations is therefore to keep spending within budget.
The objective of value for money (VFM) is often identified in connection with NFP organisations. This objective refers to a focus on economy, efficiency and effectiveness. These three terms can be linked to input (economy refers to securing resources as economically as possible), process (resources need to be employed efficiently within the organisation) and output (the effective use of resources in achieving the organisation’s objectives).
Described in these terms, it is clear that a listed company also seeks to achieve value for money in its business operations. There is a difference in emphasis, however, which merits careful consideration. A listed company has a profit motive, and so VFM for a listed company can be related to performance measures linked to output, e.g. maximising the equity market value
of the company.
An NFP organisation has service-related outputs that are difficult to measure in quantitative terms and so it focuses on performance measures linked to input, e.g. minimising the input cost for a given level of output.
Both listed companies and NFP organisations can use a variety of accounting ratios in the context of financial objectives. For example, both types of organisation may use a target return on capital employed, or a target level of income per employee, or a target current ratio.
Comparing and contrasting the financial objectives of a stock exchange listed company and a not-for-profit organisation, therefore, shows that while significant differences can be found, there is a considerable amount of common ground in terms of financial objectives.