This chapter defines the term “budget” and explains the importance of the budget for a nonprofit organization. It describes the different types of budgets and provides the most common budget approaches. The most common types of budgets are an operating budget, a cash budget, and a capital budget. The chapter also describes the process of developing a budget in a nonprofit organization and presents the relationship between the budget and financial sustainability in nonprofit organizations. Budget techniques are central to the successful operation of all organizations. A budget enables organizations to allocate scarce resources, control operations, and manage performance. A budget is the translation of an organization’s plans and priorities. The chapter helps the readers to learn the basic concepts and practices of budgeting in nonprofit organizations. It also explains the essential role played by budget approaches and techniques in the successful and sustainable operations of a nonprofit organization.
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This chapter discusses the legal and organizational roles of the board of directors and special committees in the governance and financial sustainability of a nonprofit organization. It describes the differences between governance and government, and identifies some common governance theories. Corporate governance is often analyzed around major theoretical frameworks. The most common are agency theories, stewardship theories, resource-dependence theories, and stakeholder theories. The chapter highlights the key governance structures and perspectives in nonprofit organizations and lists some key principles of nonprofit governance. Governance models or approaches are considered in an eclectic perspective that combines empirical observations and literature related to nonprofit and for-profit organizations as micro societies. Eclectic perspective considers nonprofit board governance through functionalism, structuralism, structuro-functionalism, and symbolic perspectives. The chapter explores conceptual and theoretical frameworks that explain governance in nonprofit organizations in the context of financial sustainability.
This chapter introduces the concept of financial sustainability in relation to the use of financial statements. It also introduces selected financial ratios to assess the profitability, liquidity, solvency, efficiency, and effectiveness of a nonprofit organization. Profitability is the surplus of revenue over expenses. Profitability used to be a forbidden word in the nonprofit world. Many nonprofit organizations are faced with the challenge of undercapitalization and do not have enough cash or liquidity to pay their regular bills. The liquidity of an organization can be measured by the current ratio, the net working capital, and the acid test or quick ratio or liquidity ratio. Solvency is different from liquidity because it deals with the long-term ability of an organization to continue to exist and expand. The debt ratio and the debt-to-equity ratio are two common measures of organizational solvency.
This chapter defines the concept of social marketing and provides some of the common areas for the use of social marketing by nonprofit organizations. The term “social marketing” has been used for several decades to refer to a systematic process of using marketing strategy to influence current behaviors of a target population into a desired behavior in order to positively change a social or community issue. The chapter describes the contents of a social marketing plan. A social marketing plan is a document that justifies the needs for a social marketing campaign, as well as the process of implementation by outlining a SWOT (strength, weakness, opportunity, threat) analysis, a description of the target population, the goals and objectives, an impact statement, the marketing mix strategies, an implementation plan, an evaluation plan, and a budget. The chapter establishes the relationship between social marketing and financial sustainability.
This chapter describes a financial sustainability plan and explains the importance of a financial sustainability plan for nonprofit organizations. It discusses the elements of a financial sustainability plan. A financial sustainability plan should include an executive summary, financial sustainability analysis, financial ratios analysis, strategic goals and objectives, action plan, benchmark and outcomes, continuing quality improvement strategies, and budget. Many nonprofit organizations are faced with a constant challenge to match financial sustainability with their vision and mission statements. Some of the challenge may have to do with how much money they can successfully raise. This aspect can be manipulated by greater fund-raising efficiency and effectiveness. The chapter suggests approaches and best practices in developing a financial sustainability plan for a nonprofit organization. It includes a step-by-step process to use to develop a financial sustainability plan.
This chapter explains the purpose and benefits of information systems for nonprofit organizations. Information technology refers to the means of access to information and related services that combine various support and devices, such as telephone, computer, software, and the Internet. Information technology includes all computer-based information systems and related technology used by organizations in the operation of their programs, activities, or services. The chapter discusses the dimensions of information systems and also discusses the most common types of information systems in organizations. Some organizations develop and maintain: executive information systems, management information systems (MIS), and transaction processing systems. Effective information system must meet at least five criteria such as accuracy, completeness, consistency, relevance, and timeliness. The chapter presents the relationship between information technology and the financial sustainability of nonprofit organizations.
This chapter defines the concept of risk and discusses the mechanics of risk management. A risk is the potential for negative, unwanted, or unpredictable consequences from an event, an activity, or a decision. Risk management involves making and carrying out decisions for the organization that will minimize the effects of risk. The chapter identifies the common areas of risk for nonprofit organizations and presents various types of risks related to management of a nonprofit organization. It introduces the theories and practices of integrated risk management in relation to its contributions to the financial sustainability of a nonprofit organization. The chapter describes the nature and contents of a risk-management policy. Risk-management options refer to the decisions of an organization to take action or purchase insurance for the purpose of: Risk avoidance, risk reduction, risk retention, risk sharing, and risk transference. The chapter explains the relationship between risk management and financial sustainability.
This chapter focuses on the asset-based approach to community development. It provides the different types of assets that create opportunities for a nonprofit organization, describes the asset-mapping process, and explains the relationship between asset mapping and financial sustainability. The chapter introduces the theories, concepts, and approaches of asset mapping as a strategy to help nonprofit organizations identify obvious and hidden assets within their communities, and mobilize them to connect issues and needs with assets, and foster the financial sustainability of a nonprofit organization. It examines the community context of nonprofit organizations in relation to community groups, neighborhoods, and larger social systems that influence quality of life. The chapter includes the concept and theory of community capacity, models of asset-based development for building community capacity, empowering individuals and groups, generating funding from new sources, and creating additional paths toward financial sustainability.
This chapter describes the concept of investment and the items in an investment policy statement. Investment is the purchase of a financial or real asset by an individual, an organization, or an institution, in order to generate a return over time, which is proportional to the risk assumed during the investment period. The chapter identifies the different types of investments available for nonprofit organizations. The most common types of investments are short-term investment vehicles and fixed-income securities. Contrary to short-term investments, long-term investments are made with funds that are not needed for use in a period of less than a year. Examples of long-term investments are pension funds, self-insurance funds, and endowment funds. The chapter explains the extent to which investments can contribute to financial sustainability of nonprofit organizations. It summarizes the key principles for investment management and examines the management structures involved in investment for nonprofit organizations.
This chapter defines the concept of financial statement and introduces the generic structures or formats of three main financial statements: the income statement, the balance sheet, and the statement of cash flow. The income statement includes three major sections: The income or revenues, the expenses or expenditures, and the balance or summary. The balance sheet of a nonprofit organization includes three main sections: Assets, liabilities, and fund balance. The chapter establishes the differences between an income statement and balance sheet. It explains the sections of Internal Revenue Service (IRS) Form 990 related to the income statement and the balance sheet. The chapter explores the principles and procedures used to develop various financial statements and link them to the legal financial reporting requirements for a nonprofit organization. It helps the reader to gain experience with the basic terminology and tools to read nonprofit and public financial statements.