Any organization, whether for profit or not for profit, requires experienced and able management especially those responsible for finances for it to thrive. Financial management can be referred to as the strategic planning, directing, controlling and organizing of financial activities in an institute or organization. Financial management includes also the application of management principles to the finances of an organization. It's one of the most critical aspects of business and excellent expertise is required in financial management.
Financial management is all the same but requires a different approach when managing finances of a not for profit organization since these institutions are faced with many financial management issues. One of the major financial management issues faced by nonprofit organizations is the challenge of soliciting adequate funds to operate their organization since money from government grants, foundation grants and donations can change from year to year (George, 2018). Small organizations may also face the challenge of inadequate experienced resources to put into the process of grant application.
Causes of Financial Management Challenges in NPOs- Funding Sources
In every nonprofit organization, there is no one specific source of funding. Funds are coming in from many different sources like fundraisers, grants, donors and members among other sources. The most difficult task that comes with the issue of many financial sources is keeping track of all the cash from different sources (Aldashev et al., 2017). It is very difficult and confusing which makes it a necessity to have experienced accountants and financial managers keeping the organization's books of accounts. Also, identifying long term sustainable sources and acquiring new funding sources is a major problem facing nonprofit organizations.
Being capable of keeping all of these financial sources straight is key to addressing the major financial challenges in an organization. A software for accounts receivable is necessary which sets automatic alerts to inform you on who needs to pay, who has paid, how many days to payment among other alerts. This will help financial managers to automatically detect who among their funders have paid and who is yet to pay.
Cash Flow Management
Cash flow is always a challenge for both for-profit and nonprofit organizations but unlike for-profit, nonprofit organizations cannot give out discounts to boost sales when in a strict financial situation (Gottlichova and Soukalova, 2015). Not for profit cannot go out giving discounts to customers or sell more. If the grants from the government of any other donor does not cover all the expenses of the organization, the nonprofit organization is supposed to formulate a development plan to compensate.
To curb this challenge of cash flow management, an organization is required to improve its planning and budgeting process. Also, an organization can improve cash flow forecasting. Invest the energy, cost and time in creating detailed cash flow forecasts and operating budgets (McClish and Reeve, 2018). When cash flow is properly planned and monitored, an organization is capable of foreseeing possible issues and take necessary action before they occur.
Inadequate Back Office Operation Funds
Income and accounting in nonprofit organizations is different. Government funding and fundraising is how most of the nonprofit organizations acquire funds for their operations, and all profits must be reinvested into their operations. This means that there is no place for error and no emergency kitty. This also means that there are not enough funds to hire a quality experienced accountant which limits the organization's ability to improve its finances. Not owning the professional experience needed to run vital back-office functions in the organization is a major challenge facing nonprofit organizations (Kim and Peng, 2018). Outsourcing the accounting and bookkeeping function can be used to address this challenge which ends up saving more than 35% of the organization's funds.
Strict Audit Requirements
Nonprofits are required to adhere to higher standards of internal controls and reporting than other small businesses. This is because, nonprofits use donated money-funds from the public- and all finances must be traceable (George, 2018). Moreover, NPOs are responsible for the predetermined use of their finances to further their missions. Reconciling all balance sheets accounts and updating audit work-papers every month can be used to address this problem.
NPOs always turn to grants since they have small budgets. However, grant providers never make the process easy. Often, granted money is always limited to a certain specific expense (Lena, 2018) Accountants in the nonprofits spend a lot of time tracking which funds go where, which grants are received and the specific time that a grant will be collected. Easily tracking these grants would save the accountants lots of time for researching new grants to pursue and this can be addressed by coming up with an accounts receivable software instead of keeping files in the office.
Lutheran World Relief is a nonprofit organization that works with partners all around the world to fight poverty, human suffering, and injustice. However, the organization faces a challenge of inadequate funds. Since their operations are based all around the world, they sometimes find it difficult to intervene in some situations due to a lack of funds. This limits their scope of operations.
Aldashev, G., Jaimovich, E., & Verdier, T. (2017). Small is Beautiful: Motivational Allocation in the Nonprofit Sector. Journal of the European Economic Association, 16(3), 730-780. https://doi.org/10.1093/jeea/jvx024
George, C. (2018). The Funding of Start-up Nonprofits: An Exploration of Funder Perceptions, Attitudes, and Advice. Retrieved form https://scholarship.richmond.edu/spcs-nonprofitstudies-capstones/2/
Gottlichova, M., & Soukalova, R. (2015). Options for innovation of marketing approaches to the market in the non-profit sector. Procedia-Social and Behavioral Sciences, 175, 334-341. https://doi.org/10.1016/j.sbspro.2015.01.1208
Hildreth, W. B. A. (2009). The financial logistics of disaster: The case of Hurricane Katrina. Public Performance & Management Review, 32(3), 400-436. DOI: 10.2753/PMR1530-9576320303
Kim, M., & Peng, S. (2018). The dilemma for small human service nonprofits: Engaging in collaborations with limited human resource capacity. Nonprofit Management and Leadership, 29(1), 83-103. https://doi.org/10.1002/nml.21314
Lena, J. C. (2018). The Process Model of Closure and Nonprofits: The Exit of Exit Art. The Journal of Arts Management, Law, and Society, 48(1), 17-31. https://doi.org/10.1080/10632921.2017.1398116
McClish, S. J., & Reeve, K. M. (2018, July). Earned Income: The Secret to Success for the Nonprofit Seeking Financial Sustainability?. In Proceedings of the International Association for Business and Society (Vol. 29, pp. 71-83). DOI: 10.5840/iabsproc2018298
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