«(paper proposal) Dan W. Hess Professor of Finance School of Business Seattle Pacific University Seattle, WA 98119 206-281-2192 hessd ...»
INTEGRATING FINANCIAL CONCEPTS
OF NONPROFIT ORGANIZATIONS
INTO THE FINANCE CURRICULUM
Dan W. Hess
Professor of Finance
School of Business
Seattle Pacific University
Seattle, WA 98119
INTEGRATING FINANCIAL CONCEPTS
OF NONPROFIT ORGANIZATIONS
INTO THE FINANCE CURRICULUM(Abstract) Although nonprofit organizations are a major sector of economic activity and many of our students will eventually find employment in this area, it tends to be neglected in the finance curriculum. This is all the more unfortunate and surprising given the explicit Christian mission found at most CBFA schools. This paper will identify and discuss the unique problems and differences encountered by nonprofit’s in their finance/treasury departments. Given this background, the paper will then propose how the finance curriculum could be enriched by suggesting specific nonprofit concepts that would be most useful for infusion into finance courses.
The argument has been made that economic criteria such as maximizing value or earnings dominate decision making in for-profit organizations. But, such criteria are secondary or nonexistent in nonprofits, especially service based nonprofits whose primary focus is providing aid to the indigent. Here there are competing criteria such as religious values, compassion, community needs and the primacy of the service ethic. Since not- for-profits (N.F.P.’s) technically don’t seek to maximize profit, do these competing criteria significantly alter the related treasury/finance function in these organizations?
This paper will delineate the similarities as well as the differentiating factors between 1 these two organizational forms specifically in the finance area. The purpose is to offer suggestions on how to incorporate the unique aspects and problems of nonprofits into our finance courses with the goal of increasing the mission fit and relevancy of the finance curriculum.
The methodology for the paper will consist of field and telephone interviews with several financial managers at nonprofit organizations. The purpose of the interviews is to illicit responses regarding the finance function in their organization as well as their views on the educational needs of financial managers at nonprofits. In order to make the study more manageable and to concentrate on those organizations who rely on voluntary giving as their primary source of revenue, the sample was narrowed by excluding hospitals, churches and educational institutions. Sample organizations include, among others, CRISTA Ministries, World Concern and Mercy Corps International. (Appendix A gives a listing of respondent organizations). Each respondent will receive a list of suggested discussion topics and questions (Appendix B). This will be followed several days later by a field or telephone interview.
The paper will be organized as follows: Section 1 will be an introduction.
Section 2 will describe similarities in the treasury functions of for-profits and nonprofits.
Section 3 will discuss unique problems and differences in the treasury functions. And, section 4 contains suggestions for transforming the finance curriculum to better fit our Christian missions and improve relevancy for our students.
There were several areas of the treasury function where little difference was found between nonprofit and for-profit organizations. These were primarily in the cash flow and working capital management areas. For example, most respondents said their cash flow projection techniques and reporting formats were the same as in any organization.
However, they all complained of cash flow problems and the lack of adequate reserves.
Also, areas such as accounts receivable and accounts payable management were thought to be very similar. Accounting systems, for the most part, were also very similar to forprofit organizations. Finally, cash management systems and techniques appeared to be little different from those of similar size organizations. Most respondents reported that they used up-to-date systems for payroll, transferring cash and tracking funds in various accounts.
However, several respondents noted that they were likely to be more sympathetic in their handling of late payers than in for-profits. They tried to be sensitive to cases where the payer was in a dire economic situation, which, of course, well reflects the stated mission of the nonprofit. Gary Paisley of Food For the Hungry stated, “Our reason for existence is to help the indigent and the poor, so that same attitude carries over to late payers who have legitimate reasons for being delinquent.” And, Dan Busbee of the Wesleyan Center stated, “Most of our receivables are from nonprofit bookstores. We
than taking them to a collection agency. We want to avoid an adversarial relationship.” The above noted similarities give guidance in determining how to approach these topics when planning the finance curriculum. First, cash flow and working capital management should not be neglected in the finance curriculum as these are critical areas in the small to medium size organization which N.F.P’s tend to represent. Second, the similarities in how the key finance functions are managed in N.F.P.’s and for-profits would suggest that stand alone teaching modules are not necessary. Since many of the unique issues facing N.F.P.’s are directly applicable to existing finance concepts, they should be infused into the existing curriculum. This saves precious teaching time and ensures a seamless flow as these topics are presented. This is not to deny the existence of unique financial management aspects found in nonprofits as well as different ethical issues faced by these organizations. Several of these will be discussed next. However, since there appears to be few differences in the operational aspects of these functions between for-profit and nonprofits, the key role of the professor is to ensure understanding of how to organize, report and manage financial areas regardless of whether the setting is for-profit or nonprofit.
UNIQUE PROBLEMS AND DIFFERENCES IN THE TREASURY FUNCTIONSThe respondent interviews revealed a number of areas where unique problems are faced and where the treasury operation is different for nonprofits. A summary of these areas is listed here with further discussion to follow. 1. The use of rates of return and other financial performance measures in the decision making is not as evident. 2. Unique
executives perceive that area managers are less knowledgeable about and concerned with bottom-line issues and measures than with human values and a commitment to compassion and service. 5. Difficulties in identifying the organization’s customers.
6. Issues related to measuring and rewarding job performance. 7. Dealing with the regulatory issues related to fund raising.
Measuring Financial Performance For N.F.P.’s, the notions of maximizing net income, return on investment and stockholder value are not commonly used measures of organizational performance.
However, in an attempt to have some measure of return and performance, all respondents utilized one or more forms of quantitative benchmarks. For example, most utilized some type of “cost per beneficiary” measure where the intent is to measure the cost of delivering services. Although none used rates of return, the notion of estimated useful life and “payback time” was used by some in analyzing capital expenditures. Also, obtaining and reporting a low overhead rate (administrative and fund raising costs/total revenue) was a key financial measure. Finally, the “return on investment” notion had the most meaning for respondents. However, it was used in the context of measuring the success of fund raising efforts. For them, the investment was committing resources to fund raising and they all spoke of maximizing the ROI ratio. A ratio of 5:1 was considered successful while 2:1 or less was thought to be a poor return. Several respondents expressed frustration in being unable to adequately formulate financial return measures for dollars invested in aid to beneficiaries. They perceived most of their effort
committed to help. Although, mathematically they are the dual of each other.
Managing Cash Flow A problem mentioned by all respondents was cash flow management with two areas of concern commonly cited. One had to do with the continual battle to have enough cash available to make payroll and pay bills. The other had to do with the related difficulty of projecting income. Respondent organizations derived most of their income from voluntary giving which tends to produce uneven cash inflows. Several respondents pointed out how different and difficult it is to do projections of gift income versus sales income. Also, several respondents mentioned that their income was media driven. For example, relief agencies like Food for the Hungry and World Concern see an influx of income when a situation like the refugee problem in Rwanda hits the news. The income is certainly welcome, but the unpredictability of it makes long-term cash flow and staff planning difficult. Exacerbating the above problems, several respondents mentioned inadequate reserves. Cash flow problems certainly are not unique to nonprofits.
However, the capricious nature of donor based income and low reserve levels create a particular set of problems for the financial manager in these organizations.
Bank Funding Constraints Contributing to the above problem, several respondents felt that banks do not understand their organizations. They found that banks tend to be leery of any organization whose income is based primarily on voluntary giving. Bill Brown of CRISTA Ministries stated, “banks are reluctant to lend to us because of the negative
and other reasons banks quite often imposed more stringent loan criteria and granted lines of credit that were relatively meager given the size of the organization in question. Gary Paisley of Food For the Hungry was frustrated that he could only secure a $200,000 line of credit although he had a $24,000,000 annual budget.
Financial Integrity versus Humanitarian Needs Financial managers at N.F.P.’s have the perception that area managers are less knowledgeable about and less concerned with bottom-line issues and measures and the reporting requirements that are essential to a well functioning financial control system.
Several respondents mentioned that it is sometimes difficult to get area managers to comply with reporting requirements and budgeting systems. Area managers make them feel like they are an impediment to the “real” work of the organization. Respondents felt at times that there was a division between the “relief providers” and “administration” aspects of the organization. The administration was thought of as a “necessary evil” by the relief agency heads. While the old line versus staff tension is present in many forprofit organizations, this tension can be particularly acute in relief-based nonprofits. The grand, inspired plans of the field worker managers are often undergirded by the notion that in the name of human decency this project must be accomplished. The finance people who say it may have to be scaled back are thought, by the relief project managers, to be uncaring and concerned only with the financial aspects of the operation. Their commitment to compassion and service may be questioned by the operations people in the field. Several respondents mentioned, almost defensively, that if they didn’t stress the
would be accomplished, large or small. They felt that part of their job was balancing economic survival with unlimited worthwhile projects and communicating this dilemma to the relief agency leaders. Several mentioned how their hearts have been torn by seeing the pictures of hungry children or homeless, drug-addicted street people and having no way to meet that need through their organizations.
Related to the above, several respondents expressed frustration regarding the decision making process in their organizations. Quite often they were the only person on the management team with business training and/or experience. While they were used to and understood the need for long-range planning, budgets and efficient decision making processes, their colleagues, who were often trained in social work or sociology, were sometimes cumbersome in such matters. Cheryl Knudson of the Union Gospel Mission stated, “Rather than plan ahead for capital expenditures and contingencies, there is a tendency to make decisions only in emergencies.” Bill Brown stated, “ The decision process is longer here compared to my experience working for a for-profit company.
There is less of a sense of urgency. On the other hand, people’s feelings are considered here and I appreciate that aspect.” In a related area, several respondents felt that financial information and reporting systems for use by internal managers were lacking in their organizations compared to that typically found in for-profit firms. Alwin Lewis of World Concern stated, “I think that one of my biggest challenges is to provide strategic internal financial information to the leaders and managers in our organization.” While external reporting is important, it can be guided with the help of the independent accountants who audit the organization. More
organizational mission and goals. Part of this is that the financial manager has to advocate and train users in the importance of financial information in the achievement of organizational objectives. Often financial planning is not part of relief service planning and sometimes it is considered a “necessary evil” by the non-financial manager or leader.
Respondents expressed the idea that financial planning, accounting and control needs to be viewed as a key to successful relief efforts, not a hindrance or a hurdle.