Nonprofit organizations are created to address an ongoing need in society (Blackbaud, 2011). Often their mission is based upon what they hope to contribute to the community or correcting a deficiency. There is often a tension between a nonprofits mission and financial results (Allsion & Kaye, n. d. ). This is because the bottom line, which influences many strategic decisions, does not always work in the best interest of stakeholders (Allison & Kaye). A nonprofit organization stakeholder is a benefactor. Some benefactors may include funders, donors and the community.
It has been stated by Allison and Kaye (n. d. ) that “passion for mission is a great source of strength for nonprofit organizations. The institutionalized impulse to “change the world” has brought about important advancement in American society. As a strength, the passion for mission taps incredible creativity, energy and dedication for the work of an organization. However, zeal for the mission can lead staff, board and volunteers to discount “business” realities…” A nonprofit’s single-minded, mission driven nature, can result in financial neglect, especially during periods of growth (Wilson, 2011).
In order to balance both mission and financial stability, a nonprofit should place equal emphasis on financial viability using solid reporting mechanisms and the pursuit of its mission (Wilson). Nonprofit boards of directors have authority over organizations they govern and have the responsibility of making it a success (Allison ; Kaye, n. d. ). They operate similar to for-profit board of directors. Some of the roles of the board include setting the nonprofits agenda and direction, making sure it has adequate financial resources, set strategies, monitor management and provide oversight (BoardSource, 2010).
A nonprofit organization generally lacks the financial flexibility of a for-profit because it depends on resource providers that are not engaged in a commercial transaction (Blackbaud, 2011). Since much of the resources provided are from donors to provided goods or services for a specific purpose, the nonprofit organization must demonstrate that funds are used for that purpose (Blackbaud). The purpose is either specified by the donor or implied in the nonprofit’s mission and management must report accurately the use of the funds (Blackbaud). Nonprofits biggest struggle is raising money.
Creating a framework to bring in funds to nonprofits is a challenge and nonprofits must be careful not to make their funding models too general or too specific (Foster, Kim ; Christensen, 2009). Many nonprofits raise money by fundraising. There are other sources of funds nonprofits receive and their often depend on the type of nonprofit organization. Nonprofits can get funds from the government or federal agencies or the private sector. Private sector donations are often in the form of grants and awards from foundations. Performance evaluation is important for a nonprofit organization.
Many funders or donors want to know how they money has been spent and make sure it was used as directed. Nonprofits will use an independent public accounting firm to prepare financial statements which are similar to for-profit companies. They reports will be presented to the board of directors. They will provide a statement of financial position, statement of activities, a statement of functional expenses and a statement of cash flows (Averkamp, 2011). The statement of cash flows is the same for both for-profit and nonprofit companies. The statement of financial position is similar to a balance sheet.
It details an organization’s assets and liabilities, when the assets turn to cash and when liabilities have to be paid (Averkamp, 2011). A statement of functional expenses reports expenses by their function and by the nature or type of the expense and a statement of activities shows the amount of revenue and expenses according to changes in net assets (Averkamp, 2011) Unfortunately, many nonprofits do not have consistent methods of recording and presenting their financial positions (Finkenstaedt, 2009). This is because internal accounting practices for nonprofits follow the preferences of their major funding sources (Finkenstaedt).
Therefore, the information reported and the format of financial statements varies significantly from one organization to another (Finkenstaedt). Additionally there are few standards or benchmarks for nonprofit accounting. This presents a problem from a certified public accountants standpoint as everything is subjective. As a result, no systematic requirements exist and there is no standard format for preparing audited financial reports for nonprofit companies (Finkenstaedt).