Not for Profit Organization - Everything you need to know

Not for Profit Organization - Everything you need to know

What are functions and objectives of not for profit organisation?

Nonprofit organizations exist mainly to provide help or resources to a target audience with a specific need. They usually serve a public purpose such as enriching the lives of people in the community, and enjoy special considerations in terms of tax, legal status and accountability. A nonprofit organization is mission-driven, which requires the management and board to set objectives aimed at achieving the organization’s stated mission.

Strategic Objectives

A nonprofit organization’s strategic objectives focus on the services provided to its target market. This requires identifying the needs of the relevant community and developing programs and projects geared at fulfilling those needs.

For example, a nonprofit whose mission is to build literacy skills among homeless children will have strategic objectives such as the implementation of a program to obtain and manage a supply of books, learning aids, space, and an instructor.

Financial Objectives

Nonprofits are not required to show financial surpluses, but they need to generate enough income to cover their costs and establish reserves for lean financial times.

Financial objectives include raising enough money to fund the activities included in their strategic plan, as well as fixed costs such as premises rental, staff compensation and utility bills.

Nonprofits can generate income through fundraising activities or revenue that results from services they provide.

The primary objectives are to break even and maximize cash flow, while avoiding excessive financial risk.

Operational Objectives

The operational objectives of a nonprofit organization relate to the management of funds and resources to achieve specific tasks.

These objectives commonly show quantitative performance measurements, such as the type and frequency of activities and the number of people served or helped.

The operational objectives include short-term dates for the completion of individual projects and programs, the resources used for each and the degree of success that the organization wants to achieve.

Governance Objectives

Nonprofit organizations are subject to stringent governance requirements, mainly because they usually use donor or grant funding to do their work. This makes them accountable to their donors and the grant programs, as well as to the public whose taxes go toward grant funding.

Governance objectives include the establishment of sound policies for issues such as compensation, purchasing and procurement, human resource and volunteer management and asset and risk management.

Partnership Objectives

Partnerships are vital aspects of nonprofit management, with organizations using in-kind donations of much-needed products and services.

For example, a nonprofit organization typically doesn’t have enough money to advertise, so a partnership with a local newspaper could benefit both parties. The nonprofit gets free advertising, and the newspaper gets recognition as a supporter of the organization’s work.

Partnership objectives identify the type of external parties with which the organization could partner, and ensure that potential partners’ principles and philosophy are in accordance with the organization’s work.

Formation and structure of Not for Profit Organizations

The organizational structure is the core of every nonprofit organization. Nonprofits consist of a board of directors and executive, managerial and administrative positions. The first step is to think about the best structure to run your nonprofit. Your board and staff should understand their own roles and responsibilities and how they help further the mission of your organization.

Board of Directors

The board of directors is responsible for running a nonprofit organization. The board sets rules and regulations, oversees finance and strategic plans and hires executive staff. Members of the board of directors usually are volunteers who receive no compensation. They are often recruited because of their expertise in certain areas, such as law, accounting or fundraising. They attend meetings throughout the year to discuss any immediate concerns, upcoming events and changes in programs or staff. The executive positions within the board of directors include a chairperson, vice president, treasurer and secretary.

Executive Staff

The executive staff runs the daily operations in a non-profit organization. Key executive staff positions include the president or CEO, vice president and other chief officers depending on the size of the organization. They are supervised by the board of directors and oversee lower-level staff positions. Typically, the president and other executive staff are the face of the organization. They speak at external events and meet with potential donors to secure money for their organization.

Managerial Staff

Whether it is developing new programs or organizing events, managerial staff handle many daily operations. They usually work directly with clients and customers by providing an array of services and programs. Common positions include development director, program manager and human resources manager. Managerial staff meet regularly with executive staff to discuss program and event updates. At some organizations, managerial staff are promoted to executive positions.

Administrative Staff

Administrative staff roles are usually entry-level positions within a nonprofit organization. They assist managerial and executive employees with office duties, including answering the phone, scheduling appointments and distributing mail. Common positions include executive assistant, secretary and administrative assistant. In a nonprofit setting, some managerial and executive staff share assistants, especially within similar departments such as communications and special events. Assistants working for department managerial staff are involved in more program work, including planning events and drafting letters to supporters.

Functions of FASB, GASB, FASAB

Goals and Functions of FASB

The goal of the Financial Accounting Standard provides information about the financial statements to stakeholder so he takes the investment decisions on the basis of these honest financial statements.

The functions of the Financial Accounting Standard Board are such as:

  • Maintain the standards up to date to reflect changes in the method of preparing the financial statements and in the economy
  • Considering those specific areas which are insufficiency in the financial areas that might be improved through standard-setting; support international convergence of Accounting Standard concurrent with improvement in the quality of financial reporting;
  • Describing the usefulness of financial reporting by focusing on characteristics of reliability and relevance;
  • FASB also explains the usefulness of financial reporting by focusing on consistency and comparability.
The standards are designed in such a way to promote transparency in financial reporting. When information is transparent, it is visible and understandable to users of these statements. It will enable the users of these statements (investors and creditors) to make accurate evaluations of business finance. Financial Accounting Standards Boards also help the board of director of the companies to assess the management’s effectiveness.

The FASB developed the Accounting Standards that directly impact how the business reports items such as inventory cost, assets, debts, revenue, stakeholder’s equity and taxation. The FASB currently issued set of pronouncement in which include;
  • the statement of Financial Accounting Concepts;
  • FASB interpretations and clauses; and
  • the FASB technical Bulletins and abstract and statement of Financial Accounting Standards.

The main benefit of the FASB is that it helps to set the current Accounting Standard and eliminate outdated ones. It helps to encourage international compliance and develop the process the resolve the accounting misinterpretations.

Functions of GASB

According to its mission statement, the primary role of the Governmental Accounting Standards Board is "to establish and improve standards of state and local governmental accounting and financial reporting that will…result in useful information for users of financial reports…"

The users of financial statements include legislators and their staff, municipal bond insurers, buy- and sell-side analysts, rating agencies, bond holders, citizen and taxpayer groups, community organizations, research institutes, professors and students, among others, and the general public.

Along with the preparers and auditors of financial statements, users are well represented before the GASB. The Governmental Accounting Standards Advisory Council (GASAC), consults with the GASB on technical issues on the Board's agenda, project priorities, and matters likely to require the attention of the GASB. Thirteen of the GASAC's 30 members are from organizations of users—representatives from the American Accounting Association, Association for Budgeting and Financial Management, Association of Financial Guaranty Insurors, the Bond Market Association, the bond rating agencies, Governmental Research Association, insurance industry investors, National Association of Bond Lawyers, National Conference of State Legislatures, National Federation of Municipal Analysts, and National League of Cities, and a member-at-large. In addition, users are well represented on the task forces that advise the GASB’s research projects.

Users provide important input in the process of devising and improving accounting and financial reporting rules. Users participate in the focus groups, surveys, and interviews conducted as a part of the GASB’s underlying research.

The Board's five-year strategic plan for 2008-2012 reaffirms the centrality of the user to the work of the GASB. The document embodies the GASB's commitment to educating users and raising awareness in the user community about governmental accounting and financial reporting issues and of the GASB itself, and involving more users in the GASB's standard-setting activities.

The objectives of the strategic plan have promulgated several current efforts. The GASB has constructed a comprehensive database of users of financial statement information to support the GASB's outreach. This project has broadened to include the GASB's preparer and auditor constituencies as well. The GASB is currently conducting research to improve its knowledge of the information needs of users. Staff has greatly increased the publication of plain-language and other user-friendly documents, including supplements to proposed standards, a series of user guides to governmental financial reports, and articles about GASB activities. The GASB's primary web site and its performance reporting site both have sections devoted to users.

Functions of FASAB

The FASAB serves the public interest by improving federal financial reporting through issuing federal financial accounting standards and providing guidance after considering the needs of external and internal users of federal financial information.

The Mission Supports Public Accountability

Financial reports, which include financial statements prepared in conformity with generally accepted accounting principles, are essential for public accountability and for an efficient and effective functioning of our democratic system of government. Thus, the Board plays a major role in fulfilling the government’s responsibility to be publicly accountable. Federal financial reports should be useful in assessing (1) the government’s accountability and its efficiency and effectiveness, and (2) the economic, political, and social consequences, whether positive or negative, of the allocation and various uses of federal resources.

How the Mission is Accomplished

The FASAB supports its sponsors’ efforts to improve federal financial reporting and the larger federal financial management community’s efforts to meet its accountability responsibilities. Its mission is accomplished through a comprehensive and independent process that encourages broad participation and objectively considers stakeholder views. The FASAB strives to ensure:
  • a timely, open, and thorough study of issues including consideration of the work of other standards-setters and the views of stakeholders.
  • participation by a variety of stakeholders throughout the standards-setting process.
  • due consideration of the costs and the benefits to the preparers and users of financial information prepared in conformity with generally accepted accounting principles.
  • the common understanding of information provided through financial reporting by participating in educational efforts.
  • the availability of implementation guidance through both formal and informal communication with preparers and auditors.
  • its own accountability through governance practices that are transparent and consistent with the Memorandum of Understanding among its sponsors.

How fund structure and financial reports of not for profit organisation differ from those of government?

The Internal Revenue Service (IRS) has allowed for the creation of tax-exempt charitable organizations. These groups manifest in one of two ways: as private foundations or as public charities.

Private Foundations

A private foundation is a non-profit charitable entity which is generally created by a single benefactor, usually an individual or business. Using this initial seed donation, an investment is made to generate income, which is then dispersed according to the agency's charitable priorities. The range of these priorities must adhere to Section 501(c)(3) of the Internal Revenue Code and includes such areas as relief for the poor, advancement of education, and the combating of community deterioration.

Private foundations generally make use of grants to individuals or other charities, as opposed to direct funding of their own programs. A public charity, in contrast, tends to carry out some kind of direct activity, such as operating a homeless shelter.

The chief criticism of private foundations comes from their operational independence. Their private funding source allows them to ignore public opinion and possibly support socially contentious projects. In addition, without the guiding influence of the market, they may generate less-than-optimal outcomes by focusing their efforts incorrectly. Private foundations also have more mandatory paperwork (to ensure the appropriate use of funds) as well as minimum asset distribution requirements (5% each year).

Public Charities

Some might consider public charities more desirable because they have to solicit donations from the community on a regular basis, and thus have to appeal to public sentiment. Additionally, a "market for charity" is created, as each organization strives to capture an individual's contribution.

The IRS requires that a charity receive at least one-third of its contributions from the general public, or meet the 10% facts and circumstances test.5 Therefore, while the foundation uses the income generated from its investments and its founding source, the public charity uses the publicly-collected funds to directly support its initiatives. This difference in funding factors into the decision regarding which form the charitable organization might take. Many investment products are able to offer a stable and consistent rate of return (think of your own savings account). Therefore, the endowment structure of private foundations provides a consistent, stable, and reliable source of continuing funds. This is important, as budgeting and funding decisions can be made with greater confidence. This has the effect of ensuring timely and efficient access to the aid the foundation seeks to provide.

Key Differences

The only substantive change between the two is the manner in which funds are acquired. The "public" in "public charity" refers to the solicitation of periodic donations from the community. The amount of these donations is used to determine a quantifiable intensity of public support, which is necessary in order to achieve status as a "public charity."

Concerning taxes, public charities generally have higher donor tax-deductible giving limits as well as the ability to attract support from other public charities and private foundations.6 From an individual perspective, public charities are desirable due to the flexibility accorded in making donations. This allows for the customization of tax strategies tailored to personal preference.

Establishing a foundation often requires a larger upfront commitment of income, both to start the foundation and to pay legal fees. In order to get the largest income tax deduction possible, 30% of your pre-tax income should go into the foundation. Through regular contributions, an individual could save up to 46% on his or her estate taxes, with any excess being allowed to "carry over" for up to five years.7 The chief benefit of operating a foundation comes from the degree of control available. The person responsible for running the foundation can decide who or what to support and can make the investment decisions. At the end of the day, both are useful vehicles for providing charitable services and the differences are a matter of inches rather than miles.

Special Considerations

If you simply want to get the most out of your tax-deductible giving, donate to one of the many public charities on offer. If, however, you wish to leave a legacy, have a large chunk of cash (say from an inheritance), or a highly valued estate that you would like sheltered from taxes, then a private foundation might prove useful.

Why may flexible budgets be more important to a governments business type activities than to its governmental activities

1) Because governments and not-for-profits must include current year capital expenditures in their operating budgets and when debt is issued in order to finance capital projects, they service it out of operating funds.

2) Flexible budgets may be more important to a government’s business-type activities than to its governmental activities because business-type activities are driven by the market and can be expected to vary more widely with changes in customer demand. Whereas, the level of government-type activities is often established by the budget.

3) The main advantage of an object classification budget is that it facilitates control, specifying in detail how every dollar will be spent. Limitations are that it may ignore the relationship between costs and organizational objectives when focusing on individual expenditures and therefore discourage effective planning and evaluation. Performance budgets overcome these limitations by emphasizing what the entity accomplishes rather than how it accomplishes it.

4) Most governments and not-for-profits budget on a cash or near-cash basis because the cash basis budget permits the entity to properly plan its cash receipts and disbursements. Timing of payments is not necessarily concurrent with the economic impact of the related activities. Also, governments must establish the amount and timing of their tax collections so as to be sure that they have sufficient cash on hand to meet their cash requirements.

5) Favorable budget variances are not necessarily a sign of efficient and effective governmental management because governments goals do not relate to revenues or lowering expenditures, but rather services provided. Revenues being significantly greater than expenditures over budget may indicate that quantity or quality of services provided were less than anticipated. Also, it maybe possible that taxes were higher than necessary.7) Year end results, reported in accordance with GAAP, may not be readily comparable with its legally adopted budget because of basis of accounting being used (cash vs. modified accrual),whether goods or services are recognized as expenditures when ordered rather than when received, reporting entity, and perspective.

The following characteristics that distinguished governmental and not-for-profit entities from business entities are:

(1) Receipts of significant amounts of resources from resource providers who do not expect to receive either repayment or economic benefits proportionate to the resources provided.

2) Operating purposes that are other than to provide goods or services at a profit or profit equivalent.

(3) Absence of defined ownership interests that can be sold, transferred, or redeemed or that convey entitlement to a share of a residual distribution of resources in the event of liquidation of the organization.

Non profit organizations are responsible for paying taxes based on their net income, nonprofit organizations are exempt from paying income tax. Since a nonprofit's goal is to make the world a better place and invest time, resources, and funds into the community. While nonprofits are not required to pay taxes on net income, they are responsible for state and property taxes. While the aim of business organizations is to maximize profits and forward these profits to the company's owners and shareholders.

Governments and not-for-profits are governed mainly by their budgets, not by the marketplace. Revenues and expenditures are controlled through the budgetary process. The government’s revenues may be determined by legislature, so they aren’t subject to competition like in for-profit. Not-for-profit revenues aren’t established by legal mandate, but are obtained from contributions, dues, tuition, or user charges, unlike the sales of a business. Government and not-for-profit budgets are very important because they are the culmination of the political process and contains most of the organization’s important decisions. The budget determines which constituents give to the entity and which receive, which activities are supported and which are assessed. Constituents want assurance that spending has not exceeded authorized amounts and that revenues and expenditure estimates were reliable. The budget is used as a control device and complements the accounting and reporting system.

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