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A not-for-profit organization requires careful financial management to ensure that it is run in a sustainable way according to its stated mission. There are several areas in which not-for-profit financial management differs from for-profit management, but similarities also exist. In order to keep donors and tax collectors happy, as well as keep the organization up and running for the foreseeable future, not-for-profit financial management may be a critical part of day to day operations.
A not-for-profit organization can have a few meanings. In taxation terms, "not-for-profit" refers to an activity, such as hiking. The technically correct term for an organization that fosters not-for-profit activities without dispensing profits to owners or shareholders, such as a monthly hiking group, is a non-profit. The terms are frequently used interchangeably, but may have different meanings in certain tax documents. Understanding the difference between these two terms, as well as between a non-profit and a for-profit enterprise is very important to not-for-profit financial management.
One of the biggest issues in not-for-profit financial management is that incoming funds are not always assured or regular. In a for profit business such as a chewing gum company, the business trades the gum directly for money. Not-for-profit enterprises, however, receive much of their funding from grants or donations, which may not be in direct exchange for any good or service. This can make prospective income or funding very difficult to gauge, particularly in the first few years of operations. As a result, budgeting, expense management, and transparent reporting become critical principles of not-for-profit financial management.
One tactic often used to keep tabs on expenses is known as zero-based accounting. This presumes that all programs undertaken are expendable, and must justify their existence in order to be continued. If, for example, a wildlife protection group has programs to save both whales and wallabies, it can compare both on several criteria to determine continuation. If the wallaby program brings in few donations or, even with donations, does not seem to be having any effect on wallaby safety, it may be discontinued. Requiring programs to be both successful and useful can help direct funds toward targeted areas where they are most necessary.
Transparent financial and progress reporting is considered by some experts to be vital to not-for-profit financial management. Not only do regular reports for donors force the organization to keep careful track of funding, they can help reassure donors that money and endowments are being used sensibly and for the desired purpose of the organization. Being able to show donors a clear record of both good management and program success can also help improve the reputation of the entity, which may, in turn, bring in new donors.