Financial decisions are deliberative choices made by an organization with respect to investment priorities, funding allocation, and working capital needed to conduct organizational
FIGURE 8.2 Key factors influencing financial decisions in nonprofit organizations.
operations. Figure 8.2 presents various factors that can affect financial decisions in a nonprofit organization:
- Funding opportunities
- Financial analysis
- Organizational challenges
- Organizational mandates
- Organizational leadership
- Multifaceted decision path
Funding opportunities: Funding opportunities exist to the extent that a nonprofit can adapt to the priorities set by funding sources. The funding priorities of individual, corporate, and other institutional entities influence the decision of a nonprofit organization to seek a particular funding or not. In other words, seeking funding requires a match between the priorities of a nonprofit organization and those of a grant-maker agency.
Financial analysis: The analysis of financial statements is another key factor that influences financial decisions in a nonprofit organization. The financial statements include the statement of activities (describes revenues generated and how they are spent), the statement of financial position (describes the assets and liabilities), and the statement of cash flow (describes the inflow and outflow of cash). The analysis of these financial statements can dictate decisions regarding the budget for the upcoming fiscal year, fund-raising activities, spending behaviors, and other similar financial decisions.
Organizational challenges: Nonprofit organizations exist because they want to tackle community or social challenges. These challenges are explored more systematically through the assessment of the clients' needs. In that context, needs assessment and SWOT (strengths, weaknesses, opportunities, and threat) analysis can help uncover what should be the key organizational priorities, and influence how to best use financial resources in order to be up to the challenges faced by the organization.
Organizational mandates: Effective nonprofit organizations develop strategic plans every 3, 5, 7, or 10 years to adopt strategic goals in the light of their vision and mission statements. Part of setting strategic priorities is to align with organizational mandates, which are key elements to guide the implementation of a strategic plan. Therefore, organizational mandates influence decisions about line items to be included, as well as what to increase or decrease in annual budgets.
Organizational leadership: A nonprofit organization is only as effective as its leaders. The vision of the leaders of a nonprofit organization influences not only the governance culture, but also how an organization sets strategic priorities. The leaders influence the financial decisions regarding ranking of priorities, approval of budgets, and allocation of financial resources to programs.
Multifaceted decision path: There is no one single factor that influences the financial decisions in a nonprofit organization. Funding opportunities, financial statement analysis, organizational challenges, organizational mandates, and organizational leadership combine in various forms to influence financial decisions in nonprofit organizations. Therefore, the use of multiple criteria offers a multifaceted decision path for financial decisions in nonprofit organizations.
Financial monitoring involves a system that controls the accounting of methods and procedures, the reliability of financial reporting, and the ability of an organization to obtain feedback that can help achieve strategic and operational goals and objectives. Financial monitoring helps nonprofit organizations collect information about revenues, expenses, costs, and performance. Financial monitoring is a prerequisite for financial accountability. Without financial monitoring, it is impossible to ensure that strategic plans, annual plans, and budgets are being implemented properly. The financial monitoring in a nonprofit organization involves the board of directors, the executives, the managers, the funders, and the public in different capacities. For example, as part of its fiduciary responsibilities the board monitors financial oversight. The executives monitor the obligations of financial accountability to internal and external stakeholders. The managers monitor partly in reaction to the expectations of accountability from their supervisors. The funders monitor to ensure that their contributions are being spent properly. The public monitors to ensure that publicly supported organizations deserve the support they receive.
Nonprofit organizations have the responsibility of using their resources as promised to the constituencies or donors (e.g., individuals, groups, institutions). Donors make their contributions based on the vision that an organization shared with them and the purpose for which their contributions will be used. This creates an obligation for a nonprofit organization to use the donations for such specified purposes and to explain to the public how the organization has delivered on its commitment to use financial resources as promised. Financial accountability implies that an organization maintains a sound system for internal control, develops and adopts conflict-of-interest policies, prepares and publishes ongoing financial reports that are available to all internal and external stakeholders, and conducts internal and external audits by qualified professionals. Auditing is a key element of financial accountability because it involves the opinions of an independent third party, the CPA (certified public accountant).
The following items refer to the three levels of an organization's financial record, which are compilation, review, and audit:
1. Compilation is the lowest level of the record, which involves little more than gathering various financial records into a readable format. In compilation, the accountant does not express his or her opinions and does not confirm the authenticity of material presented.
2. Review is the middle level. For a review, the accountant compiles information into standardized forms and analyzes such information to reflect consistency. The accountant does not express her or his opinions, but performs quick analyses for the sake of consistency. This simply provides additional comfort knowing that another set of eyes has reviewed materials for inconsistencies or gaps.
3. Finally, the audit is the highest level of analysis of financial records. The audit is the most intensive of the three levels. This is the deepest, most intense examination of financial information. The audit tests management s representations in many ways based on pre-established protocols. This provides greater opportunity to spot errors and omissions, and make suggestions for improvement. The levels of auditing offer a different mix of complexity of the analysis. It takes more time to complete, but provides stronger assurance to external stakeholders. Independent audits are a natural means to assure the public's trust in a nonprofit organization. Yearly financial audits are becoming a necessary part of nonprofit financial management. In fact, nonprofit organizations (e.g., universities, hospitals, government entities, and public charities) receiving federal funding have specific auditing requirements that they have to meet, in order to continue to receive their funding.
Further, the Sarbanes-Oxley law, passed in response to the increase in accounting scandals and questionable financial practices, requires that boards of publicly held companies take responsibility for the relationship with the auditor. Although the Sarbanes-Oxley requirements did not specifically target nonprofit organizations, they put financial managers of nonprofit organizations on notice regarding the financial accountability of publicly supported agencies.