Financial management in nonprofits: basics
The purpose of nonprofit organizations and social enterprises is to solve a social problem, not to make profits. But without financial means, they cannot operate either.
Unlike business corporations, nonprofits cannot generate all their financial resources through the production of products and services. Instead, they are dependent of financial support from other sources, such as states, foundations, or private donors. This has implications for the financial management of nonprofits. In the following, we will take a look at the aims of financial management and categories of financial sources.
1. Aims of financial management: effectiveness and liquidity
In business corporations, the aims of financial management are profitability and liquidity (von Schnurbein, 2017). Profitability means that the financial resources generate a maximum return on investment, and liquidity is the ability to stay operative. Since nonprofits do not aim for profit maximization, profitability is not a justifiable aim. Instead, we select effectiveness. Thus, financial management should enable the organization to use its financial resources in the most effective way. The second aim, liquidity, is highly important for nonprofits. Nonprofits usually cannot apply easily for external finance, but they have to assure constant cash flow. The two aims of financial management lead to a trade-off dilemma: high cash assets secure liquidity, but at the same time reduce the effective use of financial means for the mission. Thus, financial management in nonprofits has to offer answers to the following two questions:
- What are the financial requirements of the organization?
- Which financial sources suit best the needs of the organization?
von Schnurbein, G. (2017). Nonprofit Financial Growth and Path Dependency. CEPS Working Paper Series, No. 12, Basel: CEPS.
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