Non-Profit Organizations

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Management and performance audits can provide significant insights regarding the effectiveness of an organization's strategic management system. Issues regarding the overall "fit" of strategic management with the organization's management paradigm should be carefully examined as part of such evaluations.

What is a Non-Profit Organization ?


A non-profit organization also known as NPO, not-for-profit organization, non-commercial organization, nonprofit etc. 

Nonprofit organizations are legal entities formed under the laws of a particular country or state. They have a distinct legal structure, often requiring the organization to have a mission or purpose that is not primarily for generating profit.

A non-profit organization is one that is chartered by the state to operate in the interest of society. It operates free of any obligation to pay income taxes. It is restricted, by definition, from participation in equity markets, since it has no shareholders. Its sources of funds are derived from contributions, grants, operating surplus, and debt instruments of various types. The principal goal of non-profits is defined by their mission. Unlike for-profit institutions, profit does not enter into their mission.

Non-profit organization may be classified into two groups: governmental organizations and private, tax-exempt organizations. Private organizations can be further divided into commercial organizations and charitable groups; the former includes unions, trade associations, and clubs, and the latter includes hospitals, religious groups, research, educational, and social service organizations.

Non-profits receive tax-free status and are restricted from distributing excess revenues over costs or from having shareholders. Tax-free status is granted these organizations because they perform a function that benefits society. The absence of equity and shareholders prevents a potential conflict of interest from developing between serving shareholders' needs and performing a service that benefits society.

Definitions of Non-Profit Organizations


Here are definitions of nonprofit organizations (NPO) provided by various authors and experts:

1) Peter F. Drucker: 
"A nonprofit organization is an organization that is neither a business nor a government agency. It is an organization created to serve a social or public purpose, and its primary focus is on the mission it serves."

2) Lester M. Salamon: 
"Nonprofit organizations are private organizations that pursue activities with the intention of serving the public good and not for the purpose of generating financial profits for their owners or members."

3) Bruce R. Hopkins: 
"A nonprofit organization is an entity formed for purposes other than generating profit or financial gain for its members, founders, or operators. Nonprofits are typically organized to further a social cause or provide a public benefit."

4) Richard T. Osborne: 
"Nonprofit organizations are voluntary, mission-driven organizations that exist to create social value or serve a public or societal interest. They typically operate on a nonprofit basis, with any surplus revenues reinvested into their mission rather than distributed to individuals or shareholders."

5) Helmut K. Anheier:
"Nonprofit organizations are organizations that are legally constituted, privately governed, and self-regulating. They operate in the voluntary or third sector, distinct from the private and public sectors, and pursue missions that serve the common good."

6) According to the Internal Revenue Service (IRS):
"Nonprofit organizations are those "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals."

7) According to National Council of Nonprofits:
The National Council of Nonprofits defines nonprofits as "mission-driven organizations that serve the public benefit and do not distribute any surplus funds generated from their activities to individuals or shareholders."

Objectives of Non-Profit Organization


The objectives of nonprofit organizations can vary depending on their specific mission and focus areas. However, here are some common objectives that many nonprofit organizations strive to achieve:

1) Address Social Needs: 
Nonprofit organizations often have a primary objective of addressing social needs and improving the well-being of individuals, communities, or specific target populations. This can include providing access to education, healthcare, food, shelter, clean water, and other basic necessities.

2) Create Social Impact: 
Nonprofits aim to create positive social impact by addressing the root causes of social issues and working towards sustainable solutions. They seek to bring about positive change in society, promote social justice, and improve the quality of life for individuals and communities.

3) Promote Advocacy and Awareness: 
Many nonprofits engage in advocacy efforts to raise awareness about social issues, influence public policy, and promote systemic change. They work to educate the public, mobilize support, and advocate for the rights and well-being of marginalized groups or causes.

4) Advance Research and Innovation: 
Nonprofits in areas such as scientific research, healthcare, and technology often have objectives related to advancing knowledge, conducting research, and fostering innovation. They may aim to develop new treatments, technologies, or methodologies that can benefit society and improve outcomes in their respective fields.

5) Preserve and Promote Culture and Arts: 
Nonprofits in the arts and cultural sector often have objectives related to preserving cultural heritage, supporting artists, and promoting artistic expression. They aim to enrich communities through artistic and cultural programs, exhibitions, performances, and educational initiatives.

6) Promote Environmental Sustainability: 
Many nonprofit organizations are dedicated to environmental conservation, sustainable development, and mitigating the impacts of climate change. They strive to protect natural resources, promote sustainable practices, raise awareness about environmental issues, and advocate for policies that support a healthier planet.

7) Support Education and Learning: 
Nonprofits in the education sector focus on providing access to quality education, supporting educational institutions, and promoting lifelong learning. They may offer scholarships, develop educational resources, support teacher training, and advocate for equitable and inclusive education systems.

8) Foster Community Development: 
Nonprofits often have objectives related to community development, fostering social cohesion, and building resilient communities. They aim to empower individuals, strengthen social networks, and promote community-led initiatives that address local needs and improve the overall well-being of communities.

Features of Non-Profit Organization


The characteristics of non profit organizations are as follows :

1) Absence of a Profit Measure: 
Performance evaluation is more difficult 

2) Different Tax and Legal Status: 
These institutions are not taxed and no stockholders exist.

3) Tendency of Non-Profit Institutions to be Service Organization: 
This makes it difficult to measure the quantity and quality of service provided. 

4) Greater Constraints on Goals and Strategies: 
Donors may restrict the use of funds for predetermined purposes.

5) Lest Dependence on Clients for Financial Support: 
Many depend on endowed sources of support, this making them less dependent upon customers for support.

6) Dominance of Professionals: 
Potentially dysfunctional pressures on the goals of an organization can be created, since these personnel have dual allegiances, to the organization and to their profession. 

7) Differences in Governance: 
There are more numerous sources of influence and power, thus creating fragmentary governance processes.

8) Differences in Senior Management: 
Often these institutions are run by professionals trained in another field besides management, such as college professors, musical artists, ministers and priests, and doctors.

9) Tradition of Inadequate Management Controls: 
This too is derived from a tendency in these organizations for management to be made-up of professionals who value professional goals but who undervalue managerial skills.

Management Control Systems in Non-Profit Organizations


The issues involved in drafting management control system.in a non-profit organization can be discussed in the following heads:

1) Mission of Non-Profits: 
Non-profits are organized so as to pursue and accomplish a mission, i.e., its purpose. Drucker emphasizes that a mission statement should contain the following three elements:
  • The opportunities that the organization can exploit or needs that it can meet.
  • The strengths of the organization.
  • What members of the organization believe in?

2) Stakeholder's Goal: 
In a non-profit organization, there often is no dominant stakeholder but a multiplicity of key stakeholders, e.g., a school board, a church or a childcare agency has multiple key stakeholders. In formulating stakeholder's goals, it is necessary to integrate all of the stakeholder's goals around the missions of the organization,

3) Key Success Factors: 
Key success factors for many non-profit institutions are the number of volunteers that it is able to attract and the number of volunteers; it is able to train at various levels of quality. Another crucial variable is fund development, since most rely heavily on the support of the people, especially the volunteers, for contributions to support its paid staff and its program. Another critical variable is the ability to attract the quantity and quality of board member it needs.

4) Performance Measures: 
Performance measures should be established for each critical success factor for each goal. Reports on these performance measures should be prepared and distributed to those responsible for their management. 

5) Management Style and Culture: 
The small and mid-sized ones tend to take on the personality traits of the executive director and if he is a professional, there is a tendency to place primary attention upon his area of interest or training with little regard for management.

6) Formal Control Process: 
The formal control tool is the budget. The budgeting process is complicated in the absence of clear, quantifiable performance objectives for evaluating programs. As part of program evaluation, it is necessary to determine program costs. Program costs are usually sub-divided into two categories: direct and indirect. In most non-profits, overhead is allocated on the basis of direct labor costs.

7) Communication Systems: 
Board members, if organized properly can provide a very valuable contribution to the communication systems of the non-profit institution. If their strategic work is organized by committee and each committee meets regularly with the relevant operating committee to add vision and perspective, the board can play a very strong function in furthering the mission of the organization.

8) Rewards: 
The paid staff as well as volunteer staff is committed to the mission of the organization, hence financial rewards are not very important. Promotion opportunities are also not frequent. 

9) Informal Control Process: 
It includes: 
  • Interpersonal Relationship: Because of fewer hard measurements, informal communications, networking and politics tend to be important processes for making resource allocation decisions. Medical managements of patients tend to be very adaptable to the progression and resolution of diseases. Management flexibility, on the other hand, has historically been much less demonstrable.
  • Informal Rewards: The strong culture of concern and pride in patient care is rewarded with a sense of accomplishment, providing strong information rewards. Many positions provide a fair degree of status within a hospital. Certainly, the physicians and administrators are in positions of high status.
  • Informal Communications: Informal communications tend to be very prevalent and natural among peers but more restricted laterally between departments.

Types of Non-Profit Organizations


Nonprofit organizations encompass a wide range of causes and sectors. Here are some common types of nonprofit organization:

1) Charitable Organizations: 
These organizations focus on addressing social needs, such as poverty alleviation, education, healthcare, disaster relief, and community development. They often provide direct services or distribute resources to individuals and communities in need.

2) Foundations: 
Foundations are nonprofit organizations that provide grants and funding to support charitable initiatives and programs. They often have an endowment or funding source and distribute funds to other nonprofits working in specific areas of interest.

3) Advocacy and Policy Organizations: 
These nonprofits work to influence public policy, raise awareness about social issues, and advocate for specific causes or marginalized groups. They engage in research, lobbying, and public education to drive systemic change.

4) Environmental and Conservation Organizations: 
These nonprofits focus on environmental conservation, sustainability, and protection of natural resources. They work to raise awareness about environmental issues, promote conservation practices, and advocate for policies that protect the environment.

5) Arts and Culture Organizations: 
These nonprofits promote and support artistic and cultural endeavors, such as museums, theaters, orchestras, dance companies, and art galleries. They often provide opportunities for artists, preserve cultural heritage, and offer educational programs.

6) Educational Institutions and Organizations: 
Nonprofits in the education sector include schools, colleges, universities, research institutions, and educational foundations. They provide formal and informal education, scholarships, research, and training programs.

7) Social Service Organizations: 
These nonprofits focus on providing social services to vulnerable populations, such as the homeless, refugees, children, seniors, and individuals with disabilities. They offer a range of support services, including food assistance, housing, counseling, and healthcare.

8) Professional and Trade Associations: 
Nonprofit associations serve specific professions or industries, providing networking opportunities, professional development, and advocacy for their members. They work to promote industry standards, professional ethics, and collaboration among professionals.

9) Religious and Faith-based Organizations: 
These nonprofits are affiliated with religious institutions and engage in religious activities, social services, and community outreach. They provide spiritual support, humanitarian aid, and social programs aligned with their faith.

10) International Nonprofit Organizations: 
These organizations operate globally and address issues that transcend national boundaries. They may focus on international development, human rights, humanitarian aid, or peacebuilding initiatives.

Advantages of Non-Profit Organization


Advantages of nonprofit organization include:

1) Social Impact: 
Nonprofits are mission-driven organizations dedicated to addressing social issues and making a positive impact in communities. Their primary focus is on the betterment of society rather than generating profit.

2) Public Trust and Credibility: 
Nonprofits are often viewed as trustworthy and credible entities due to their commitment to social causes. This trust can help in building relationships with stakeholders, attracting volunteers, and mobilizing support from the public.

3) Tax Benefits: 
Nonprofits enjoy tax-exempt status, which means they are exempt from certain taxes at the federal, state, and local levels. This allows them to allocate more financial resources toward their programs and services.

4) Donations and Grants: 
Nonprofits have the ability to receive donations and grants from individuals, corporations, foundations, and government agencies. These funding sources can provide financial stability and enable nonprofits to carry out their mission effectively.

5) Volunteer Engagement: 
Nonprofits often rely on volunteers who contribute their time, skills, and expertise. Volunteers are driven by their passion for the cause and can significantly expand the organization's capacity without adding to the payroll costs.

6) Flexibility and Innovation: 
Nonprofits have the flexibility to explore innovative approaches to address social issues. They are not bound by profit-driven motives, allowing them to take risks, experiment with new ideas, and adapt to changing needs.

7) Collaboration and Networking: 
Nonprofits frequently collaborate with other organizations, both within and outside the nonprofit sector, to achieve their goals. These partnerships foster knowledge sharing, resource pooling, and collective impact, leading to more effective solutions.

8) Advocacy and Influence: 
Nonprofits often engage in advocacy efforts to raise awareness about social issues, influence public policy, and drive systemic change. They serve as a voice for marginalized communities and can mobilize public support to drive policy reforms.

9) Longevity and Legacy: 
Nonprofits are designed to operate in perpetuity, focusing on long-term solutions rather than short-term gains. They can establish a lasting legacy by creating sustainable programs, building community infrastructure, and leaving a positive impact for future generations.

Disadvantages of Non-Profit Organization


Disadvantages of nonprofit organizations include:

1) Financial Constraints: 
Nonprofits often face financial challenges and limited resources. They rely heavily on fundraising efforts and grants, which can be unpredictable and competitive. Sustaining financial stability and meeting the organization's needs can be challenging.

2) Regulatory Compliance: 
Nonprofits are subject to various legal and regulatory requirements. They must adhere to accounting standards, file annual reports, and maintain tax-exempt status. Compliance can be time-consuming, complex, and may require additional administrative resources.

3) Limited Decision-Making Autonomy: 
Nonprofits may face constraints on decision-making due to the expectations and requirements of donors, funders, and governing bodies. This can limit their flexibility to respond quickly to changing circumstances or adapt their strategies.

4) Dependency on External Funding: 
Nonprofits often rely on external funding sources such as grants, donations, and sponsorships. This dependence can create financial vulnerability, especially during economic downturns or when funding sources change or diminish.

5) Staff Recruitment and Retention: 
Nonprofits often struggle to attract and retain talented staff due to limited financial resources. They may offer lower salaries compared to the private sector, making it challenging to compete for skilled professionals. High turnover and talent retention can affect organizational stability and effectiveness.

6) Competition and Collaboration: 
Nonprofits often operate in a competitive environment where they need to compete for limited resources, funding, and public attention. Collaboration with other organizations may be necessary, but it can also involve complexities, such as aligning missions and managing different organizational cultures.

7) Overhead Stigma: 
Some people have a perception that nonprofit organizations should spend a significant portion of their funds directly on programmatic activities rather than administrative or overhead costs. This can create pressure to keep administrative costs low, potentially impacting organizational efficiency and capacity-building efforts.

8) Accountability and Transparency: 
Nonprofits are expected to maintain a high level of accountability and transparency. They must demonstrate that they are effectively utilizing resources and achieving their mission. This can involve extensive reporting and documentation, which can be time-consuming and resource-intensive.