Financial management of not for profit organization is as crucial for organizational success as this is important for profit making organizations. Funding needs and performance measures of profit making and not for profit organizations vary considerably but the main financial focus of cost minimisation and bringing economies of scale is equally weighted at both sides.
Financial management of not for profit company involves assessing the spending need, collecting donations and grants and making the best possible speeding within the resource available. Not for profit organization have unavoidable limitation of scarce resources ,the reason is shareholder does not take any return in exchange of money granted. In case of profit making organizations, shareholder are always happy to invest more and more with the expectation of gaining financial return and wealth maximization. The only return that a shareholder of not for profit organization can expect is social return and improved goodwill that will reward in financial terms as well but this return cannot be measured unless the time of realization of economic benefit.
Ideally, to manage finance needs and achieve the aim of not for profit organization, management is concerned about cost minimisation therefore cash flow management and budgeting is of prime focus. The major factor that limits the effectively forecasted inflow is donors policy and timings of investments. This is not necessary that finance needs are growing and inflows also growing in line. Those who providing the grant and donation is not those who may be using the welfare services provided by not for profit organization thus unable to finance as per the requirement.
With regard to budgeting, management always faces the issue of unpredictable situation, sometimes the grants and donations available is more than the spending needs and sometimes emergency situations cannot wait for the donations to be reached. The lead time of donations request and its availability is also a issue beyond the control of financial manager. All what he or she can do is, accommodate a longer period for which finance in required than the actual time span. This is a precautionary way to control financial deficit and accommodate for emergency situation before they occur.
Effective budgeting strategy mostly adopted in not for profit organizations is zero based budgeting. A hypothetical assumption is being made related to all costs and revenue form scratch. Evidence will be required to justify the existence of every budgeted expenditures related to future program. Transparency is required to have qualitative and quantitative assessment of the budgeted program.
Another important step to ensure better financial management of not for profit organization is Cash flow management. Cash flow position exhibit fluctuation and sometimes need for cash out flow is more than the cash inflow hence leaving the cash flow at negative balance. Maximum effort that can be made by a financial planner is to use forecasted techniques in a way that has cash available as buffer. In case of unavoidable cash deficit, the alternate solution is to delay payments and bills and at the same time sending proposals to donors for approval and relieving funds for spending.
Along with Budgeting and cash flow management, asset management is also an important part in order to financially manage a not for profit organization.