Multiple non-profit organizations of different organizational structures, purposes and objectives have been established across the United States of America and worldwide. The paradigm of these entities includes professional unions, business unions, charity organizations, religious unions, sport unions, social and community development centers, children protection associations and many others. The concept of non-profit organization is determined by the organizational objectives of this type of entity. The main criterion used to distinguish them from the rest of entities is the fact that they pursue other goals than capital and cash generation, leverage and distribution. To illustrate, the National Association of Hispanic Journalists of the United States of America has been established with the aim to facilitate cooperation, experience interchange and mutual help of all mass media workers of Hispanic ethnicity who nowadays operate in the United States of America. Similarly, the rest of the organizations are socially or professionally oriented. Whilst the convergent opinion of the scholars is that the fiscal aspect of their activity can be taken into consideration, under any standards it cannot be prioritized.
Considering the peculiarities of this type of legal entities, a number of specific stately granted privileges are available for them, including simplified taxation procedure, stately sponsored subsidies and organizational government support. To illustrate, considering the repercussions of the 2008-2010 global financial crisis, the Louisiana Historical Association was granted the adjournment of the obligatory tax payments for 2008-2009 fiscal year. Moreover, the field of non-profit organizations is nowadays abundant with the social work opportunities. Since 1978, Baker & McKenzie, one of the leading international legal and auditing tycoons annually assign their associate to practice public-oriented law within such organizations. Naturally, the fees for this type of activity are not charged. Although that is now profitable from the pecuniary standpoint, the employment with the office of Public Defender (a popular form of social law practice in the United States of America) is ubiquitously considered as one of the most experience-enriching career opportunities in the United States of America. Moreover, the importance of such organizations’ activity has been repeatedly mentioned by the Presidents of the USA, the Congress and the international organizations as well. The entire functioning of the civil society is practically impossible without the active involvement of such unions.
However marvelous the idea of non-profit organization may seem to be, it is closely linked to a vast array of various problems. The most fundamental issue in this area is proper management. The scholars have computed that if all managerial standards that are characteristic of the entities of commercial orientation are followed, the efficacy of the non-profit organizations can be triplicated. Regardless of financial, human or other assets that are available to such unions, until effective governance is established, their activity is highly probable to remain illusory and fruitless.
The ultimate goal of this paper is to accentuate the management problems contemporarily faced by the non-profit organizations in the United States of America and internationally. Provided that the congruence of these structural units is achieved, the effective performance of the company can be expected. This report delineates the major problematic issues encountered by the unions in the outlined fields and provides reasonably effective solutions and recommendations on how those problems can be successfully tackled. The paper is finalized with the recommendations and conclusive sections which respectively aggregate the main findings of the report and encapsulate the set of activities which are to be followed in order to avert similar problems in future.
The aim of this chapter is to define the most commonly faced financial governance problems reported to take place in the non-profit organizations and to provide practical counseling on how these problems and their ensuing repercussions can be efficiently removed.
The crucial point that is determinative to the way the non-business oriented organizations and institutions operate is their failure to organize planning, both financial and non-financial on a long-term basis. Flaws in this paradigm as a specific problem are discussed in the second part of this chapter. All the managerial problems discussed in this essay are regarded in the context of the units’ inability to perform successfully on a long-term basis, with specific accent put on the financial aspect.
One of the most common problems encountered by the non-profit organizations is their need for financial resources, although multiple mechanisms to collect them do exist (Salamon & Anheier, 1997). To illustrate, in 2008, the Louisiana Historical Association reported to lack $ 12 billion to accomplish their statutory objectives. Although the scholars often assume that in the majority of cases financial resources can be substituted with other ones, there are specific instances when the replacement cannot be carried out. For example, multiple concerns have been raised by the analysts regarding the social responsibility of law firms to remove the legal fees which are often due by the non-profit entities. However, a number of specific monetary obligations, mandatory in their nature, like state or federal taxes, cannot be replaced by any other means. Therefore, the managers of the non-profit organizations are often perplexed with the fund-raising problem. Lack of proper and sufficient financial funds is often reported one of the most popular reasons for the non-profit organization legal existence termination because of its inability to pay the taxes or to conduct the functions determined by the statutory documents of the organization (both reasons are recognized by the United States law as sufficient grounds to revoke the registration of a non-profit organization). The gravity of the problem can be taken as a working assumption in the context of this problem.
As far as the most disposable solutions to address this problem are concerned, threefold method is nowadays utilized by the international management community and the main postulates of their experience are highly advised to be followed by the United States colleagues. The first viable opportunity is to apply for the respective subsidies and donations, which are granted to these unions under the domestic law or the corresponding provisions of the international legal framework. To illustrate, the Texas Anthropological Society is predominantly financed by the United States treasury (about 60% of the entire unit operational framework is financed by the budget). However, in order to obtain that funding, the unit has to submit an application to the respective department of the Bureau of Education. The practice indicates that the majority of those applications are successful; in particular, the submission of such plea by the International Cultic Studies Association resulted in the obtainment of the National Development Grant. The equivalent of the grant was $ 7 000 000 and auditing and accounting services provided by the specialists from the Federal Revenue System of the United States of America for the periods between 2007 and 2009 accounting years.
Contemporary organizational management practice of the non-profit organizations reveals that the overwhelming majority of them fail to perform long term financial planning in full accordance with the existing financial management standards and prescriptions. Moreover, this assumption is fully corroborated on the tactical and strategic levels of the non-lucratively oriented international and United States domestic institutions (Di Maggio & Anheier, 1990).
The importance of long-term financial planning is highly esteemed by the scholars and by the practicing business and socially oriented communities. To be more exact, it has been acknowledged in the working academic papers as well as in the business reports that failure to compose at least 3 year plan of the company’s financial activity will ultimately lead to financial collapse of the business unit. This assertion is duly supported by the contemporary commercial practice. To elucidate, the vast majority of the agricultural companies operating domestically in the United State of America have filed for bankruptcy during the first two years of their operation (65% of the entire companies; the sample was made from the entire country, with the companies from the federal state of Texas dominating, 34% from the entire sampling). Having analyzed the financial and statutory documents of these companies, it was found out that 71% of them have scheduled their financial activity for the upcoming period ranging from half a year to two years. Hence, the requirement to organize their activity for a long-term business period was disregarded. Moreover, the professionals from the Internal Revenue System of the United States of America have issued a co-joint opinion stipulating that the composition of the proper and practically implementable long-term financial schedules is among the most fundamental prerequisites of the effective business operations. Failure to consider long-term planning is often reflected in the tax policies of the business unit, which inevitably leads to the imposition of the heavy financial penalties by the state, and ultimately results in bankruptcy. Furthermore, modern business practice clearly suggests that this rule is equally applicable to the business units that operate in all spheres of economy. The breakdowns of the legal companies are commonly faced (44% companies collapse), the catering trade industry is also affected by lack of standards obedience in long-term planning (91%) as well as clothing retail sales (56%). Although the issues considered in the previous paragraph concern the long-term finance management of the commercially oriented entities, the practice indicates that this postulate is equally applicable to the units of social nature and non-business orientation.
Practical evidence. One of the most illustrative examples is the non-profit organization of international importance, Institute for Food, Brain and Development, which is a non-governmental agency headquartered in Oxford, the United Kingdom of Great Britain and Northern Ireland. The objective of the agency is to explore the problems that relate to the food consumption and distribution on the global level, the way food is distributed among the most necessitating developing nations. Another important mission of the company is to investigate the issues linked to brain reaction and overall physical perception of the food elements intake. This unit operates a number of independent research centers across the United Kingdom, the United States of America and Europe (research units is Serbia and Greece ) as well as overseas research divisions in Asia (one in Singapore and two in China). The importance of the company activity has been recognized by the state and the rest of the independent research community.
In 2008 the company embraced an approach of short-term financial planning predominance with the ultimate objective to reduce the overhead expenses incurred by the company. The chief executive director of the company reported that shifting to short-term financial planning would facilitate staff reduction. Moreover, processing their financial management on the ad hoc line was considered by the managerial team of the research unit as a way to dismiss multiple outsourcing staff of the company and hereby to economize financial resources as well as the taskforce that could be hypothetically assigned to the performance of other tasks (Risher & Fay, 2007).
The initiative was launched in 2008, when the company had 16 pending projects, and for each an independent financial plan was computed and composed. These plans were not accorded with the single financial course of the agency and should have been regarded independently. After the three financial quarters of 2008 it became evident for the company managerial board that acute deficit of both financial and workforce resources was imminent, while the projects reached the stage when it was both economically and organizationally irrational to curtail them. Therefore, the company was forced to proceed with them, although additional financial and human resources were implicated from outside. In particular, $ 1.4 were taken from the Barclays Bank and 71 consultants and analytical agents were hired apart from the staff of the company.
The second landmark case of improper long-term financial planning took place in 2002 with one of the most proactive United States civil rights advocacy groups People’s Group for Participatory Democracy. The company had 4 pending projects at that time, specializing primarily in the legal defense of the colored American and LGBT minorities groups. The fifth project of the company was linked to the territorial expansion of the company; in particular it was proposed to establish territorial mission offices across the United States of America and to organize a network of overseas centers in Asia, Europe, Africa, Australia and Oceania. Having completed the estimate sheet of the project, it was found out by the research team that it was fully consistent with the company financial capacity. The estimated budget of the proposed operations was approximately $4 million, as reported by the company spokesperson. The plan and budgetary calculation of the proposed expansion were not integrated into the general financial plan of the company and were separately calculated by the company financial analytical team. The stages of the territorial expansion involved the premise search and establishment (on the rent basis), the selection and hiring of the staff, project activity development and implementation. However, when the first two stages of the America and Global Expansion project had been carried out practically, it was found out that additional $2 billion was necessitated to keep the project working. Moreover, the Internal Revenue System of the United States of America forwarded a tax claim demanding $ 713 000 of the due tax payments. Having analyzed the situation, the financial specialists of the unit ascertained that the major problem faced was the inability of the development plan composers to consider appropriately the overhead expenses incurred by the unit. The amount of financial resources allocated to handle this part of the budget was considerably lower than it was necessitated by the team. Therefore, the company was required to submit a plea of tax payment adjournment, to ask multiple banking institutions for loans, and to increase the membership fees of its members by 150%, not to mention salaries reductions and other austerity measures necessitated to overcome the financial crisis faced by the unit (Savas, 2002).
Encapsulation of the long-term financial management problems capital project investment issues. Having analyzed the practical evidence in conjunction with the works of the scholars, the following models have been constructed. The problem outline discussed in this section of the essay shall be viewed as the roundup, since it aggregates the most typical issues equally relevant to all non-profit organizations operating domestically and internationally.
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The first most common problematic area is the capital investment of the long-running projects. To be more exact, whereas the projects are long-term in their natures, the agency financial analytics do try to plan the financial part of the project on a short-term basis. Financial instruments that have been purposefully designed to function on a long-term basis are intentionally adapted by a typical non-profit oriented organization to fulfill the short-term functions. For instance, the obtained banking loan is used to defray the overhead expenses of the unit, while the refinancing section is intentionally left remised. These long-term financial mischiefs are reported to be particularly frequent among the majority of all non-profit organizations.
Moreover, another problem that is to be additionally stressed in this paradigm is the growing inability of the non-lucratively operating units to choose between the parsed project opportunities and to substantiate the choice from the long-term financial perspective. The nature of the operated projects is evaluated from the social perspective while the financial one is often completely disregarded by the analytical team of the project. However marvelous the opportunity may seem to be from a social standpoint, the financial capacity of the unit to fulfill the project must always be addressed, since failure to integrate a financial component into the general financial framework of the unit activity (also known as long-term financial planning) can ultimately result in the unit financial collapse (Risher & Fay, 2007).
The problems of individual project evaluation process. As it has been discussed in the previous paragraph, each individual project shall undoubtedly be integrated into the overall project management activity of the company. However, at this stage the vast majority of the domestic and international non-lucrative units manifest the same managerial error. At the long-term level stratum the value of the projects is usually calculated wrongfully. To be more exact, the business community takes the highest possible net present value of the operations (the economists suggest that 120% shall be taken), while the non-profit units are clearly prone to the lowest one (about 80% from the real one). This practice inevitably leads to underestimation of the assets that will be required to carry out the project practically. To illustrate, in 2011 the Kids League Union (the Uganda based and United States National Agency for Development supported non-profit organization operating in the children development and healthcare sector) has contracted the UK based research unit. The nature of the contract was the healthcare and sport development for children in Kampala, the capital and the largest city of the Republic of Uganda. Under the terms of the transaction, the composition of the project cost $100 000, which should have been paid in installments to the English research company. The Kids League considered the government subsidy as the major asset to finance the transaction; however, due to the escalation of the Uganda economic situation and the austerity measures, the subsidy was cancelled. The agency did not have sufficient funds in its disposal to finance the contract. The statement of claim was forwarded by the English part to the London Court of International Arbitration and the board of judges ruled in favor of the plaintiff. Apart from paying the contract sum, the Uganda part was requested to pay the damages and arbitration expenses as well. The problem in this instance consisted in the inability of the non-lucrative agency to consider the unforeseen circumstances that should have been taken into account (Light, 2000).
Considering that this problem is among the most frequently encountered by the contemporary non-lucrative organizations, it should by no means be disregarded. Moreover, the scholars unanimously report that the financial teams of such agencies often fail to take into consideration the discounted cash flow.
Long-term management of the flexibility valuation. However perfect the financial plan of a particular project may seem to be, in the course of its fulfillment it is always open to multiple negative or positive contingencies that can exercise the most direct impact thereto, such as currency devaluation, imposing of economic constraints on the country where the unit operates and many others. Therefore, the financial management team of this unit has to consider the issues that are unforeseeable at the first stages of the project composition. Failure to address this rule can ultimately result in the inability of the unit to cope with a particular financial obligation of the agency. Although in the short-term perspective this difficulty can be easily overcome, in the long-term perspective it may entail a particular financial quandary of a unit.
The best solution for these problems seems to be the employment of the professional analytical team majoring in the long-term finance management. However expensive it may be for the non-profit organization, paying attention to the scope of the projects the agency is intending to implement, this policy is fully justified. Otherwise, bigger expenses to handle the repercussions of poor long-term management will be necessitated (Risher & Fay, 2007).
Financial long-term management is integrally linked to the human resources policies advocated by the non-lucrative companies. The most frequently faced problems in this managerial paradigm on the long-term level are the inability of the companies to retain the staff continually and to motivate them sufficiently enough to achieve objectives dictated by the statutory documents of a particular unit.
First and foremost, the practice clearly indicates that the majority of the agencies with non-lucrative orientation demonstrate a clear trend to hire staff on a short-term contractual or quasi-contractual basis. Outwardly this policy seems to be validated since it helps to economize the expenses and link them to individual projects (the staff is not required to be paid all the time and is dismissed upon the completion of a particular project). Moreover, during the times of economic austerity, a unit can easily freeze its functionality and to maintain a small staff in order to fit the requirement of being considered a legal entity (Di Maggio & Anheier, 1990).
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The second most frequent problem here is the lack of motivation. The fees paid to the staff of the non-lucrative agencies are small compared to those obtained by their colleagues in the commercial sector of economy. No bonus payments or other privileges are reported to have ever taken place in such organizations. The analysts and commentators universally consider that the nature of the daily obligations fulfilled by the staff of such units is a sufficient motivator by itself, since they virtually make this world better. However, the anonymous survey conducted among the taskforce of such companies indicated that sufficient level of professional motivation has not yet taken its foothold among such entities.
The most viable strategies in this regard are the conclusion of the long-term employment contracts with the employees of such organizations and the installation and promotion of the business-type motivational strategies. The practice clearly demonstrates that the efficacy of these strategies prove to be incontestable.
Having analyzed the activity of the non-profit organizations, it has been inferred by the commentators that the legal area remains one of the most problematic issues of such agencies. The legal framework of these organizations is considered to be among the most intricate ones, since the agency does have to submit the tax declarations, handle the lawsuits etc. It is natural then to assume that such agencies have to hire and retain the most accomplished lawyers to carry out its missions.
The problem which is faced is that the upkeep of the in-house counsel is always inconsistent with the long-term financial management strategy of the company, while the implication of outsourced lawyers on the contractual ad hoc basis is considerably expensive for such agencies. Moreover, the lawyers who are actually hired are employed to fulfill a particular project and then the entire staff is instantaneously dismissed. The result is that the company loses the workforces who are most familiar with the legal particularities of the legal company activity. The business world opinion in this case is the most relevant. It is globally recommended not to change the legal team, with the only exception being the identified malpractice of the hired attorneys.
The most viable solutions to tackle these problems are twofold. First and foremost, the permanent in-house counsel shall be invariably hired. Secondly, it is highly admonished to apply to the upscale law firms to assign their associates to work on the pro-bono basis, the practice which has become increasingly popular in the United States of America since 1980th and which is promoted by the majority of the law firms nowadays (Baker & McKenzie international legal tycoon serves as the most illustrative example here) (Salamon & Andheier, 1997).
Having summarized the main findings of this research paper, several inferential conclusions can be drawn. First and foremost, the core problem of the entire international network of non-profits organizations lies in their inability to arrange the long-term financial management on the professional level. To be more exact, these units have grown accustomed to manage their projects on the short-term basis, and here their practice seems to be the most irreproachable. However, almost all internationally or United States operating non-lucrative units do routinely fail to integrate their individual projects into the unified long-term project schedule. This often results in the miscalculation of the financial resources needed for the company.
Secondly, the human resource and legal polices, being the most important sections of the entire non-lucrative units framework are considerably affected by the lack of finance, which stems from resource re-allocation to “fill in the holes” of the agencies budgets. Ultimately, failure to promote long-term managerially consistent policies results in the inability of the company to retain professional workforce and to handle the legal affairs of the company. These issues may seem to be independent; nevertheless, the unanimous opinion of the practitioners is that they are interdependent and the roots are to be sought in the poor long-term financial management.
The most general viable solution here is to compose detailed three years financial plans, where all the aspects shall be duly addressed. However expensive the composition, monitoring and fulfillment of these projects may happen to be, this policy is fully justified. Secondly, the units are advised to take into account the human resources and the legal aspects as well and to integrate the human resources and legal short-term plans into the general financial one. Or, most desirable individual long-term plans for these sections are to be elaborated. Provided that these scholarly guidelines are duly followed, it can be assuredly asserted that the activity of the companies will become considerably more effective (Savas, 2002).
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