Financial Aspect Question 2

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If an organization is a nonprofit, what financial aspects are important for its formation and operation?

 Does the term nonprofit mean that the organization cannot have more revenue than expenses?

 If a nonprofit organization does earn a profit, who should receive the benefit from that profit?

Oct 5th, 2015

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Financial management:

Financial management entails planning, organizing, controlling and monitoring the financial resources of an organization to achieve objectives.

The important financial aspects that are key for the formation and operation of an NGO are as follows:

  • Consistency

The financial policies and systems of an NGO must be consistent over time. This promotes efficient operations and transparency, especially in financial reporting. This does not mean that systems may not be refined to cope with a changing organization. Inconsistent approaches to financial management could be a sign that the financial situation is being manipulated.

  • Accountability

The organization must explain how it has used its resources and what it has achieved as a result to all stakeholders, including beneficiaries. All stakeholders have the right to know how their funds and authority have been used. NGOs have an operational, moral and legal duty to explain their decisions and actions, and submit their financial reports to scrutiny

  • Transparency

The organization must be open about its work, making information about its activities and plans available to relevant stakeholders. This includes preparing accurate, complete and

timely financial reports and making them accessible to stakeholders, including beneficiaries. If an organization is not transparent, then it may give the impression of having something to hide.

  • Viability

To be financially viable, an organizations expenditure must be kept in balance with incoming funds, both at the operational and the strategic levels. Viability is a measure of the NGO's financial continuity and security. The trustees and managers should prepare a financing strategy to show how the NGO will meet all of its financial obligations and deliver its strategic plan.

  • Integrity

On a personal level, individuals in the NGO must operate with honesty and propriety. For example, managers and Board members will lead by example in following policy and procedures and declare any personal interests that might conflict with their official duties.

The integrity of financial records and reports is dependent on accuracy and completeness of financial records.

  • Stewardship

An organization must take good care of the financial resources it is entrusted with and make sure that they are used for the purpose intended --this is known as financial stewardship. The governing body (eg the Board of Trustees) has overall responsibility for this. In practice, managers achieve good financial stewardship through careful strategic planning, assessing financial risks and setting up appropriate systems and controls.

  • Accounting Standards

The system for keeping financial records and documentation must observe internationally

accepted accounting standards and principles. Any accountant from anywhere around the

world should be able to understand the organization's system for keeping financial records.


There is no model finance system which suits all NGOs. But there are some basic building

blocks which must be in place to achieve good practice in financial management.

Accounting Records

Every organization must keep an accurate record of financial transactions that take place to show how funds have been used. Accounting records also provide valuable information about how the organisation is being managed and whether it is achieving its objectives.

Financial Planning

Linked to the organization's strategic and operational plans, the budget is the cornerstone of any financial management system and plays an important role in monitoring the use of funds.

Financial Monitoring

Providing the organization has set a budget and has kept and reconciled its accounting records in a clear and timely manner, it is then a very simple matter to produce financial reports which allow the managers to assess the progress of the organization.

Internal Control

A system of controls, checks and balances collectively referred to as internal controls put in place to safeguard an organization's assets and manage internal risk. Their purpose is to deter opportunistic theft or fraud and to detect errors and omissions in the accounting records. An effective internal control system also protects staff involved in financial tasks.


There are many too;ls which a manager of an organization can use to achieve good practices im financial management. These includes the following:

  • planning

  • organizing

  • controlling

  • monitoring

Does the term nonprofit mean that the organization cannot have more revenue than expenses?

A nonprofit organization is one that does not declare a profit and instead utilizes all revenue available after normal operating expenses in service to the public interest. These organizations can be unincorporated or incorporated. An unincorporated nonprofit cannot be given federal tax-exempt status or the designation of being an organization as defined by the Internal Revenue Service. When a nonprofit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders.

Making a Profit From "Related" Activities

Nonprofit corporations, by definition, exist not to make money but to fulfill one of the purposes recognized by federal law: charitable, educational, scientific, or literary. Under state and federal tax laws, however, as long as a nonprofit corporation is organized and operated for a recognized nonprofit purpose and has secured the proper tax exemption , it can take in more money than it spends to conduct its activities.

Making a Profit From "Unrelated" Business Activities

Sometimes nonprofits make money in ways that aren't related to their nonprofit purposes. While nonprofits can usually earn unrelated business income without jeopardizing their nonprofit status, they have to pay corporate income taxes on it, under both state and federal corporate tax rules.

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Oct 5th, 2015

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