Performance Evaluation Parameters for Non-Profit Organizations

SHEETAL WAGH

A non-profit organization (NPO) (also known as a non-business entity) is an organization with the purpose of which is something other than making a profit.

A non-profit organization is often dedicated to furthering a particular social cause or advocating for a particular point of view.

In economic terms, a non-profit organization uses its surplus revenues to further achieve its purpose or mission, rather than distributing its surplus income to the organization's shareholders (or equivalents) as profit or dividends. This is known as the non-distribution constraint.

The decision to adopt a non-profit legal structure is one that will often have taxation implications, particularly where the non-profit seeks income tax exemption, charitable status and so on.

Objectives and goals:

Some NPOs may also be a charity or service organization; they may be organized as a profit corporation or as a trust, a cooperative, or they exist informally. A very similar type of organization termed a supporting organization operates like a foundation, but they are more complicated to administer, hold more favourable tax status and are restricted in the public charities they support. Their goal is not to be successful in terms of wealth, but in terms of giving value to the groups of people they administer to.

Functions:

NPOs have a wide diversity of structures and purposes. For legal classification, there are, nevertheless, some elements of importance:

• Management provisions• Accountability and auditing provisions• Provisory for the amendment of the statutes or articles of incorporation• Provisions for the dissolution of the entity• Tax statuses of corporate and private donors• Tax status of the founders

Features of Non-Profit Organizations:

1. Main Aim is Service:The basic aim of non-profit organizations is to serve the society. They are working for the benefit of the society as a whole.

2. Profit is not the Criterion:Non-profit organizations are formed for some idealistic purposes such as religious, charitable or providing education etc. Earning of profits can never be their aim.

3. Surplus not Distributed among its Members:Though earning profit is not the criterion for non-profit organizations, yet there may be excess of income over expenditure or excess of expenditure over income. The former is known as ‘surplus’ and latter is known as ‘deficit’. Unlike other business, surplus or deficit of non-profit organizations is not distributed among its members. They are adjusted in the capital fund of such organizations.

4. Separate Entity:The separate entity concept is equally applicable to non-profit organizations. Such organizations are treated as a separate entity distinct from its members.

5. Unique Names Connoting their Working:The names of non-profit organizations denote the nature and style of their functioning. For example, JMD Educational Society, Shri Sai Keertan Mandli, Shri Sunder Dev Sports Club and Shri Sanatan Dharam Ramlila Committee etc.

6. Management by Elected Persons:These organizations are run and managed by elected members.

7. Major Funds from Contributions and Donations etc. :Usually, non-profit organizations are not self sufficient to run their activities with the revenue generated from their own sources, so they depend upon the subscriptions, donations and grants received from various government departments.

There are 4 main Performance Evaluation Parameters for Non-Profit Organisations:

Fund Accounting

Governance

Product Pricing

Planning and Budget Preparation

1} Fund Accounting:

Government and NPO (non-profit organizations) are required to organize their accounting systems on a fund basis.

A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts recording cash and/ or other resources together with liabilities, obligations, reserves, equities which are segregated for the purpose of specific activities to achieve certain objectives in accordance with specific regulations, restrictions, limitations

Thus, each type of fund is sub-accounting entity for the purpose of external as well as internal reporting of financial estimates, budgets and performance to the stakeholders.

Fund Accounting is a method by which NPO maintain multiple funds within one set of records. These funds are typically the General (Operating) Funds, Temporary Restricted Funds and Permanent Restricted Funds.

Fund Accounting is a system of accounting in which separate records are kept for:

a) Resources donated to an organization that are restricted by donors or other outside parties for certain specified purposes or use;

b) Portions of an organization's unrestricted resources that the board has set aside for some specified future use;

c) All other unrestricted amounts.

Features of Fund Accounting:

1) This system of accounting is used by NPO of both types: Governmental and Non-Governmental

2) Each fund is a separate entity for accounting and accountability3) Each fund has to balance for income received and expenditure made in

accordance with the restrictions places on their use4) Budget approval and appropriation is the basis of income generation and

spending.5) Despite restrictions placed on the use of specific funds, there will always be a

general fund from which the organizational expenses will be passed.

2} Governance:

Governance is the systems and processes concerned with ensuring the overall direction, effectiveness, supervision and accountability of an organisation.

Good governance ensures:a) compliance with law and regulationb) that an organisation is well run and efficientc) that problems are identified early and dealt with appropriatelyd) the preservation of the reputation and integrity of the sectore) that charities make a difference and the objects of the charity are advanced

Governing is about:f) agreeing the purpose of the charity or non profitg) agreeing broad strategies to carry out the charity or non-profit’s purpose effectivelyh) accounting for the non-profit’s performancei) ensuring it operates within the law.

3} Product Pricing:

Price is the assignment of value or the amount the consumer must exchange in order to receive the offering. Pricing strategy deals with the methods of setting profitable and justifiable prices which is one of the most difficult areas of marketing decision making.

Pricing is usually a key element of the marketing mix for Non-Profit Organizations (NPO). It can help these groups to achieve a variety of organizational goals:

Profit Maximization: Though NPO are not typically to maximize profits but there are numerous instances in which they try to maximize their returns on specific events or a series of events

Example: A ₹1000-a-plate political fund-raiser

Cost Recovery: Some NPO attempt to recover only the actual cost of operating the organization.

Example: Tolls, roads and bridges, publicly supported colleges, and mass transit.

Market Incentives: Some NPO follow a lower-than-average pricing policy or offer free services to encourage increased usage of product.

Example: Seattle’s bus system offers free services in the downtown area to reduce traffic congestion, encourage retail sales, and minimize the effort required to access downtown public services.

Market Suppression: Price can discourage consumption. High prices help to accomplish social objectives independent of costs of providing goods and services.

Example: Taxes (tobacco and alcohol taxes), parking fines, toll and gasoline excise taxes.

4} Planning and Budget Preparation:

• Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.

• It may also extend to control mechanisms for guiding the implementation of the strategy.

• Strategic planning became prominent in corporations during the 1960s and remains an important aspect of strategic management.

• It is executed by strategic planners or strategists, who involve many parties and research sources in their analysis of the organization and its relationship to the environment in which it competes.

• Strategy has many definitions, but generally involves setting goals, determining actions to achieve the goals, and mobilizing resources to execute the actions.

• A strategy describes how the ends (goals) will be achieved by the means (resources).

• The senior leadership of an organization is generally tasked with determining strategy. Strategy can be planned (intended) or can be observed as a pattern of activity (emergent) as the organization adapts to its environment or competes.

• Strategic planning is a process and thus has inputs, activities, outputs and outcomes. This process, like all processes, has constraints.

• It may be formal or informal and is typically iterative, with feedback loops throughout the process.

• Some elements of the process may be continuous and others may be executed as discrete projects with a definitive start and end during a period.

• Strategic planning provides inputs for strategic thinking, which guides the actual strategy formation.

• The end result is the organization's strategy, including a diagnosis of the environment and competitive situation, a guiding policy on what the organization intends to accomplish, and key initiatives or action plans for achieving the guiding policy.

Michael Porter wrote in 1980 that formulation of competitive strategy includes consideration of four key elements:

a) Company strengths and weaknesses;b) Personal values of the key implementers (i.e., management and the board);c) Industry opportunities and threats; andd) Broader societal expectations.e) The first two elements relate to factors internal to the company (i.e., the internal environment),

while the latter two relate to factors external to the company (i.e., the external environment).These elements are considered throughout the strategic planning process.

A “budget” is a quantitative expression of a plan for a defined period of time.

It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.

It expresses strategic plans of business units, organizations, activities or events in measurable terms.

A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them

Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise.

It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include:

• To control resources• To communicate plans to various responsibility center managers.• To motivate managers to strive to achieve budget goals.• To evaluate the performance of managers• To provide visibility into the company's performance• For accountability

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