Financial and Strategic Management for Nonprofit Organizations, Fourth Edition

Herrington J. Bryce

• Publisher: De Gruyter
• Year: 2017
• ISBN:
  9781501505638
• Edition: 1
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

The highly acclaimed Financial and Strategic Management for Nonprofit Organizations provides an encyclopedic account of all the key financial, legal, and managerial issues facing nonprofit executives. This is today's definitive single-source text and reference for managing any nonprofit organization. Designed for both professional and graduate student readers, this work thoroughly addresses all key aspects of building managerial skill and promoting imagination and innovation in organizations across the nonprofit spectrum. Herrington J. Bryce presents every technique and concept in the context of today's public policies, leading practices, laws, norms, and expectations.

Herrington J. Bryce was a senior economist at the Urban Institute, a Brookings Economic Policy Fellow, a Fellow at the Institute of Politics at Harvard and a visiting professor in regional economics and planning at the Massachusetts Institute of Technology. He taught micro economic theory and public finance at Clark University in Worcester, Massachusetts, and was director of the program in legal and budget studies at the University College at the University of Maryland. He currently teaches courses at the College of William & Mary in nonprofits but mostly in corporate financial strategy and cost management—heavily reflected in this text. He has published extensively and has served on many state, local and federal government advisory committees. He has a PhD in economics from the Maxwell School at Syracuse University, and a CLU and ChFC from the American College.

Part I:Why Us

The nonprofit organization is an entity operating simultaneously in several spaces— one of which is its location of operation and of formation; another is its type and mission category, and a third is its status as a corporation and beneficiary of tax exemption. Each of these imposes rules and constraints on the organization and each comes with certain benefits but at a price of conformity. The manager leads into chaos or not at all when not intimately aware of these and the aspiring manager makes an uninformed choice when the alternative forms and spaces are not known. The chapters in this Part I provide material facts and discussion on these critical spaces what they allow, what they prohibit, and the primary legal reference for each. Appropriately, the first chapter in this Part I, is in the view of the author essential because it gives an operating perspective

Chapter 1
The Foundations of Nonprofit Management as Asset Management

Nonprofit management is a highly specialized form of asset management. The assets are the nonprofit as an organization (an organizational asset), all of its financial and nonfinancial assets, its tangible and intangible assets, and its non-behavioral and behavioral assets such as its sociological and its psychological assets. These are all productive ingredients of value used in one way or the other to create something of yet greater composite value that transcends the individual. That objective, the production of something of greater social value, is the organization’s mission definable in specific ways.

In meeting that objective, the management’s responsibility is to protect and to use the assets it inherits, to build on those assets so as to sustain the performance and relevance of the organization as a conductor of its mission, and to use those assets efficiently so that they can be deployed over a wider space, time or population; and in so doing, to continuously treat them with care, loyalty and adherence to purpose and to account for them properly and transparently to those, the public, for whom its benefits are intended.

How well it does these things will depend, among other things, on the quality of training, the imagination and creativity of its leadership and the context including the rules and laws by which it operates.

In a modern society, one with money as a medium of exchange or store of value, financing and financial management are necessary to do the above. The financial center of the organization carries on all the key money functions divisible into tasks and related to the organization. These functions include the raising of money, a financial asset, its investment so that it may be able to sustain growth, its stewardship, and the accounting for both its collection and use.

The nonprofit is not a bank, so collecting and growing financial assets is not singularly an objective by itself. The nonprofit is created to do specific things for the public. Therefore, financing must be related to the imperatives of programs and services. All of this is encompassed and accomplished within an organization utilizing other assets including human and sociological assets as well as the hard physical assets. Therefore, financing must also relate to the organization—what it contains, its structure, its hierarchy, its environment, and the operating rules and norms by which it must abide especially those that are externally determined for these cannot be overridden or modified by the governance structure of the organization much less the manager.

The Hierarchy

In addition to these functional purposes, the nonprofit manager must also work within the hierarchical structure of the organization. This is more than a matter of power; it is also a matter of responsibility and accountability as reflected in Figure 1.1 with a focus on the financial operation.

Figure 1.1: A Typical Organizational Structure

Every nonprofit tax exempt organization, without exception whatsoever, exists to serve a public interest in a specific way stated in the mission the nonprofit elected by its founders, in its charter that permits it to do so, and in the application of exemption that allows it to do so with the benefit of being tax exempt. Hence, every nonprofit exists to perform a specific activity that traceably leads to a net benefit to a society as a whole and therefore, the public’s interest. Some nonprofits do this directly and other do this indirectly through members.

The principal role of the trustees is to be the internal overseers of conformity of the organization with that purpose and adherence to that promised mission and using the assets of the organization to exclusively do so. Accordingly, the trustees oversee performance, a custody of the assets to perform, and for whom, when, where and how into perpetuity unless stated otherwise, all in the interest of serving the public. But the trustees also have an equally important function and that is to oversee the stewardship over all assets entrusted to the nonprofit to carry out that function. Stewardship implies preserving and protecting the assets (including the organization) that was formed, accumulating more as is necessary for the mission purpose, and dispensing it as optimally as possible to advance both the organization (the corporate asset that encapsulates all other assets) and the fulfilment of the mission as a contractual promise.

In carrying out this function, the trustees engage a principal manager either by direct hire, through a volunteer arrangement or through a management contract. This is true for the smallest to the largest of organizations because someone has to sign checks, do the work of the nonprofit, guide whatever staff is engaged and do the necessary paper work whether it is for communication persons (a letter) or it is for government reporting on any level of government. Appreciating, understanding and performing this management function with more than a pedestrian but yet teachable and practical way is what this book is all about. In the end, it is all about organizational performance as guided by individuals.

The Need for a Nonprofit Perspective

We have heard it a trillion times: Nonprofits are different from firms and governments. We shall explore the details of that assertion in the next few chapters—not for theoretical purposes—but for purposes of highlighting and explicating the requisites of successful management. However, if this is true that these sectors have different orientations, and it is, then we need a nonprofit managerial perspective. One that is not only based on significant differences, but that encourages managerial creativity, competence and comfort in what it manages, for what purpose or mission, with what methodology, contributing what value and for whom or for what public, a substantial portion of which may reveal no preference by their willingness or ability to pay or the need to do so. By being members of the public, they cannot be excluded from the benefits even as they spill over from those who receive them directly or by simple indifference.

A perspective, for the purposes of this book, is the framework out of which vision, ambition, plans, budgets, and managerial decision and actions grow. It is what a manager calls upon when trustees, clients, employees, donors, and the manager assert: “We need to keep in mind what this is all about.” And the manager with self-assurance can respond: “We are about this or that because of who we are, why we were founded, what we intend to achieve and why it will have meaningful value to our public as well as to ourselves. Yes, it is worth our effort!”

Even within the nonprofit sector perspectives differ not only because of differences in management style but because each faces a different set of opportunities, challenges, operating constraints and objectives and each manager brings a different set of experiences. There is a general perspective, however, that describes nonprofits and into which a nonprofit manager needs to utilize his or her own style, vision, and operation. The following section discusses details of that perspective. It is uniquely and accurately nonprofit and it justifies a concentrated effort in nonprofit teaching, practice, and management. It is at the core of this book.

We begin with certain core details, contextual operating realities and the environment—all affecting the managerial imagination and creativity of those choosing to manage a nonprofit organization.

Geographically, the perspective of this book is grounded in the laws of the United States. However, most of it is invariant to world geography for the following reasons. We are focused on management, most of the countries in this world where there are functioning nonprofits, created these through the adoption of laws of the United States, England and Wales, and of Canada. Many in Central Eastern and Europe have adopted these strategies in general, if not specifically, by the requirements for accession to the European Union. I am sensitive to this because of my own on-site work in many of these countries. For this reason, while this work is not a comparative analysis, the reader will find several references especially to Canada.

The Core Tasks of Managing Nonprofit Organizations

The core task of managing any organization, profit or nonprofit, is the same: to manage people, resources, and the interactions between and among them to achieve a pre-set objective. A difference between the nonprofit and other organizations—for-profit or government—is the combination of pillars on which the nonprofit organization stands to accomplish objectives even when its objectives and those of a firm or government are arguably be the same; e.g., to provide state-of-the art medical services. These five pillars (5Ms) and their core meaning are:

–Money: How it may be raised and used.

–Marketing: To persuade others to support and to participate on the merits of promise and performance.

–Membership: An identity and affinity—a public to which the organization caters with or without charge.

–Management: Its perspective, suitability, imagination and creativity toward organization and mission.

–Mission: An overarching, permanent, and empirically verifiable contractual promise to always do specifically as promised.

Management skill is essential and necessary but it is not sufficient for managing a nonprofit organization, because these five pillars give rise to a particular set of operating perspectives about what the organization may do, for whom, how, within what constraints, with what evidence of accomplishment and justification of public support be it in the form of tax exemption, membership fees or gifts and contributions. What are the elements of this perspective? It begins with the understanding of the dynamics of the nonprofit sector and it places emphasis on the value of the service it provides its public.

Secular Growth of the Nonprofit Sector

The nonprofit sector is about secular growth—especially among 501(c)(3) s. Between the last edition of this book (2000) and 2014, this group of nonprofits grew over 160 percent from 692,524 to 1,117,941. Even more, the expenditures on charities significantly outpaced the expenditures on GDP. According to the IRS (2010), between 1985 and 2010 the accumulative growth in expenditures on charities after correction for inflation was 127 percent and on the GDP after the same correction it was 66 percent. While the IRS offers no explanation, this statistic suggests a long-term secular growth trend in the nonprofit sector. We can hypothesize the following:

In good times, there may be a change in the rate but not in the growth of nonprofits and a shift in the type of nonprofit services performed—from necessities to ordinary or from non-discretionary to discretionary goods and services; e.g., from charityprovided food to recreation and from a decline in elective surgery to an increase (as hospitals reported). In short, in good times, there is a positive but moderated growth and a shift in types of expenditures.

In bad economic times, there may be an increase, probably in the rate of growth, of charities as needs and population in need increase. In short, in bad times, there is a positive but moderated growth and a reverse shift in expenditures.

The nonprofit sector appears to serve a function not unlike the social safety net: It provides a floor (other than government) to GDP, partly because it is an agent through which much of the safety net operates, whether financed by the government or by private donations, gifts and contributions. Hence, the nonprofit manager’s perspective should be grounded in operating within a sector of secular growth, whether in good or bad times, in spending needs and in the competitive entry of more organizations with a changing menu of offerings while the basic ones (food, shelter, health) remain, but are subject to some cyclical variations.

Not only is the expenditure (the demand) in secular growth as above, but so is the number of entities. Table 1.1 below shows that the number of 501(c)(3)s has been steadily growing by an annual average of about one percent from 1999 (actually from before) to the most recent data 2014. Its decline in 2011, the IRS reports, is due to a decertification of some 350,000 entities because they failed to report for the previous three years. But the steady rise resumed shortly after this administrative action. This steady growth before, during, and after the recession of 2008 means greater competition for public support, for grants, in some areas for clients or members, and the implicit need to describe a market niche—all topics of this book. B...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Acknowledgements
• About the Author
• Contents
• Introduction: Teasing Your Managerial Imagination, Creativity and Resolve
• Part I: Why Us
• Part II: We Need to Raise Money
• Part III: Marketing the Good and Bad News: Convincing
• Part IV: The Inescapable Risks and Costs
• Part V: Financial Performance Future and Prolog
• Part VI: Steady Growth
• Appendix A
• Appendix B: National Taxonomy of Tax-Exempt Entities —Core Codes
• Appendix C: Mathematics of Lobbying Expenditures
• Appendix D: Sample Conflicts of Interest Policy (Revised 5/22/97)
• Appendix E: New York State
• Appendix F: Breakeven Point
• Appendix G: Key Concepts in Federal Contracting and Glossary of Common Financial Terms Found in Such Contracts
• Appendix H: Risks of Cost Denial
• Index