Chapter 23 – Nonprofit
Organizations
 Importance
 Well
of nonprofit organizations
over $100 billion is donated and allocated
each year
 Assets probably exceed a trillion dollars
 Nonprofits carry out important social goals
including education, healthcare, and welfare
Strategy in Nonprofits
 Nonprofits
go through strategic planning
process similar to business
 Must have a competitive advantage in order
to be able to attract funds
 Must
meet an important need more efficiently
than competing nonprofits
Management and Governance of
Nonprofits
Nonprofits face many of the same agency
problems as for-profit corporations
 Donors want to earn a high return on their
“investment” in terms of mission achievement
 Audited accounting statements aid monitoring
 Competition for funds between nonprofits creates
pressures for efficiency

Capital Budgeting in Nonprofits

Nonprofits face more complex goals and success
measures
 Lives
saved
 People educated
 Etc.
Capital Budgeting in
Nonprofits

Given goals to be achieved, it is often possible to
use classic capital budgeting techniques to find the
most efficient ways to achieve goals. Examples
include
 Lease
vs. purchase of a homeless shelter
 Energy efficiency investments
 Outsourcing of services such as accounting, food
preparation and maintenance
Capital Budgeting in Nonprofits
 Efficiency
investments can be analyzed as
they are in for-profit corporations
 Mission investments can be analyzed in
terms of minimizing the present value of
cash flows to achieve a mission
Taxes and Nonprofit Cash Flows
 Nonprofits
must have a legitimate charitable
focus to receive exemption from income
tax, and to allow donors to deduct their
contributions from their taxable income
 Nonprofits can have for-profit subsidiaries
Risk in Nonprofits
 Nonprofits
face many of the risks faced by
for-profit businesses
 They use tools such as pro forma analysis to
assess risk and ability to meet obligations
 They do debt capacity calculations
 They use discount rates that reflect the risk
of their investments
Accounting for Nonprofits
Nonprofits use a method called fund accounting
 Instead of profit or loss, they use increase or
decrease fund balance
 Recognition of additions, such as the values of
deferred gifts, is an area of constant debate, as is
the recognition of income in for-profits

Capital Structure for
Nonprofits
 Many
nonprofits borrow money,
particularly for uses such as building
acquisition
 Debt capacity analysis is very similar to that
used by for-profits
 Ratios such as debt-to-assets can be used
 Pro-form cash flow analysis is also used
Cost of Capital for Nonprofits
 Opportunity
cost should be the guiding
required return principle
 If we are considering investment of
resources in a more efficient building, we
might look at the volatility of energy
savings and compare it to investment in
energy stocks, for example
Capital Rationing
Nonprofits almost always have more desirable
projects than they can fund
 A direct calculation of the benefits of educating
three people vs. saving one life with a heart
transplant is not possible
 Projects can be ranked in terms of the amount of
achievement of a particular goal per dollar spent
