Chapter 23 – Nonprofit Organizations u Importance of nonprofit organizations u Well over $100 billion is donated and allocated each year u Assets probably exceed a trillion dollars u Nonprofits carry out important social goals including education, healthcare, and welfare

Strategy in Nonprofits u Nonprofits go through strategic planning process similar to business u Must have a competitive advantage in order to be able to attract funds u Must meet an important need more efficiently than competing nonprofits

Management and Governance of Nonprofits u Nonprofits face many of the same agency problems as for-profit corporations u Donors want to earn a high return on their “investment” in terms of mission achievement u Audited accounting statements aid monitoring u Competition for funds between nonprofits creates pressures for efficiency

Capital Budgeting in Nonprofits u Nonprofits face more complex goals and success measures u Lives saved u People educated u Etc.

Capital Budgeting in Nonprofits u 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 u Lease vs. purchase of a homeless shelter u Energy efficiency investments u Outsourcing of services such as accounting, food preparation and maintenance

Capital Budgeting in Nonprofits u Efficiency investments can be analyzed as they are in for-profit corporations u Mission investments can be analyzed in terms of minimizing the present value of cash flows to achieve a mission

Taxes and Nonprofit Cash Flows u 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 u Nonprofits can have for-profit subsidiaries

Risk in Nonprofits u Nonprofits face many of the risks faced by for-profit businesses u They use tools such as pro forma analysis to assess risk and ability to meet obligations u They do debt capacity calculations u They use discount rates that reflect the risk of their investments

Accounting for Nonprofits u Nonprofits use a method called fund accounting u Instead of profit or loss, they use increase or decrease fund balance u 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 u Many nonprofits borrow money, particularly for uses such as building acquisition u Debt capacity analysis is very similar to that used by for-profits u Ratios such as debt-to-assets can be used u Pro-form cash flow analysis is also used

Cost of Capital for Nonprofits u Opportunity cost should be the guiding required return principle u 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 u Nonprofits almost always have more desirable projects than they can fund u A direct calculation of the benefits of educating three people vs. saving one life with a heart transplant is not possible u Projects can be ranked in terms of the amount of achievement of a particular goal per dollar spent