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  1. 1. NCLC 375/GOVT 358 -- Nonprofit Financial Planning Understanding social mission and entrepreneurial cross pressures NCLC 375/GOVT 358 -- Nonprofit Financial Planning (4:4:0) Prerequisite: 60 credits or POI Catalog description -- Provides an understanding of the social mission and entrepreneurial cross pressures underlying financial planning and accounting in the nonprofit sector. Topics include revenue sources, revenue projections, entrepreneurial techniques, and cost analysis for nonprofit and nongovernmental entities. Three hours of lectures complemented by one hour of field case studies for experiential credit. Context - The impact of the global market and global environment on nonprofit sector financing and accounting With world capital flowing more in accord with market pressures and with entrepreneurial expectations geared to gain a good return on investment, nonprofit organizations will find it increasingly difficult to isolate themselves from these competitive demands and entrepreneurial techniques associated with raising money. While philanthropy remains an important societal force in allocation of scarce resources, nonprofit organizations need to consider which philanthropic and entrepreneurial concepts and tools are appropriate to adopt in order to remain fiscally solvent. Such a task for these social mission oriented entities is formidable. Often, these nonprofit organizations face pressures and cross pressures that do not meld with competing for money and capital on the basis of economic efficiency nor return on capital. Nonprofit organizations are built on trust. Additionally, statutory requirements, social mission statements, donor restrictions, and bureaucratic lethargy can work against use of the economic efficiency and the return on investment drive associated with global economic markets. Historically, nonprofit organizations have viewed the saliency of their social mission, not how entrepreneurial they were, as the way to stay solvent. Moreover, opposition to economic or market efficiency goals is frequently considered appropriate in value laden, socially conscious, democratic societies. The anti-global, sometime cell based terrorist movement makes the survival challenge more imposing for nonprofit organizations. The even present demand since 9/11/01 makes preparedness (often via database construction and access) an added task for nonprofit organizations. Objectives -- explore, observe, and use traditional and entrepreneurial financial planning and business accounting tools in nonprofit organizations facing the cross pressures of markets, social missions and disaster preparedness • Examine the nature of the cross-pressures between trust, social mission and market criteria. 1
  2. 2. • Provide a basic understanding of special legal status and role private nonprofit organizations are granted by governments for providing certain public services • Introduce students to the traditional social mission driven approach of nonprofit organizations, the historic reliance on charitable contributions, and traditional financial planning and accounting • Consider entrepreneurial financial planning strategies and tools such as in-house savings for investment, obtaining a line of credit, social investment capital (sometimes through angels), long term borrowing, royalty payments, endorsements, franchising and sale of products, that can reasonably be adopted by nonprofit organizations facing market and social mission cross pressures • Incorporate emerging accounting and financial reporting models amenable to judging entrepreneurial financial and social mission results realized by nonprofit organizations • Provide an atmosphere where students can learn by hearing from and interacting with nonprofit and business professionals who deal with these pressures on a daily basis. • Use database, document management and intranets to organize, access and format information • Use spreadsheets, such as Excel, to test and implement financial challenges faced by nonprofit organizations. Course Project -- Working with Nonprofit Professionals The course project will offer students the opportunity to explore individual interests in specific nonprofit organizations and apply the academic material from the class. The purpose of the project is to assess how well or poorly the entity is doing financially. Interviews, tours, reading the annual financial reports and doing a spreadsheet analysis of pertinent financial data will help judge financial performance. As part of the project, identify and critique an entrepreneurial technique(s) used by a nonprofit organization. Cases discussed in class will provide a starting point for ideas and contacts. Specific nonprofit organizations such as INOVA Health Care Systems, the Alliance for Children and Families, Northern Virginia Family Services, and the National Urban League are examples of places that can provide illustrations for student projects. Detailed requirements for the course project are listed at the end of the syllabus. A timetable is also presented. A partial list of nonprofit organizations is given at the end of the syllabus. Grading The course will be based on two take home exams (each worth 35%), a project (worth 20%), and set of computer exercises (10%). The first take home is the mid-term and second of the two exams is a final and is due on the date set for the final in the course. Grades are based on 90-100, A; 80-89, B; 70-79, C; 60-69, D; below 60, F. Generally, medical excuses are the only reason for missing an exam or other graded work. 2
  3. 3. GMU Computer Accounts Check this URL if you have not activated your GMU email account: http://mason.gmu.edu/ISO/SysEng/Mason/account.html If you use your own ISP, you will have redirect your GMU email to the email for that ISP. Many of your assignments will be email to your GMU email accounts. Texts and Readings McLaughlin, T. (2002). Streetsmart Financial Basics for Nonprofit Management. Wiley. In the topics section, a number of the readings are marked handouts. The professor will provide these readings to you. The syllabus also includes a reference section for further. If you are interested in one of these and cannot locate it, ask the professor or one of the reference librarians. Topics 1) Introduction to Database organization, Spreadsheet Use and Document Formatting – done through out the semester a) Some of the fundamental ideas and techniques of database organization and spreadsheet will be introduced by the Star staff b) Information about Star can be found at i) http://media.gmu.edu/ c) Material will be provided (usually via GMU email) for the computer exercises 2) Special status and traditional financial planning and accounting in nonprofit organizations. The trust element is examined in this section. a) Readings: In this initial section, the readings are designed to provide a picture of the special legal and traditional social mission orientation of private nonprofit organizations as well as different types of nonprofits. (1) McLaughlin. Chapter 1. "Organizational Structure: Programs and Corporations." Textbook (2) See http://www.bizfilings.com/learning/nonprofitfaq.htm for information on steps to incorporation a 501(c) 3. An IRS chart of types of nonprofits is also given in the above URL. Look under “What are the IRS classifications of nonprofit corporations?” Click on the bottom that takes one to the chart 3) Challenges nonprofit organizations face when multiple organizations see themselves as equally capable of providing services traditionally rendered mainly by a nonprofit. a) "The Future of the Nonprofit Sector: Its entwining with private enterprise and government." Weisbrod, B. (1997) in Journal of Policy Analysis and Management. V. 16. # 4. 541-555. Professor will announced how to obtain this article 4) A budget system for nonprofit organizations a) Integrate with strategic plan 3
  4. 4. b) Integrate with IT capacity c) Use of flexible budgets i) Readings: ii) McLaughlin. Chapter 11. Budgeting iii) Practice problem with flexible budgets- this practice problem will offer students an opportunity to use a database, spreadsheet, and document formatting and organization 5) Cross pressures on finance and accounting in nonprofit organizations - trust, markets, and gaps a) Historically, nonprofit organizations have operated on the basis of trust and service. Nonprofits do not distribute any earnings and do not seek to maximize profits. Thus, the assumption is that nonprofits can provide efficiently to the needy and receive adequate resources from society's philanthropic values. However, this view has been challenged by the emergence of global economic markets as a major force for distributing scarce resources. i) The readings in this section examine the debate over whether global economic markets can improve or adversely affect social equity and stability, two values associated with governments and nonprofits. (1) M. Lindenberg. 1999. "Declining State Capacity, Voluntarism, and the Globalization of the Not-for-Profit Section." Nonprofit and Voluntary Sector Quarterly. 28:4: Supplement: 147-167. Professor will announced how to obtain this article ii) Practice problem to show challenges faced by nonprofit entities in this competitive global market -- when should nonprofits operate globally? Use of database and Excel with a progressively better formatted document. This assignment will provide a simple example of working with databases, Excel, and document manipulation 6) A financial management, reporting and accounting system for nonprofit organizations and preliminary report on project. i) The financial management system of a nonprofit is shaped by these different forces, namely, (1) trust, (2) market pressures, (3) a gap left by the problems of the social welfare state. ii) Perhaps different types of nonprofits can select different mixes of trust, markets, and gaps to design and operate their financial management systems. iii) This financial management system tried to strike a balance among the three. iv) General guidelines for financial management systems are (1) A genuine cause to attract support (2) Diversity in revenue sources (3) A willingness and openness to accept market pressures and challenges 4
  5. 5. v) A carefully designed accounting and financial reporting and monitoring system to report internally as well as to contributors and other interested parties b) Elements i) Use the budget as a central planning tool. Connect it to the overall strategic plan of the nonprofit and the information technology capacity. Fund raising strategies, revenue estimates and needs estimates are integral to the budget process. A tool called flexible budgeting is a helpful device for nonprofits. Flexible budgets allow for different levels of service and funding. They show performance, and, under or overruns, for different levels of service and funding. ii) Financial statements with nonfinancial measures are an important counterpart to the budget. The budget is the plan; the financial statements and performance measures show results. iii) Internal control essentially provides for security of assets and for careful observation of whether policy is being followed. (1) Readings (1) "Mission: managing your two bottom lines." Chapter 2 in McLaughlin (2002). Streetsmart Financial Basics for nonprofit managers. Wiley. c) Preliminary Report on Project 7) Midterm, in class, about here 8) Entrepreneurial financial management in complex systems. Entrepreneurial means using business like tactics to raise money and control spending. Licensing is an entrepreneurial technique. a) Once nonprofits move aggressively into entrepreneurial techniques they face several challenges. These include i) Taxation ii) Private sector rivals iii) Reluctance of staff and boards b) A nonprofit may allow a company to use the name or logo of the nonprofit for a fee. Here is a list of entrepreneurial techniques. i) Royalties - A royalty is a payment for the use of a valuable right. Payments for the use of trademarks, trade names, or copyrights are ordinarily classified as royalties by the IRS (Internal Revenue Service). ii) Endorsement - A nonprofit can earn a healthy profit by lending its name and logo for a fee to a for profit. The motivation is to allow the for profit to show that the nonprofit endorses the for profit's products and services. The Arthritis Foundation had an agreement with Johnson and Johnson to endorse aspirin. iii) Affinity cards - A nonprofit's name or logo is imprinted on a commercial credit card and marketed to the organization's constituents. Universities use this techniques. The nonprofit receives a percentage of what is charged by the cardholder. The danger is that the nonprofit may be providing personal services to its members in working with the 5
  6. 6. credit card company. That is, the nonprofit is finding credit card deals for its constituents. iv) Advertising - Nonprofit organizations can sell space in their publications. If done on a regular basis this practice is UBI (unrelated business income) and is taxable. v) Corporate sponsorship - Nonprofit organizations can display corporate logos and receive payment from the corporation. vi) Mailing lists - Nonprofit organizations can receive rental income from allowing others to use their mailing list. vii) Educational travel tours - The social mission of a nonprofit organization can be advanced by offering travel tours to education people on the value of the social mission. viii) Borrowing - using the credit markets to raise capital and money instead of relying on donors solely. (1) Readings (a) "Pricing: How much should it cost?" Chapter 13 in McLaughlin (2002). Streetsmart Financial Basics for nonprofit managers. Wiley. (b) "Capital: why capital is not four letter word." Chapter 10 in McLaughin (2002). Streetsmart Financial Basics for nonprofit managers. Wiley. (c) Anreasen, A. (1999). "Profits of Nonprofits." Harvard Business Review. Nov-Dec: 47-50+ optional (d) Practice problems on entrepreneurial techniques, including time value of money issues 9) The financial reporting and accounting system -- measures of success, health, and compliance a) Using these systems for decision making by insiders and outside parties b) Understanding that these financial reports can dramatically affect allocation of scarce resources to the nonprofit c) The role of FASB (financial accounting standards board) d) Accounting basics i) The accounting equation 10)The statement of activities (similar to the income statement) i) Use of accrual, matching, and fair value and how "paper" losses can adversely affect the report on operating success ii) Readings: iii) "Nonprofit Accounting: Acknowledging the Strings Attached." Chapter 6 in McLaughin (2002). Streetsmart Financial Basics for nonprofit managers. Wiley. (1) Practice problem on statement of activities (a) Types of revenue (b) Handling pledges receivable (c) Paper losses and gains 11)The statement of financial position (similar to the balance sheet), the use of fair value and how "paper" losses can adversely affect the operating success 6
  7. 7. and how poor management of endowments can make the statement of financial position look bad i) Readings ii) "Balance sheets: how they get that way." Chapter 4 in McLaughlin (2002). Streetsmart Financial Basics for nonprofit managers. Wiley. (1) Practice problem showing the components of net assets, unrestricted, temporarily restricted, and permanently restricted 12) Week 12: a) Readings i) "Cash flow management." Chapter 9 in McLaughlin. b) Practice problem -- more on pledges receivable 13) Week 13 Progress report on Project 14)Do NGOs have a difference financial management system? -- time permitting. 15) Review 16) Final Exam- take home Other references: • "Globalization and its limits." Wade, R. in Dickens, P (1998). Global Shifts. • Chapter 1 - "A View from the Top" in Herzlinger, R. and Ntterhouse, D. (1994). Financial Accounting and Managerial Control for Nonprofit Organizations. South-Western Publishing Co. Cincinnati, OH. • "Post-Walrasian Political Economy." Bowles and Gintis (1993). In Bowles, S, Ginitis, H, and Gustafsson. Markets and Democracy: Participation, Accountability, and Efficiency. Cambridge University. • "The Role of Nonprofit Enterprise in '1993': Hansmann Revisited." Steinberg, R. and Gray, B. (1993). Nonprofit and Voluntary Sector Quarterly. V. 22. # 4. Winter: 297-315. • "Modern Economic Theory and the Study of Nonprofit Organizations: why the twain shall meet." (1996). Nonprofit and Voluntary Sector Quarterly. V. 25. # 4. December: 470-483. Optional. • "Application of cost-volume-profit analysis in the governmental environment." Caldwell and Welch. (1989). Association of Government Accountants Journal. Summer. 3-9. • "Evaluating the Economics of Public Sector Outsourcing." The Government Accountants Journal. Winter: 30-35. • "The bigoted Scouts of America. (discrimination against homosexuals and atheists in the Boy Scouts of America)." Dority, B. (1998). The Humanist. July-August v. 58 # 4: 35(3). • Ryan, W. (1999). "The New Landscape for Nonprofits." Harvard Business Review. Jan-Feb: 127-136. Handout. 7
  8. 8. Course Project GOVT 358/NCLC 375 -- Nonprofit Financial Planning and Accounting Project Requirements The primary questions to be answered in this project are derived from the class material. The questions are: 1) Background a) Which goals or mix of goals seem to dominate the nonprofit organization -- social equity, social change, political change, others? b) How can the financial management and accounting system be described? For example, which rule making body covers the organization? Which financial management model does the entity use? Is there a treasurer, an accounting department, and who does the audit? 2) How do you judge the financial success of the nonprofit organization? Is it good, poor, average? Some models will be given in class to analyze the financial statements. Use a spreadsheet to do your analysis of the financial statements 3) Entrepreneurial Techniques a) Describe an entrepreneurial technique used or if none are apparent, explain why. b) What is the history of the selection of this entrepreneurial technique? c) How has its success been measured? 4) What recommendations would you make for change in the overall financial management and in entrepreneurial technique? Take a position. If the financial condition is declining, what changes might be made? If you feel the entrepreneurial technique is the wrong one for the organization or that is has been imposed or forced on the organization, what changes should be made? Each project will consist of • An interview with a staff member of the nonprofit • A careful review of the financial statements -- financial statements usually have two years of data in the annual report. • Coverage of the points noted above under questions • A spreadsheet analysis of the financial statements. Models will be provided in class Projects should be about 10-15 pages in length (double spaced and typed). Be consisted with references. A range of references should be used, including academic, trade organization, and sources relevant to the organization being studied. You can consult and discuss the topic with other members of the class, but the paper must be your own product. Remember, the material from the course can be used for organizing and writing the paper. Tentative schedule for the project 8
  9. 9. Week 3 Identify 2 or 3 nonprofit organizations that might be of interest for the project Week 5 Select a nonprofit; present sources (including an interview) that you expect to use Week 8 Detailed outline -- two pages description, plus the financial statements to be used in assessing the financial success of the nonprofit, and a working bibliography Last class Final project The Technology Component The Information Technology - Data Organization and Spreadsheets Central to student appreciation data organization, algorithms and spreadsheets is to begin with simple financial problems, then, move to progressively more difficult problems. As the problems become intellectually more challenging, students begin to see value of focusing on literature behind the algorithms for financial problem solving rather than spending hours using only isolated data and spreadsheet tools and trial and error. Staff for Starworks will demonstrate the use of data organization techniques and Excel and be available for assisting students. Information for contacting Starworks is attached. Multiple Data Sources and Data Organization Although a carefully prepared and cross-referenced tabbed notebook is still important, database logic and techniques can add considerable power to storing, accessing and formatting the various types of data and information in this course. Use of database logic and techniques can not only reduce the labor intensive and frustrating qualities of a course with various sources of data and information, but such use can make the student contribution more powerful and it can be of value for job and academic career use. One of the fundamental data elements in this class is a database on revenues and expenses for nonprofit and nongovernmental organizations. Often the task is to select from the databases to address a particular question such as whether a nonprofit should more from local or domestic venue to a global one. The data input (from the database) and what if (pro forma) spreadsheet analysis can be done more than once to show alternatives and make decisions. Readings can be scanned as text files to search for academic and professional material relevant to the database and spreadsheet operations. Finished or quasi finished documents can be stored using document management systems that arrange and make these documents searchable by content and file name. Image searching a variety of files on key words such as "revenue from foreign sources." The even present demand since 9/11 makes preparedness (often via database construction and access) added tasks for nonprofit organizations. Students will get an opportunity 9
  10. 10. to repeat this database, what if, document manipulation process when they do their field study. The database, what if, document manipulation process will be gradually introduced with the instructor and the Star unit showing the basic techniques. In other words, staff for Starworks will be available to demonstrate the use of data organization techniques and Excel and be available for assisting students. Partial List of Nonprofit Organizations National Arts Stabilization The Congressional Award The Fund for American Studies Washington Performing Arts Society America's Promise Rails-to-Trails Conservancy Project On Government Oversight WVSA arts connection FDLI ZeroToThree National Clean Cities, Inc. Byte Back The Bloomingdale Fund, Inc. Catholics for Housing, Inc. City Lights School, Inc. Habitat for Humanity of Northern Virginia Volunteer Fairfax United Way - Fairfax / Falls Church CrisisLink Alexandria Volunteer Bureau Americans Helping Americans Alexandria Christmas in April / Rebuilding Together New Hope Housing ALIVE! The Campagna Center Capital Area Immigrants' Rights Coalition Children's Trust Neighborhood Initiative International Service Agencies Phillips Programs American Humanist Association Computer CORE Washington Council of Agencies National Center for Nonprofit Boards The Reading Connection League of Women Voters Northern Virginia Family Services Housing and Community Services of Northern Virginia, Inc. (HCSNV) Advocates for Youth 10
  11. 11. Multiple Sclerosis Assn of America AHC Inc. Fairfax Choral Society Kircher - Marketing Communications | Advertising & Design | Interactive Media Alzheimer's Association, National Capital Area. National City Foundation NAHJ American Health Assistance Foundation Instructor -- Prof. John Sacco jsacco@gmu.edu 11