The managers of non-profit organizations are in charge of designing a true Management Control system that guarantees the effective and efficient use of resources.
A non-profit organization is one whose objective is different from obtaining benefits for its owners. Generally, its objective is to provide services. In entities of this type, the decisions made by managers are aimed at providing the best possible services with the available resources.
The success of this type of organization is measured first of all by the quantity of services it provides and by their quality, measured by the contribution made to public welfare. Taking into account that the concept of service is not very susceptible of being measured in real values, it is also very difficult to choose between action alternatives in these, due to the difficulty of directly relating the costs of services and benefits..
Despite these complications, managers must somehow ensure that resources are used efficiently and effectively, this is where the problem of establishing management control measures to be applied in the policies and practices that are implemented starts. in the provision of services.
Survival
A nonprofit must receive funds through its income or other sources that are at least equal to its expenses if it intends to continue providing its services.
Characteristics of non-profit entities that affect management control
- Absence of a benefit measure Different legal and tax consideration Tendency to be service organizations Notable limitations on objectives and strategies Less dependence on clients for financial support Importance of political influences
Absence of benefit measures
The absence of a measure of benefit is the most important characteristic, since it affects all non-profit organizations, the other characteristics affect many, but not all, because they reflect trends rather than intrinsic characteristics.
All organizations use resources to produce goods and services, that is, they use inputs to produce outputs. In an organization that pursues profit, it provides an overall measure of effectiveness and efficiency. The absence of a single satisfactory global measure of performance comparable to profit is the most serious problem facing managers of non-profit organizations in developing management control systems.
In this sense, management control should be aimed at evaluating the advantages of the measure of the benefit of its service in terms of:
- Facilitate a single criterion that can be used in the evaluation of alternative courses of action Allow a quantitative analysis in those proposals in which income can be compared with costs Provide a single measure of performance Facilitate decentralization Compare performance between different organizations of the same type
Tendency to be service organizations
Most non-profit organizations are service organizations and therefore do not have the same advantages in terms of management control as companies that produce and sell tangible goods. There are then marked differences that influence the implementation of the management control system.
- Services cannot be stored, which is why if the available means to provide a service at a given moment are not used, the potential income is permanently lost. Service organizations tend to be intensive in human resources. Although these organizations require relatively little capital per unit of output, controlling this is more difficult.It is not always easy to measure the quantity of services due to the heterogeneity and specificity of each one.It is very difficult to inspect the quality of a service during its benefit.
The Management Control System must comprise one structured in terms of programs and another in terms of organizational responsibilities.
Limitations on objectives and strategies
Within broad limits, an organization seeking to make profits can select the sector in which it will undertake its business, it has the possibility to choose between different ways of competing in the sector and it can even change these strategies whenever their managers decide.
Most non-profit organizations have much less degrees of freedom and tend to change strategies slowly, generally these types of organizations make decisions about the package of services they will offer, but cannot easily decide to discontinue these.
On the other hand, organizations that receive financial support from different entities must be subject to the conditions imposed by them. In addition, many of these conditions include the types of services they can offer, and may restrict managers' choices about how their financial contributions should be used.
Sources of financial support
An organization that pursues profit gains financial resources from sales and services. If the income stream is inadequate, the organization does not survive. A company cannot survive for a long time if it produces a product that the market does not want, in this way, the market dictates the limits within which the manager can operate.
Some nonprofits also get all or substantially all of their financing from their sales revenue. Conversely, others receive significant financial support from sources other than income from services rendered. In these organizations there is no direct connection between the number of services received by customers and the amount of resources provided to the organization.
Elements of the management control process
The first requirement of good Management Control in a non-profit organization is that managers appreciate the importance of control, recognizing its feasibility, understand how to use it and want to dedicate enough time to the process.
Furthermore, the control system must comprise two main account classifications, one structured in terms of programs and the other in terms of organizational responsibilities. At the lowest level is in the account groups, each of which relate to a single program concept and a single center of responsibility. These accounts are added together at the level of concepts and categories of the programs and at the various levels of the organizational hierarchy.
The system should contain historical data and estimated data on future costs and outputs. Historical data is defined and structured in the same way as future data. An accounting system that gathers historical data that is inconsistent with estimated costs and outputs does not provide an adequate basis for control.
Management accounting in non-profit organizations
Regarding management accounting, most expenses should be measured according to the same principles that govern financial accounting, but with a greater degree of detail. Expenses are grouped by program concept and by responsibility centers. In reporting on responsibility centers, it may be desirable to measure only direct costs and omit distributed costs or to identify controllable costs separately from non-controllable costs.
Some responsibility centers are expense centers, whenever appropriate. However, responsibility centers are classified as profit centers, that is, their managers are responsible for expenses and income. The term profit center does not imply that the manager necessarily has to obtain a benefit, rather, the objective is to achieve a level of coverage of income with respect to expenses.
The budget process
The budgeting process is much more important in a non-profit entity than in one that seeks to make a profit. This may allow operational managers to modify certain plans to their own initiatives, under the assumption that the revised plan is likely to increase profits. In contrast, non-profit organizations must adhere closely to the plans expressed in the budget.
The annual operating budget is derived from the approved programs. Essentially it is an evaluation of the part of the program corresponding to the other year. In the course of the budget process, a careful estimate is made of the program costs and responsibilities for program execution that are assigned to the individual responsibility centers.
The budget is seen as the most important part of the management control process, because it specifies how the activities of the following year will be conducted.
A budgeting process begins with a realistic estimate of income. Ordinarily, expenses are planned to be approximately equal to income. This balance between expenses and income differs from the approach used in organizations seeking profit.
If budgeted expenses exceed income, the difference should be equalized by the generally unwanted actions of soliciting donations or other funds. However, a prudent course of action is usually to reduce expenses rather than analyze what income can be increased.
Bibliography:
* Management control and budget control. Carlos Mallo José Merlo Mac Graw Hill
* Management control. Setting environment and process. Anthony R. 1990
