MNPM7010

Fund Development and Financial Management for

Nonprofit Organizations

COURSE ASSIGNMENT 1

Student Name: Liu Bian

UID: 3036441377

Total Word Count: 1591

(Questions excluded)

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Answer ALL Questions
1a.
Financial management is a crucial task in any organization. It is the process of
organizing, planning, managing, and overseeing the organization's financial
resources in order to accomplish its objectives. It is perfect for managing all of an
organization's financial operations, including risk assessment, accounting, payments,
and the acquisition and utilization of cash.

As a non-profit organization, we may think that primary mission is to achieve social

purpose rather than financial management. But unless the NPO gets finances in
order, it won't be able to achieve goals. The primary importance of NPO financial
planning and management is to achieve its overall goals and objectives. The
following points illustrate the importance of financial management to non-profit
organizations.

Financial management contributes to efficient performance of NPO. Financial

management allows nonprofits to assess their performance over time, using key
financial metrics such as ratio analysis to make informed strategic decisions and
improvements.Therefor, planning and monitoring process play an important role in
financial management, which examines that how resources are used and whether
they are used in a mission-oriented and effective way so that NPO can realize its
social purpose perfectly.

Financial management is a supervision tool that can reduce fraud and theft action in
NPO. Because of special nature of NPO, where funds cannot be distributed. NPO
should submit financial report every year to government and public to ensure the
plans can be taken out correctly, which can build up a trust relationship with
government and receive funds continuely. Regular checks are also mandatory to
minimize illegal practices such as misuse of resources, formalism in operation. With
complete financial planning, coordination and control, these problems can be easily
solved.

Financial management enhance the accountability and legitimacy of NPO. Good

financial management can be shown in financial statements with forceful data, which
demonstrate the economic dimension of NPO’s performance.With excellent financial
management, NPO raise their profile and enhance their value. By developing clear
financial plans and policies, NPO have also earned a good reputation within their
communities. They can also improve their current position and expect to gain a wide
range of trust, confidence and reliability.

Financial management promotes sustainability and longevity of NPO. good financial

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management means to have financial plans linked to a strategic plan, which includes
diversify funding sources, strategic budget, clear financial goals and donor
relationships development strategies. all information relevant to assets, liabilities and
funds. Regular financial report is one of effective methods to develop and maintain
relationships with donors, which is helpful to cultivate loyal donors who will provide
on going support through engaging them to understand NPO’s financial
performance,and whether NPO allocated their money wisely and effectively.

1b.
Actually , Cash accounting and accrual accounting are two fundamental methods
used to record financial transactions.The concepts just reflects time difference in
recording.In NPO accounting, “modified accrual accounting “, both cash and accruals
accounting , are used in financial statements, which meet different requirements
respectively.

（1）Cash accounting
The cash accounting is based on the actual receipt and payment of funds to
determine the income and expenditure of the current period. That means revenue
and expenses are recognized only when cash is received or paid. In Hong Kong,
government subvention from SWB should be recorded in cash basis. For example,A
nonprofit holding a fundraising event would record ticket sales only when cash is
received, even if tickets were sold in advance.

There are several advantages in using cash basis accounting for NPO.Firstly,it is
clear and simple to explain how well NPOs manage their budget in the form of
service.Because cash accounting mainly reflect the actual inflow and outflow of
cash, which help NPO and stakeholders have a better understanding of cash
situation. However, cash accounting is lack of detailed information about expenses
and revenue. It will be difficult to determine whether the planned programs have
been run well or not, to verify where expenses exceeded or where under
budget.Apart from that, even though the NPO fully applies cash accounting, the
financial reports are not limited cash. For example, there are expenses for property
and equipment. It means they are physically present. Since they are categorized as
fixed assets and the value is significantly material, it is a must to report these kinds
of assets.

（2）Accrual Accounting
In commercial organizations, people usually use accrual basis in record keeping,
which means all income and charges relating to a financial year should be taken into

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account, without regard to date of receipt or payment.That means revenue is
recognized when earned, and expenses are recognized when incurred, regardless of
when cash transactions occur.For example ， For the same nonprofit event, ticket
sales would be recorded as revenue when the commitment to purchase is made, not
when cash is received, and expenses would be recorded when they are incurred,
such as when booking a venue or hiring staff, even if payment occurs later.

First, accrual accounting provide a comprehensive financial situation and decision-

making basis, including account receivable and payable, which is more suitable for
large and complicated NPO. For budget management, its advantage is that it can
accurately reveal the essence of economic activity. For example, those expenses or
revenues that span periods can be reasonably allocated to the relevant accounting
period, so that the budget is closely aligned with the actual state of the service.
Additionally, accrual accounting follows the matching principle and can more
accurately reflect the real financial performance in a certain period. For example, the
cost of a service is recognized in the same period as the revenue, which is helpful to
assess the profitability of the project and have a good insight into operational
efficiency.

However, we should also notice that the accrual accounting is relatively complex,
which requires more judgment and estimation of activity, which undoubtedly
increases the difficulty and cost of preparation; Second, there is the possibility of
artificial manipulation, such as early recognition of revenue or deferred expenses,
which adversely affects the authenticity and reliability of the nonprofit organization.

2a.
The first good quality is straightforward and clear. Non-profit organization’s financial
statement have a wider range of users without professional finance knowledge than
for-profit entities, including government, board members, present and potential
donators, recipients of service and so on. Thus, irrelevant and complicated
information should be omitted to show a clear structure of financial statement,
excluding using too many technical terms and statistics.

The second good quality is Relevance. Financial statement must be relevant to the
needs of decision maker. Therefore, a good financial statement should meet users
need to comprehend the main information easily about the objective of financial
statement, evaluation elements about operation quality, capacity and strength.For
example, government and donators may more care about the statement of
comprehensive income to ensure NPO deliver services properly and get efficiency

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and effectiveness from it.For board members in NPO,they are more care about the
statement of cash flows so that they have a better evaluation of whether NPO has
enough cash to meet their liabilities and risk-resistance capacity.

The third good quality is Faithful performance. High-quality financial statement show
NPO’s economic phenomena with data and number,that would be neutral，complete
and faultless.A neutral description means the information will not be manipulated,
over-weighed or de-emphasized to exert impact to users’ information receive and
decision-making. Additionally, all necessary information which will affect user’s
understanding and judgement should be included in the financial statement. And
faultless means there are no errors and omissions in the recording and calculating.

The fourth good quality is comparability. Information on financial statement is more

useful if it can be compared with similar information on other project across different
periods. Consistency helps to achieve the comparability, referring to the use of the
same accounting methods and principles for the same projects from one period to
another. In other words, financial statement should be consistent from year to year
so that accounts can be meaningfully compared over several years.

Timelessness is the fifth characteristic for good quality. Ensuring the timelessness of
financial statement can help NPO recognize the financial problems and take
measures quickly in budget, strategic plan. Therefore, NPO mush strike a balance in
provision of reliable information and provision in a timely manner.

Based on above good characteristics, the quality of financial statement also face the
following constraints:

The first limitation is a balance of information cost and benefits. Users of financial
statement usually ignore the cost incurred in preparation and collection of
information. Sometimes, NPO try hard to offer complete and reliable information, but
it costs huge time and manpower. Apart from that, benefits are not always obvious
and measurement. Therefore, financial report rules should exclude the unnecessary
information about management, which may waste manpower and resources and
hamper employee’s motivation so that financial statement is more cost-effective.

The second constraint is Materiality. Statistical information affected by its nature and
Materiality, it is considered to be material if its omission or misstatement may affect
the decisions made by the user depending on the financial statements. That means
when amount is so small when compared with other items, standard for disclosure
may also be considered less importance.Consequently,international financial

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management standards didn’t lay down a certain percentage of materiality. Because
it affects the relative importance of these items on applying of accepted financial
management principles.