BUS202 Financial Decision Making

Research the topic of Social Value and analyse how Social Value could be used in the financial decision making of a NFP program.

This is an Essay topic - formulas are optional.You will need to use full essay formatting such as title page (as per standard AC sample in Moodle), headings and bibliography.There are two essential readings under the essay heading and the Week 10 lecture will also be essential material.

Financial Decision Making in NFP Sectors

So far this subject has solely focused on decision making that firms make through analysis of financial data. However how does an organisation that does not exist to raise revenue, increase profit margins or provide a greater return to its shareholder evaluate its performance and determine decision making? Not for profit (NFP) organisations can not exclusively use financial reporting and measurements for it to establish its decisions and performance.

NFP organisations exists to improve and benefit the lives of individuals, communities, organisations and society as a whole through providing support and services.

NFP organisations can be focused on any of the following areas;

- Health

- Social services

- Aged Care

- Education

- Religion

- Culture

- Sport and Recreation

All of which aim to benefit the lives of those they are servicing.

This benefit (value) the NFP organisation is providing to society is not always transferable into quantitative measurements to assist decision making. For example, how does a charitable soup kitchen that serves homeless people evaluate its decisions and performance when it does not aim to make profit but aims to provide a service to the homeless people in the area. It is not about benefiting an owner but rather benefiting the people (society).

This is where it becomes complex. Because organisations in the NFP sector cannot solely be focused on financial reports, they need to consider how is the organisation is meeting its mission and vision. Often it can involve measurements and results that do not have a number value.  

NFP organisations need to still establish performance and decision-making metrics to ensure the stable operation of the organisation into the future.

Problems that can arise from not doing so include;

Accountability ~ If there is a lack of organisation measurements to establish how successfully the organisation is operating then there can be nothing to keep the organisations board and directors accountable to what they set out to achieve. This can lead to greater organisation issues in distrust and dishonest which can be detrimental effects in the NFP sector.

Strategy ~ It is found that those organisations which do not establish performance of decision making metrics do not utilise strategy frameworks to base operations on. This is a result of the uncertainty of what the organisation sets out to achieve.

Management ~ More frequently business leaders are on boards or managerial positions within NFP organisations. They seemingly have a bias to analyse financial performance whilst forfeiting the purpose and mission which the NFP organisation set out to accomplish.

Consequently, NFP organisations must set out performance and decision making metrics to assist operations. Two common tools are described below.

Input Vs Output

A traditional evaluation analyses the inputs required and used for the outputs achieved. It evaluates the effectiveness and efficiency of the organisations operations. The aim of the analyses is established whether the program activities are producing the desired results (effectiveness) and whether the results are adequate in proportion to the cost of effort (efficiency).

When analysing inputs, the organisation needs to collect data on such elements as the number of staffed hours, volunteer hours, the number of planning hours per programs, the equipment required, the expenses incurred etc. Similarly, outputs such as the number of meals served, the number of attendees, the number of clients served and number of members will need to be collated. The data collection will vary in accordance to the type of NFP organisation.

The organisation can then analyse its efficiency and effectiveness by comparing the two. Efficiency can be determined through such measurements as the cost per meal produced, the number of working hours per program, the cost involved with recruiting a new member and so on. Effectiveness is analysed by the number of people reached in the program compared to the projected amount reached, the quality of the service provided to clients compared to the planned standard, the level of member satisfaction compared to the organisation desired level etc. This provides a basis for the organisation to determine whether the inputs the organisation are being effectively and efficiently used in achieving its desired outputs.

It can help the organisation establish areas of strengths, weakness, opportunities and threats. They might be resources that are not being effectively used, or volunteer hours incorrectly allocated to certain services or programs, or too many expenses incurred in an area that isn’t achieving many benefits.

Family of Measure

Secondly, a new framework known as the “family of measure”, analyses five areas of the organisation that link to three key measurements. (see diagram below)

The first two areas, mission and vision link to the impact measure. The impact measure exclusively looks at the organisations progress towards its mission and long term objectives that the organisations focuses on. It is the overarching measurement of the organisations progress to meeting its mission. For example, is the vision and mission of serving homeless people meals actually happening? how many people are being fed? What is the number of homeless people in the area and how many are getting meals?

The next two areas, goals and strategies link to the activity measure. The activity measure, analyses the progress towards the goals and program implementation that drive organisation behaviour. It focuses on how the organisation is implementing correct strategy and operation to accomplish its goals. The organisation would consider such elements as what the aim of the programs is being launched, what sites are services being provided from and what resources are being utilised.

Thirdly, tactics and activities area is measured through capacity measures. Capacity measures the progress of all levels of the organisation it its ability to use resources to enable it to operate successfully. It is purposed to analyse how all areas of the organisation are enabling it to move forward. It aims to determine if areas are bottlenecking the organisation and whether resources need to be distributed differently to increase its capacity. Data that might be used in this measurement include membership statistics, volunteer database and fundraising growth.

These tools may not assist in every situation but give guidance and direction to the decisions the NFP organisation should make in order to reach its intended mission. There are no set metrics to indicate levels of performance but rather the organisations operations, resources and impact as a whole need to be considered when making decisions. For there can be suggested measures but they incorporate a large number of variables.

For example, if a church was to spend $3,000 to $5,000 on a large community outreach event that would see 100 new people return to the church the following week, would this be regarded as successful? how many of those new people would be there in 6 months’ time? 1 years’ time?

Financial Indicators

Financial performance indicators are still important to ensure that NFP organisations are sustainable, capitalized and funded for its activities. Sound financial management will require financial measurements in its general financial performance in revenue growth and working capital ratio as well as financial results from administration, programs, fundraising and grants. It is still appropriate and recommended NFP organisations use financial statements, ratios and reports to determine the financial position of the business. This can allow for planning and decision making on how the organisation can invest funds to see greater influence and ability to serve its targeted group.

Social Return

Ordinary commercial firms are now also becoming aware of the impact its operations have on the people, community, globe it operates in. Since, firms have begun analysing the social return on investment. This evaluates the social return that is not typically represented on financial statements such as in social, environmental factors. It assists the firm in identifying how effectively is the organisation using its capital and other sources to create value for the community.

Environmental and Social Reporting

Some organisations have now gone to the point of reporting on such elements of operations. It is often referred to as social accounting. It is the process of communicating the social and environment effects the organisations economic actions have on society. It is used to emphasize how seriously organisations take their corporate social responsibility.

1. Conceptual foundation – Paul in market place.

2. Theological foundation –All things to all people/Theology and Economics

3. Medium – Coffee

4. Missionary Method - Unconditional acceptance within Community

5. Theological method – non denominational Ecclesial Christology (not church but Christ)

6. Pragmatics – Commercial realities/Social Enterprise

Answer: