Finance
Executive Summary
The differences in NGOs and for-profits may be the solution to problems in providing sustainable projects to developing countries, if the two entities find ways to merge what they each know how to do best. For-profits and NGOs can be identified by a look at their financial statements. The NGOs have more experience taking on board the methods that ensure resilience and durability in the global marketplace; on the other hand for-profits can make long-term investments pay off. Sustainability is one significant impact and globalization is another.
NGOs based in the United States are regulated for how contributions are recognized, categorized and the value of donated services and funds in terms of revenue (FASB116, 1993). The FASB standards also define the services that must be included on an NGO’s financial statement. The services that “create or enhance nonfinancial assets or require specialized skills are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation” (FAS16 1977). Meanwhile for-profits describe their finances in terms of measured profits against operational costs.
The question arises as to what strategies need to be changed so that for-profits and NGOs can produce long lasting successful projects in developing countries. The financial markets are the problem that challenges NGOs to provide solutions that last in developing countries according to Sawers (2013 But how can those make a difference to providing solutions for developing countries? The answer may be to take advantage of the differences to provide quality services. The solution requires developing partnership frameworks with active negotiations between the entities to provide the needed solutions for the long-term.
Sawers (2013) pointed out that in the olden days competition produced hard driven rivalries. In the new millennium the landscape has changed to the point where “90 percent of global decision-makers in business, government and NGOs” rely on more collaboration in order to experience “significant global growth” (Sawers, 2013).
Solana (2014) sets forward an implementation strategy for three-way partnership building between NGOs, private for-profit businesses, and governmental entities to produce positive change in developing countries. The strategy calls for evaluating the similarities and differences of each group, in particular to identify where to allocate risk. The risk falls to the organization in the partnership that can “avoid or mitigate them and responsibilities to the most capable in order to have a sustainable service delivery to the beneficiaries in a financially sound way” (Solana, 2015 p. 259).
Solanda (2015) proposes a Public Private Not-for Profit Partnership (PPNP) scheme to correct the problems of the traditional Public Private Partnerships (PPP). In the twenty years of investment losses risk allocation determined the shareholders’ ROR.
An example of when partnerships are necessary is when NGOs have not been able to improve water-access to communities due to the disadvantages of the project-based strategy for reaching their goals. (See fig. 1) In many circumstances the NGO can act as the bridge between private and government to provide health care, sanitation or other development projects. The NGOs step out of the picture after the goal is reached to move on to produce another solution for a different community. That is because the NGO has no long term involvement in the functioning of the service. The NGOs find funding to implement the plan and provide the service, but that is where the NGO investment ends. (See fig. 1 bottom right)
Meanwhile a problem manifests itself in many cases that are perfectly suited to the financial structure and processes within for-profit businesses. Solanda (2015, p. 260) describes a case in Kenya where literally thousands of NGOs worked to solve water access problems in the country, some of them “like Kenya Water for Health Organization (KWAHO) have operated for more than 30 years.” The successes are not the whole picture, because the World Bank shows 40 percent of Kenya’s water systems are not functional amounting to losses in investments of over $1.25 billion over the past 20 years (Solanda, 2015, 2014).
Capital = Shareholders’ ROR
The slow down, theorizes Solanda (2015) is due to considering capital as defined by the shareholder’s expected rate of return (ROR). The risk allocation is the defining parameter of the risk allocation and ROR to the various types of shareholders (Solanda, 2015). Importantly, in the traditional practice the cost of capital is the interest rate when the shareholder is the bank (Solanda, 2015). The World Bank’s online database was used to compare changes in the interest rates from 200 to 2012 and then compare those values to the percent of a sanitation improvement for a country’s population that h (Table A-1). Generally, the interest rates were less but the only countries with 100 percent sanitation facilities were developed nations (UK, USA, and Japan). For Uganda the interest rates increased from 22.9 to 26.3 percent with only a 35 percent improvement and in Kenya from the interest rates decreased from 22.3 to 19.7 percent with only a 29 percent improvement for sanitation facilities (Solanda, 2015, p. 261). The examples point out the framework based on interest rates for banks as a ROR does not reflect the success or failure of the projects under consideration.
Incentives
NGOs, banks (and other loan entities) and for-profit businesses are influenced by different incentives when taking on projects in developing countries (Solando 2015). As mentioned earlier, profits are incentives that produce efficient results from for-profits, NGOs are motivated by altruistic goals, and the governments are motivated by the expectation of the pubic that high quality services will be provided (Solanda, 2015). Immediately obvious is how NGOs are not bothered by risk compared to for-profits that tend to be risk averse.
The PPNP framework proposed by Solanda (2015) can be represented by the two following equations.
PS1 = IA+S Eqn. 1
FSP = (PS2) + (PS3) + (PS4) Eqn. 2
Equation 1 represents the Payment for Service (PS1) that is used to provide the Infrastructure Availability (IA) added to the NGOs specific service required (S). The second equation is the final service that is offered to the project at the end of the project (FSP) (Solanda, 2015). FSP is the sum of the funding entities such as the government plus the NGOs funding sources plus the payment from the public (Solanda, 2015). In the framework designed by Solanda (2015) several agreements will be necessary during the long-term contracts that the partners will negotiate to produce a successful outcome. The framework is attractive because it does not rely on the differences between NGOs and for-profits that are difficult to compare such as the metrics used to measure benchmarks and goals.
Profits versus Altruistic Goals
The greatest difference between the NGO and the for-profit business is that the NGO needs to show it can produce its mission goals whereas the for-profit needs to make a profit. Since profits are measured in terms of currency the measurement tool, money, is easy to identify, but in NGOs the measurements are not as clear cut. Non-NGOs (that is for-profit organizations) provide a service or sell an item that a consumer pays for in return for using the service or taking ownership of the item. An NGO offers services, generally with a goal of improving the quality of life for people, the environment, animals and diverse populations that do not have money to exchange for the services. The NGOs rely upon membership fees, donations, or fundraisers to collect the money they need to carry on with their work. Sometimes NGOs use all three strategies or invent new ones to gain the finances they must have to continue their work. The mission of the NGO defines how resources are used to meet their goals. The mission of the NGO defines how resources are used to meet their goals.
Operational and Functional Expenses
One example is the difference between operational expenses and functional expenses. No-NGOs include on their financial statements the operational expenses that take money out of profits in order for the company to operate. Operational expenses include rent, lighting and telephone bills and all the costs of the day-to-day running of a business. Large stores like Marshalls or Targets have operating costs that are the costs of the clothing and other items they sell. An NGO does not report operational expenses on its financial statement instead it reports functional expenses.
Functional expenses are the costs for throwing a fundraiser such as renting a venue, printing tickets, advertising or cleaning. The functional costs are for diverse types of spending like those in a for-profit business, but the purposes are different for NGOs. Generally three other categories call for the costs to be itemized to meet the requirements of tax laws. The three include fund-raising, administrative management and general management. All of the itemized costs must be reported to the Internal Revenue Service (IRS).
Cost Allocations for NGOs
A business develops a budget but an NGO develops a cost allocation plan. The plan requires management to have knowledge of all the programs and functional areas under the umbrella of the NGO. Allocation can be done by different strategies but settling on approximating percentages or estimating proportional needs can be evaluated. Therefore the transportation costs are divided among the users of the NGO’s transportation. Users who use transportation every morning five days a week might be allocate 50 percent of the transportation funding. The public outreach group in the NGO may use the most paper and charge the most copier costs, so they will be allocated most money compared to other groups in the NGO.
Fund allocations are associated with the appropriate functional expense. Therefore planning cost allocation according to the percentage of users based on the payroll or proportional amount of need. The plan can relate appropriately to indirect and direct costs. Percentage of the payroll, personnel use or physical space can be used with a basis of percent or proportional allocation. The cost allocation plan is very practical because costs of activities and programs show how funds are being spent. The more accurate the task is carried out the more useful the cost allocation plan will be. In that way managers can use the plan to map out daily activities and to map out future plans.
Sustainability
Another reason NGOs are able to adapt quickly to the concept of sustainability is that they already measure benchmarks and goals with difficult to quantify variables like quality of life or quality of environment. On the other hand, for-profits use measurements that related to operational costs and cash flow; easy measurements to quantify numerically. Although when focusing on the issue of measuring qualitative data, if for-profits take a closer look; they do have experience with the method (Coallier & Koopman, 2014). Coallier and Koopman (2014) note that value-based metrics on difficult to quantify business aspects are becoming more common on topics like employee morale, customer loyalty, and the environmental footprint of the company. Therefore in the future more sustainable efforts using unquantifiable metrics in for-profits can catch up with NGOs.
Another strategy that could prove very practical is creating frameworks for PPNPs like that of Solanda’s proposal (2015) in order to overcome the differences between NGOs and for-profits in order to produce successful project outcomes in developing companies.
References
Coallier, Donna & Koopman, Lauren Kelley. (2014). How sustainablity can boost M&A profits. CFO Magazine. US. 30 May. http://ww2.cfo.com/management-accounting/2014/12/corporate-transparency-openness-revolution/
FASB (Financial Accounting Standards Board). Statement of Financial Accounting Standards No. 116: Accounting for contributions received and contributions made. Financial Accounting Foundation: Norwalk, CT. 1993. <http://www.fasb.org/resources/ccurl/770/425/fas116.pdf>
FASB (Financial Accounting Standards Board). Statement of Financial Accounting Standards No. 16: FAS16 Status Page and FAS16 Summary. Prior Period Adjustments. Financial Accounting Foundation: Norwalk, CT. 1977 June. <http://www.fasb.org/cs>
Red Cross. Practical Financial Management for NGOs Course Book English. Part 2. NGOConnect. 30 August 2010. <net%20http:/www.ngoconnect.net/library/>
Sawers, Andrew. (2013). Can collaboration deliver success? CFO Magazine. US. 23 January 2013. <http://ww2.cfo.com/leadership/2013/01/can-collaboration-deliver-success/>
Solana, Erick F. Oechler. 2014). Public Private Not-for-profit Partnerships: Delivering Public Services to Developing Countries, Procedia Engineering, (78), 259-264, http://dx.doi.org/10.1016/j.proeng.2014.07.065.
World Bank. (2013) Improved sanitation facilities (% of population with access). The World Bank Group. <http://data.worldbank.org/indicator/SH.STA.ACSN/countries/IN?display=default
Appendix
Appendix 1
(Solands, 2013, - 263)
