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Non-profit Organizations
 The term “non-profit” tends to have negative connotations
because it tells us what these organizations do not do, not
what they do.
 A non-profit organization is one that is chartered to operate
in the interests of the society.
 It operates free of any obligation to pay income taxes.
 It is restricted by definition from participation in equity
markets since it has no shareholders.
 Its sources of funds are derived from contributions, grants,
operating surplus and debts instruments of various types.
 The principal goal of nonprofits is defined by their mission.
Non-profit institutions may be classified
into two groups:
 Government organizations and private tax-exempt
 Private organizations can be further divided into
commercial organisation and charitable groups, the
former includes trade unions, trade associations and
clubs and the latter includes hospitals, religious
groups, research, educational and social service
Management Control Systems in
Non-profit Organizations
 The issues involved in drafting management control system in a non-
profit organisation can be discussed in the following heads:

1. The mission of non-profits

2. Stakeholders’ goals
3. Key success factors
4. Performance measures
5. Infrastructure
6. Management style and culture
7. Formal Control Process
8. Communication systems
9. Rewards
10. Informal control process.
The mission of Non-profits:
 Non-profits are organised so as to pursue and
accomplish a mission i.e., its purpose. Drucker
emphasizes that a mission statement should contain
the following three elements:
 (i) The opportunities that the organization can
exploit or needs that it can meet,
 (ii) The strengths of the organisation
 (iii) What members of the organisation believe in?
Stakeholder’s goal
 In a non-profit organisation, there often is no dominant stakeholder
but a multiplicity of key stakeholders e.g. a school board, a church
or a childcare agency has multiple key stakeholders.
 Boards or Trustees are often major stakeholders because they are
the key donors and contributors of time and effort.
 The board represents a real opportunity for these institutions so long
as they focus on achieving the mission of the institution and stay out
of operational details.
 The purpose of the board is to guide and direct the mission of the
institution by evaluating major strategies, to select the CEO; they
provide and secure funds, to provide outside professional
perspective on governance and to make CEO accountable for the
accomplishment of the mission.
 In addition to the board, each non-profit has mission
stakeholders to serve: to save the lost, to heal the sick, to
protect abused children, to educate children and so on.
 In addition, there are often external parties who do not
participate directly in the affairs of the institution that have
a vital interest in the institution, such as, the public in the
work of a school district.
 Many employees and volunteers in a non-profit organisation
participate because they believe in the mission of the
 But they believe in different aspects of the organisation.
 Physicians look upon hospitals as a place to provide
service for patients and they want beds and other
services to be available for the patients, regardless of
the cost.
 They are not concerned about hospital finances and
they resist contractual arrangements that interfere with
their practises and as a result there is often a conflict
between hospital administrators and the physicians
employed at the hospital.
 In formulating stakeholder’s goals, it is necessary to
integrate all of the stakeholder’s goals around the
missions of the organization.
Key success factors:
 A key success factor for many non-profit institutions
is the number of volunteers that it is able to attract
and the number of volunteers; it is able to train at
various levels of quality.
 Another crucial variable is fund development, since
most rely heavily on the support of the people,
especially the volunteers, for contributions to
support its paid staff and its programme.
 Another critical variable is the ability to attract the
quantity and quality of board member it needs.
Performance measures
 Performance measures should be established for each
critical success factor for each goal. Reports on these
performance measures should be prepared and
distributed to those responsible for their management.
 We should attempt to quantify as many measurements
as possible. Some are quite easy to quantify.
 Example: The number of patients attended to by the
physician during a specified period of time.
 Others (example: the quality of care) are not so easy
to measure but are nevertheless critical. But even these
critical variables that are not easily quantified may
have quantitative surrogates.
 Non-profits tend to have flatter organizational structures.
Organisations tend to be functional and the functions are headed
by professionals (e.g. doctors, social workers, ministers,
 Typical responsibility centres in a child care agency are social
work, operations, administration and education.
 They tend to be cost centres unless revenue is generated, in which
case they are either revenue centres or contribution centres.
 The modern hospital has a dual organisation structure, one for the
medical side of the institution and the other for administrative
 The medical side is dominated by physicians and a broad range
of technical and support staff.
 Administrative services include housekeeping, food service,
maintenance, billing and accounting.
 A good deal of autonomy is usually granted to the hospital
departments headed by professionals such as:
nursing,laboratory, pathology, radiology, surgery and so on.
 Most of these departments are cost centres where quality of
care and overall cost performance is the key performance
 Many hospitals have created SBUs for identifiable segments
of the hospital such as outpatient surgery, obstetrics,
pharmacy, emergency room, physical medicine, etc.
 Which are profit centers and are established for strategic
planning and implementation purposes
Management style and culture
 The small and mid-sized ones tend to take on the personality
traits of the executive director and if he is a professional,
there is a tendency to place primary attention upon his area
of interest or training with little regard for management.
 In case of hospital, dual structure results in an adversarial
but co-dependent style.
 ! Caution To manage the institution effectively, control must
be maintained on the medical side of the organisation.
 A general theme that seems to be pervasive in all
departments of hospitals is that they are delivering health
care of the highest quality possible.
Formal control process:
 The formal control tool is the budget. The budgeting process is
complicated in the absence of clear, quantifiable performance
objectives for evaluating programmes.
 As part of programme evaluation, it is necessary to determine
programme costs. Programme costs are usually subdivided into two
categories: direct and indirect.
 In most non-profits, overhead is allocated on the basis of direct labour
 In case of hospital, control within the medical side is necessary for
quality patient care. This is done by using the patient record chart,
which is divided into many segments containing progress notes, reports,
and requests for all diagnostic and therapeutic procedures performed
within each department, there are many levels of control related to
the patient care mission to ensure the highest quality care.
 A hospital is divided into mission centres i.e., the departments that
work with patients directly.
 Inpatient care, laboratory radiology. Service centres such as, housekeeping, laundry
and medical records provide support to each of the mission centres.
 In addition, there are other support cost such as supplies, depreciation and
insurance that serve both service and mission centers.
 Programme costing then involves choosing the final cost objective such as cost of
care per day or cost associated with a particular diagnostic category.
 To do this, all direct costs associated with the final costs objective are traced to that
cost objective.
 To allocate in direct cost, the standard practise is to take cost of support pools and
allocate them to both service and mission centres based on allocation criteria that
had the closest bearing on how the costs were incurred.
 The service centre costs are allocated to mission centres using allocation base that
most nearly reflect the demand for service activities in mission centers.
 Cost variances are compared to budget can be worked out and analyzed.
Communication systems
 Board members if organized properly can provide
a very valuable contribution to the communication
systems of the non-profit institution.
 If their strategic work is organized by committee
and each committee meets regularly with the
relevant operating committee to add vision and
perspective, the board can play a very strong
function in furthering the mission of the organisation.
 In case of hospital, there is plethora of communication
mechanisms within both the medical and administrative sides.
 On the medical side, there is usually a computerized hospital
information system that provides up-to-date patient
information at nursing stations and contributes to the patient
control process.
 The medical committees are comprised of physicians trying
to work out the best course of treatment for a particular
 These committees begin to alter the physician behaviour to
achieve better cost performance while providing the highest
quality of care.
 The paid staff as well as volunteer staff is committed to the
mission of the organisation, hence financial rewards are not
very important.
 Promotion opportunities are also not frequent.
 In case of hospital, the primary rewards are derived from
the satisfaction received from the fulfillment of the mission to
provide high-quality health care.
 Physicians are well paid but other professionals are paid
slightly less than their counterparts in the profit sector.
 Promotion in hospitals is few, given the flat organisation
structure. There is little crossover from the medical side to the
administrative side.
Informal Control Process
 Interpersonal relationship: Because of fewer hard measurements, informal
communications, networking and politics tend to be important processes for making
resource allocation decisions.
 Informal control process: Medical managements of patients tend to be very adaptable
to the progression and resolution of diseases. Management flexibility, on the other hand,
has historically been much less demonstrable.
 Informal rewards: The strong culture of concern and pride in patient care is rewarded
with a sense of accomplishment, providing strong information rewards. Many positions
provide a fair degree of status within a hospital. Certainly, the physicians and
administrators are in positions of high status.
 Informal communications: Informal communications tend to be very prevalent and natural
among peers but more restricted laterally between departments. Government
organizations are service organisations and except for business like activities, they are
non-profit organizations. Thus, characteristics described above, apply to these
organizations. Their business-like activities such as electricity and water utilities operate
like their private sector counterparts.
Special Characteristics
 Political influences: In government organizations, decisions
result from multiple and often conflicting pressures.
 Elected officials, to be re-elected, advocate the perceived
needs of their consistency even though they may not be in
the best interests of society as a whole.
 These conflicting pressures results in less than optimum
 The managers may be prevented from making sound
business decisions; they may be required to favour certain
suppliers or to hire political supporters.
 Strict procurement policies and civil service regulations have
lessened these pressures to some extent
Public information:
 In a democratic society, the press and public believe
that they have a right to know everything about a
government organization, because of freedom of
information statutes. Some media stories describe
exaggerated mismanagement.
 Therefore, to reduce opportunities for media gossip
stories, government managers take steps to limit the
amount of sensitive, controversial information that flows
through the formal management control system.
 This lessens the effectiveness of the system.
Attitude towards clients:
 For profit, companies and many non-profit
organizations obtain their revenues from clients; hence
these organizations welcome actual and potential clients
and treat them well.
 Most government organizations are public supported;
they obtain their revenues from the general public.
 To them, additional clients are a burden, because they
create an additional demand on the service capacity
resulting in poor services and the surly attitude of the
 Managers recognize this and do their best to persuade
employees to provide satisfactory services.
Red tape
 The government has promulgated huge and
increasing number of rules and regulations. Some of
these are necessary; others are reactions to minor
misdeeds that become highly publicized.
Management compensation
 Managers and other professionals in government
organizations tend to be less compensated than
their counterparts in business.
 Consequently, the best managers do not go into
public service. There are exceptions to certain types
of scientists and engineers. Hence, there is a
problem of rewarding good performance.
 Financial accounting: Accounting standards for state
and local government are established by the
government accounting standards.