- Prof. N.

Iyengar

MCS in Non-Profit Organizations Organization Characteristics Control Design Considerations

MCS - IBS Mumbai

1/4/2013

A non-profit organization is one that does not have owners who profit when revenues exceed expenses A non-profit organization operates in the interests of society and does not participate in the equity markets since it has no shareholders The activities of a non-profit organization are in line with the stated mission which describes the nature of its contribution to society Profit does not form a part of the mission The sources of funds (primarily three) Contributions Grants and Operating surplus

MCS - IBS Mumbai

1/4/2013

Most non-profit organizations provide services They are run professionally, by managers who develop objectives, strategies and budgets Performance reviews are conducted for the employees and they are suitably rewarded Controlling employees, systems and processes in a nonprofit organization is different from controlling them in profit seeking organizations

MCS - IBS Mumbai

1/4/2013

Mission Statement of Ford foundation Founded in 1936, the Foundation operated as a local philanthropy in the state of Michigan until 1950, when it expanded to become a national and inter-national foundation. Since its inception it has been an independent, nonprofit, nongovernmental organization. It has provided slightly more than $10 billion in grants and loans. These funds derive from an investment portfolio that began with gifts and bequests of Ford Motor Company stock by Henry and Edsel Ford. The Foundation no longer owns Ford Motor Company stock, and its diversified portfolio is managed to provide a perpetual source of support for the Foundation's programs and operations. The Trustees of the Foundation set policy and delegate authority to the president and senior staff for the Foundation's grant making and operations. Program officers in the United States, Africa, the Middle East, Asia, Latin America and Russia explore opportunities to pursue the Foundation's goals, formulate strategies and recommend proposals for funding.

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1/4/2013

Mission Statement of Ford foundation . The Ford Foundation is a resource for innovative people and institutions worldwide. Its goals are to: Strengthen democratic values, Reduce poverty and injustice, Promote international cooperation and Advance human achievement A fundamental challenge facing every society is to create political, economic and social systems that promote peace, human welfare and the sustainability of the environment on which life depends. Ford Foundation believes that the best way to meet this challenge is to encourage initiatives by those living and working closest to where problems are located; to promote collaboration among the nonprofit, government and business sectors, and to ensure participation by men and women from diverse communities and at all levels of society. Such activities help build common understanding, enhance excellence, enable people to improve their lives and reinforce their commitment to society.

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1/4/2013

Mission Statement of Ford foundation .

The Ford Foundation is one source of support for these activities. It works mainly by making grants or loans that build knowledge and strengthen organizations and networks. Since its financial resources are modest in comparison to societal needs, it focuses on a limited number of problem areas and program strategies within their broad goals

MCS - IBS Mumbai

1/4/2013

Seven key characteristics

Characteristics NP Orgs Atmosphere Bias Dual Bottom Lines Program Outcomes Gov. Board Roles Staff,Mixed Skill Level Vol. Participation
Atmosphereusually have to Volunteers Informality, Governing Assessing Difficulty Financial both Mission &inBoardpassion for Bias towardsof Scarcity The individuals with

Overview between Consensus Program Outcomes Participation andlimited are the mission, theleaders juggle multiple commitments, Tension and Supporting Most non-profit bottom Roleslimited capacity& bythey financial constrained a Have lessresources for and the relative priority lack lines Give influences many severely importance to assign evaluation due shallow pool candidates Dualresources ofvolunteer job program to decisions & to: strategic hierarchy of roles their often result standards for of hiring performancelimitensuring may haveof-inat all Responsible for exercise Absence Informality organizations, Non-profit to be balanced with the publicon altruism managersover-Participation operational levels family that their with limited program rely interest is authority, paid job, generallyoutcomes management training and responsibilities, and (funders, serveddivision organization, Some stakeholders other inhibitresult, they labour, Lack of by the of havemarket As a unambiguous volunteerstaffserving their program commitments regulators) bogthe Consensus care about both Expected to with feedback on help little underdeveloped down program making others bottom lines while successful decision experience organization to clients infrastructures be (clientsup Governance &care Mixing and community) primarily about mission Management roles
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MCS - IBS Mumbai

Control Designing for Non Profit Organizations is different from that for Profit making Organization due to following reasons: Absence of profit measure makes performance evaluation difficult Separate tax and legal status - Non-profit organizations are exempted from taxation and there are no shareholders Most non-profit organizations provide services rather than products where it is difficult to measure the quality & quantity Fragmented governance due to numerous sources of influence. Excessive constraints in terms of usage of funds Traditionally non-profit organizations have had poor management controls because the management consisted of professionals like teachers, priests, doctors, etc. who tended to give greater importance to professional goals and do not give requisite value to managerial skills

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1/4/2013

Employee Characteristic Employees in Non Profit Organization are different from those in Profit Making Organization Positive & Negative implications on Control System Negative Implication Control problems are usually aggravated when employees compare themselves with the employees of profit seeking organizations Positive Implication Employee Commitment

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Organization Culture Non-profit organizations are dominated by Employee/Professionals, who have little regard for management control systems Employee prefer to concentrate on their profession and undermine the value of MCS Because of poor compensation, do not attract the best of managerial talent Absence of performance measurement methods compounds this problem leading to a culture reflecting poor coordination and lack of trust among employees
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Rewards Employees get lower compensation and rewards as compared to employees in Profit Seeking Organizations Employees feel rewarded on achievement the goals forming part of mission statement (Example - Employees of a nonprofit organization working towards preventing the spread of AIDS feels rewarded when rate at which the disease is spreading decreases) Negligible financial rewards Achieving Goals in Mission Statement keeps employees motivated Exceptions Universities & Research Non-Profit Organizations

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1/4/2013

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Performance Measurement Measuring performance is difficult as most non-profit organizations provide services which are measured in qualitative terms rather than quantitative terms Without a quantifiable Performance Indicator, it is difficult to
Measure organizational performance and to use results control at the broad level Analyse the benefits of alternative courses of action Decentralize the organization and hold sub-unit managers responsible for specific areas of performance; and Compare the performance of sub-units which are performing dissimilar activities
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Performance Measurement . Irrespective of mission, scope and needs Control Design follow three types of performance metrics Success in mobilizing resources Effectiveness of staff on the job Progress in fulfilling the mission

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Fund Accounting Accounting system used by many non-profit Organizations is Fund accounting In Fund Accounting, accounts are kept separately for several funds, each of which is self-balancing, with the sum of debit balances tallying with the sum of credit balances Non-profit organizations have three categories for funds
General fund or operating fund, corresponding to the set of operating accounts Plant and Endowment fund, accounting for contributed capital assets and equities and Variety of other funds for special purposes
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MCS - IBS Mumbai

Programming and Budget Preparation Programming is a more important and time consuming process in a non-profit organization, where a decision has to be made on how best to allocate limited resources to worthwhile activities Non-profit organizations have to work within their budgets and cannot exceed the set monetary limits because they do not market their services to increase revenue They limit their expenditure and aim to break even at estimated amount of revenue The budget is therefore, a very important management control tool for a non-profit organization

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Meditech Hospital is a 250-bed tertiary care hospital specializing in the treatment of many forms of cancer. Founded in 1950 as a center for the treatment of tuberculosis patients, it has evolved into a major research and treatment institution. Many experimental therapies have been pioneered at Meditech Hospital. Patients with advanced diseases who did not find treatment anywhere else were treated here. From its inception until 1970, Meditech Hospital was a charitable institution, providing care to patients free of charge. In 1970, as the hospital authorities felt that the funds they received were insufficient, they began to bill patients. In order to bring professional management practices to the hospital operations, the staff decided to develop sound cost accounting and control procedures. Traditionally, hospitals have done little or no cost accounting. In the past, cost reimbursement was based upon actual costs incurred for patients. The governments policy to set different reimbursement levels for different diagnosis categories based on the severity of the diagnosis had resulted in tremendous pressure on hospitals, including Meditech Hospital, to determine their true costs for each relevant diagnosis category, so that costs could be reduced below the reimbursement level in order to provide subsidies for those services in which costs could not be reduced.

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1/4/2013

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Meditech Hospital hired a cost accounting manager to install a new cost accounting system that could be used for budgeting and cost control at the hospital. The cost accounting manager identified the top revenue-producing procedures and concentrated upon developing standard costs for these revenue-producing procedures. He interviewed each departmental head and related technicians, to determine the actual cost of each procedure performed in the department. Also the amount of time each employee spent on a given task was identified with the help of a questionnaire. The process was repeated for the medical group. The cost data developed as per this procedure were then used to develop the annual operating budget. Each departmental head was expected to forecast a volume of procedures for the next year. Besides the actual volume of procedures, case mix (kinds of patents) was also forecasted by each department head. Here departments estimated the kinds of patients they were expecting to treat over the next year. A standard treatment plan was prepared in order to identify what it took to treat an average patient with a given disease. On this basis, an approximate treatment cost to the hospital for a particular diagnosis and therapy was developed. In this way the hospital could gain insight into which procedures were more cost-effective as well as the costs of treating specific diseases.

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Department managers did not like the cost accounting manager and tried to avoid him as they felt that the cost accounting manager was confronting them with problems which were outside their areas of competence. Further, they felt that budgeting was not directly related to the mission of the organization, which was to provide the highest-quality health care to patients. Since the process of developing operating budgets in relationship to patient volume was a new concept for many medical managers, a considerable amount of time had to be spent to explain the process. A monthly cost report was used to determine productivity levels for all non-physician personnel. Physicians refused to use monthly cost reports to control their behavior.

Questions for Discussion: 1. How can sound control procedures help improve practices in a nonprofit organization? 2. Discuss the features of the new cost accounting system implemented by Meditech Hospital.

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1. A non-profit organization is meant to operate in the interests of the society. It is not influenced by any tax burden and functions freely without any obligations. It procures funds from contributions, grants, etc. Its unique feature is that profit does not enter into its mission statement. Since non-profit organizations do not work on the profit motive, they need to be oriented to function professionally. Adopting professional management practices in every functional area helps it to achieve the goals. Non-profit organizations are required to bring in professionalism by implementing sound control procedures to minimize costs. This may be done in the following ways: Designing a mission statement, reflecting the organizations purpose and the means to achieve it. Using qualified professionals to look after the finances to minimize wastage of resources Control of labour costs Minimizing interference from political forces Less dependence on external financiers.

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2.

The new cost accounting system implemented by Meditech Hospital focuses on: Revenue-producing procedures. Development of standard costs. Gathering accurate data from department heads in determining actual costs. Estimation of direct labour input of physicians. Calculation of cost per procedure to arrive at annual operating budget. Forecasting the case-mix along with the procedures. Calculation of appropriate treatment cost. Submission of monthly cost report to determine productivity levels of all nonphysician employees.

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Q&A
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