Posted: May 25th, 2022
Q1. Explain the differences between cost-effectiveness and performance management. Which performance elements are essential for assessing financial soundness of a nonprofit?
Although sound financial performance is clearly critical for an organization to flourish, cutting costs is not synonymous with performance management itself. An organization can be maximizing its cost effectiveness but not necessarily its performance. Performance management sets specific goals for employees. Goals must be measurable to be clear and effective but not necessarily tangible in nature. Performance management is a whole work system that begins when a job is defined as needed (Heathfield, 2018, par.3). It starts with the hiring process, beginning with an effective job description of each employment position. Each employment position should be linked to specific organizational needs. This is followed up by training and monitoring that evaluates the candidates performance over time based on those needs. Presumably the performance markers are also linked to financial solvency (for example, in the case of a nonprofit, soliciting a certain amount of donations from givers through effective marketing campaigns with strong ROI) but again solvency is not the sole objective.
Financial soundness of a nonprofit is assessed slightly differently than a for-profit organization. Nonprofits are not beholden to shareholders but they must still remain financially solvent and stable. It is important to remember that being a nonprofit does not mean the organization has a lack of concern for financial data. Nonprofit is a tax status, not a way of operating: Positive operating results (unrestricted revenue consistently exceeding expenses) are an indicator of strong financial management (Kramer, 2013, par.6). The ways of tracking financial success may be slightly different for the institutionfor example, versus, overly focusing on the ratio of earned to contributed revenue reliability and a steady revenue stream may be a better indicator, indicating that the organization consistently has enough funds to support its activity (Kramer, 2013, par. 5). But that does not mean ignoring revenue needs entirely.
Q2. How do the board and audit committee utilize activity-based cost reduction information in governance?
Without activity-based cost reduction approaches, a firm is able to lack a clear view of what drives costsand profitability of business units transparent across the enterprise (Using ABC, 2018, par.1). In contrast to other methods, activity-based costing, focuses on activities not responsibilities. It depersonalises the cost review and enables management to value the activities undertaken in relation to the level and/or quality of service provided and factors which cause the costs to be incurred (Using ABC, 2018, par.6). Instead of simply offering information about the financial drain upon the organization, Analysis by activity also allows a fundamental rethink of the way the institution is organised and how it operates and may result in radical reorganization (Using ABC, 2018, par.5). Rather than merely providing a showcasing of the different financial drains upon the organization, activity-based costing gives a portrait of how the organization is currently operating.
Focusing on activities allows the organization to determine how and why, not simply that, certain drains upon potential sources of profit are occurring. Finding substitute activities or more efficient ways to deliver the same service can result in meaningful reductions without impeding organization performance. An audit of efficiency simultaneously with costs prevents managers that have been padding their budgets in an effort to reduce a financial drain upon their bloated departments from benefiting from such financial slight-of-hand. It also ensures that departments that are performing vital but resource-intensive services are not cut to the detriment of overall organizational performance.
Heathfield, S. (2018). Performance management. The Balance. Retrieved from: https://www.thebalance.com/performance-management-1918226
Kramer, P. (2013). Top indicators of nonprofit financial health. Nonprofit Finance Fund. Retrieved from: https://www.nonprofitfinancefund.org/blog/top-indicators-nonprofit- financial-health
Using ABC to reduce costs. (2018). Global FS Consulting. Retrieved from: http://www.globalfsconsulting.com/display.php?page=1086
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