Question

1. Are the capital budgeting rules discussed in Chapter 5 (namely NPV, IRR, Payback Period and Profitability Index) applicable to not-for-profit corporations? How should such entities make capital budgeting decisions? Defend your recommendation.

Answer 1

Yes, the capital budgeting rules are applicable to not-for-profit corporations. Not-for-profit corporations do not have extra cash in hand but they still get the work done by a very tight budget. Capital Budgeting can help these corporations to become experts of strategic budgeting.

Capital Budgeting refers to the process of defining the long term financial profitability of any investment made on behalf of the organization. It is the process by which the business decide where to invest in.

Due to the funding structure, nonprofits need to be more cautious than most businesses with their investments. Funding for nonprofits mostly come from outside source. Most nonprofits depends on donors or grants for their funding. This means that annual budgets will alter depending on cash flow. Just like any other firm, there will be years where the cash flow is great and others when the money runs low. Planning for forward is crucial.

To make Capital Budgeting decisions, nonprofits can:

1. Focus on where to cut costs- Most nonprofits fight to find areas to cut their budget because most of their funds are spent on their cause. There are some non-conventional ways nonprofits can strategically cut costs to save money on their operating budget, but the prominent is in-kind gifts.

   There are many firms out there who provide in-kind gifts to nonprofits. In-kind gifts differ from corporate partnerships in the way that they are generally one-off donations to an organization without the expectation of anything in return. This includes everything from office space, technology, software, legal services, and more. Even if you can’t find in-kind opportunities, many businesses will offer heavily discounted prices for nonprofit organizations. The key is asking for what you need and finding businesses that are willing to work with your budget.

2. Expand the income stream- Expanding the cash flow plan through different means is a fine starting step to take. Two ways nonprofits can find new funding opportunities are through capital campaigns and corporate partnerships.

   A capital campaign is a targeted fundraising campaign used to raise money for a specific initiative or program. Capital campaigns are appropriate for funding big projects that your current budget is not capable of. They are mostly used for building new office space or creating an endowment fund, but can be used for anything your nonprofit might need it for.

   A corporate partnership is a relation between a nonprofit and a for-profit organization. These are mutually beneficial partnerships where the for-profit business gets the benefit of working with a trusted nonprofit and the nonprofit receives funding they would not otherwise have access to.