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For many NFPs the main source of funding comes from the government. This is certainly true for public bodies and for quasi public bodies. In most countries it is also true for educational institutions. For the largest charities it is also true as governments tend to use these charities to distribute their aid programmers.

Other sources of funding include borrowing but this is only really an option for capital projects when some security can be provided. So for many NFPs the other main source of funding is from fund raising. This can take the form of seeking donations or legacies or trusts. For the larger organisations then raising funds through trading is also a viable possibility and in the UK, for example, the shopping centers have a considerable number of charities represented.

Structure of a charity

As charities are a significant number of the organisations in the NFP sector then we need to consider their structure in some detail. The first point to make is concerning the legal environment in which they operate. This can be described intra vires rather than ultra vires. The difference is as follows:

Ultra vires

An ultra vires organisation has the power to do anything which it is not specifically prevented to do according to either the law or its founding legal articles of association. All commercial organisations are founded like this and can therefore extend and change their operations according to market needs and circumstances.

Intra vires

An intra vires organisation can only undertake those activities which it is specifically empowered to undertake. It is therefore much more difficult for such an organisation to extend or change its activities. All charities are established as intra vires organisations. This can be defined as its charitable purpose.

A charity has many tax and regulation advantages but in return there are certain restrictions on what it can do. Thus a charity is not able to act as a pressure group - at least not overtly. Politics are excluded from its sphere of operation. It can engage in fund raising of course but it is prevented from trading as a means of raising funds. This might seem surprising given how many charities are visibly engaged in trading. This is done either through a third party or by means of a trading subsidiary which then gifts the proceeds to the charity.

Thus these restrictions are legal restrictions to ensure that the benefits of being a charity can only accrue to an organisation with a genuine charitable purpose but they are interpreted fairly liberally for organisations which are recognised to be charities. The ultimate sanction of course it the removal of charitable status from such an organisation.

The final point to make about charities is that they make extensive use of volunteers as well as of paid employees. This keeps their operating costs down of course but also adds another stakeholder group with an interest in and concern for how the charity operates, manages its performance and services its beneficiaries. Moreover the relationship between volunteers and paid employees is sometimes a source of conflict.

Accounting issues

We have dealt with a number of accounting issues already in our consideration of planning and budgeting; of the measurement and reporting of performance; and of the evaluation of results. Another important point to make though is concerning the time horizon adopted by these organisations. Many projects are long term in nature but sources of funds are often short term in nature. So there is a long term horizon for expenditure but a short term horizon for income, this is problematic and a source of difficulty in planning for many of these organisations.

Many of these NFP organisation engage in fund raising, as we have seen. This itself causes complications for the accounting of such organisations and can affect its operational procedures. Money can be given to one of these organisations either for its general activities or for a specific purpose. For example the larger charities frequently have appeals for a specific disaster relief operation. When money is given for a specific purpose then it can only be used for that purpose. Thus these organisations tend to have a number of funds for specific purposes.

This can be problematic when the need for such money has been completed and there is a surplus - it is difficult to use this for another purpose. A further difficulty is caused by the fact that some funding is needed for general administration. People are willing to give for a specific cause but not for general administration. Thus the accounting for these organisations is geared towards making as much expenditure as possible direct expenditure rather than indirect.

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