Managerial Accountinng Essay

Managerial accounting is regularly used by for-profit corporations to improve overall efficiency and profitability. Nonprofit organizations, on the other hand, have not traditionally been accustomed to evaluating operations using managerial accounting principles. But the adoption of managerial accounting techniques could be as beneficial to ensuring the longevity of nonprofit organizations as it is to for-profits, provided that nonprofit managers can select appropriate measurements, or benchmarks, that provide practical information for planning, control, and decision-making.

"Both for-profit and nonprofit organizations rely upon planning to forecast the resources needed to achieve goals. The former plans budgets enabling the optimum use of resources for profitability. The latter sets fundraising campaign goals to bring in enough revenue to support the maximum number of programs and services possible. Once planning is completed, however, for-profits continue to apply managerial accounting principles, while most nonprofits do not, despite the fact that control and decision-making could make a profoundly positive impact on their operations.

Managers of nonprofit organizations, including the director of development and director of major giving, are often compensated based on their performance in areas such as dollars raised, visits to donors made, and overall team success in meeting fundraising goals. But it is more difficult for executives to evaluate nonprofit operations for the purpose of changing or discontinuing them, largely because of the difficulty in understanding what to measure. Where a for-profit organization can usually tell whether a product costs more to produce than it returns in profit, nonprofit "products," such as donor relationships, are less tangible" (N/A, 2012).

As stated in a recent brief published by the Center on Philanthropy at Indiana University, commonly-tracked costs, such as the costs associated with cultivating donors, are sunk costs, and, therefore, inaccurate measures of a fundraising program's efficiency. A central principle used in evaluating performance in order to control operations is management by exception. For-profit managers are charged to investigate any exceptional departures from the plan. But nonprofits have a hard time determining exceptional levels of departure. Because so few agree upon performance measures, there are no industry benchmarks to evaluate against. This is why benchmarks are needed to help nonprofits manage by exception, and, in turn, better control operations.

But nonprofit managers must figure out how to measure their operations if they hope to keep them afloat, because competition is as real among nonprofits as for-profits. More than 50,000 organizations receive nonprofit status each year, and, due to duplication of efforts (according to IRS statistics), a full 60% of today's organizations will be out of business within 10 years. Despite their enormous numbers, no one has been able to come up with a reliable set of metrics or standards to judge nonprofits because, as some believe, the types of services nonprofits provide -- tangible or intangible -- are impossible to accurately measure -- no matter what type of tool or system you use to measure them (Wedig, 2004).

Until an industry standard of measurement can be established, nonprofit managers must rely on the less formal principles of managerial accounting to help their organizations thrive. Some form of measurement that is useful to the manager must be implemented. This is where benchmarking can play a critical role.

Nonprofit managers may believe that benchmarking is not useful when profitability is not an issue. But, taking a cue from for profit companies' profit-margins, nonprofits should measure their performance-margin -- measuring their success by the "difference" they make. This "difference" could be determined by how many lives are saved, how many people are taken off the streets, etc. Once this difference can be measured, it can then be benchmarked and improved upon.

Just as with for-profit organizations, nonprofits will get what they measure. Once focus is placed on managerial accounting principles, organization-wide awareness will be raised and improvements will occur naturally. Nonprofit organizations will begin to reap the benefits of healthier operations, less turnover, and even greater donations, because the key to survival for the nonprofit in today's economy depends not just on the ability to raise money, but on the ability to demonstrate effectiveness, and improve it. By applying incremental analysis and adopting benchmarks