Nonprofit organizations’ activities require high reporting and are strictly controlled by the tax legislation governing the monetary liability of such firms. Under constant supervision by oversight boards, such companies often face challenges caused by legal or financial constraints. To promote charitable or other activities, this is crucial to adhere to a number of conditions, and the task of the leadership of these organizations is to effectively assess the development steps to overcome potential barriers. By analyzing the operation conditions of a specific social welfare nonprofit firm, the corresponding difficulties and the ways of overcoming them will be presented based on the existing legal and operational conventions. Effective fundraising strategies and reliable reporting mechanisms are indispensable factors for the sustainable and continuous development of nonprofit organizations.
The Nonprofit Organization’s Description
The nonprofit organization works to target social welfare through advocacy services and family support. One of the key areas of activities is helping children who find themselves in difficult life situations, for instance, those who have been abandoned by their parents or who cannot receive a normal education or health care due to the low social status of their families. This type of activity does not apply to traditional charitable organizations since, as Worth (2018) notes, the practice of social welfare firms lies primarily in advocacy and not only in charitable assistance. This assistance, however, is also included in the scope of the company’s work.
Based on the Internal Revenue Service, the type of such an organization is identified under Section 501(c)(4). According to Reilly et al. (2003), this Section integrates civic and social welfare firms with a defined tax-exempt status. The authors describe such a company as the one operating “exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community” (Reilly et al., 2003, p. 5). As the target community, the child population is considered both within the country and abroad, particularly in states with weak, underdeveloped economies.
The organization provides humanitarian support to orphans and is actively involved in the engagement of volunteers in different countries. The firm oversees the collection of donations, interacts with social organizations, and promotes the idea of helping orphans and children with low social status in various communities. In addition, security protocols are being promoted, and related initiatives are being brought up for discussion by the authorities as projects designed to protect the child population. To address the health issues of the target audience, special insurance funds are organized, which, as Worth (2018) remarks, is a common practice for firms of this profile. To solve children’s educational challenges, interaction with responsible boards is carried out to help children with studying at school and subsequent admission to higher educational institutions.
Engaging sponsors to the organization’s activities is an essential aspect of the work. One of the mechanisms to help target children with education is through interaction with the national Department of Education as the body that oversees public and private institutions (Daniel et al., 2006). Resolving housing difficulties and providing temporary shelters are also part of the organization’s range of tasks. According to Worth (2018), the help of volunteers in such activities is mandatory since working with children from disadvantaged regions, for instance, those in which hostilities are taking place requires the participation of interested citizens directly in these places. As a result, the organization aims to provide social support to children in difficult life situations and in dire need of adult help.
Challenges Faced During the Work Process
Despite the good goals and important tasks that the organization sets itself, some challenges arise, which are often caused by external factors and do not depend on the activities of the firm. One of the difficulties is building effective partnerships that are critical to successful and sustainable activities. As Atouba and Shumate (2019) argue, the selfless interest that is the core business of nonprofit organizations is a hindrance for many potential partners. The effectiveness of collaboration is complicated by the fact that not all stakeholders are ready to act equally actively to address charitable goals and objectives that do not imply capitalizing on profits. Atouba and Shumate (2019) cite homophily as a common phenomenon among nonprofit firms. It implies finding partners based on similar lines of business and compatible values and priorities (Atouba & Shumate, 2019). In other words, if a certain company does not share the views regarding gratuitous assistance, this can be problematic to attract it as a partner for the provision of social welfare services, and the organization in question sometimes faces this issue.
Another significant challenge is the constant limitation of financial spending for targeted needs. Smith and Phillips (2016) highlight the important role of government agencies in sponsoring nonprofit organizations due to their lack of direct profits. At the same time, as the researchers state, the authorities often have a preference for projects that are potentially profitable, and competition with commercial companies is often difficult to withstand (Smith & Phillips, 2016). Any investment from the state requires increased accountability, but even in this case, the funds coming from the official boards are often insufficient to establish sustainable operation. The resource base with a limited budget cannot be used to solve comprehensive tasks, which, however, cannot be justified in the context of helping the target audience due to the lack of clear reasons why someone receives support and someone does not. As a result, the organization has to constantly look for sponsors outside the public field to raise funds and work in accordance with the stated goals, which cannot be realized without a specific financial background.
Financial reporting is a challenge that the organization has to deal with due to its international activities. Despite being located in the United States, the firm’s international work is associated with heightened tax responsibilities. In addition, as Worth (2018) remarks, operations abroad are complicated by distinctive country laws and individual reporting principles that are important to meet to avoid formal claims. Working with children has always been complicated by a number of ethical aspects and the increased attention of the authorities to this form of social interaction. As a result, the organization has to implement large-scale projects to prepare all the necessary documents and comply with local financial regulations to avoid claims from oversight boards. This slows down the firm and is a barrier to unimpeded assistance to targeted communities. Therefore, this context of the organization’s practice requires significant effort on the part of all employees and the management involved.
Finally, the challenge of establishing productive communication with some communities is a problem that also limits the capacity of the organization. This barrier does not apply to partnerships since interaction involves improving the knowledge base, which is sometimes problematic due to the lack of interest from third parties (Knickman, 2007). The organization cannot conduct its work effectively if certain political constraints, for instance, legal barriers, contradict the social welfare discourse and prevent the plans from being fully implemented. Beyond economic and ethical perspectives, problems can manifest themselves in underdeveloped policies that address the needs of the population, including children. For instance, the laws of individual countries prohibit adopting children by foreign families, which is a significant obstacle. Moreover, having no support from the local authorities, the organization is forced to resort to legal support from the relevant agencies, which is directly related to additional costs. Thus, political restraints can cause severe inconvenience to the firm’s open and transparent work.
Role of the Board in the Relationships with the Organization and the CEO
In the process of interaction between the CEO and the board of nonprofit organizations, specific relationships are built. They directly affect the efficiency of work and the success of the implementation of the tasks set. In the firm in question, the board includes motivated employees who understand the importance of the social welfare activities undertaken and share the CEO’s interests in addressing the key work priorities. However, full agreement on all operational aspects is not always achieved due to distinctive views on the business aspects of practice both domestically and abroad. According to Worth (2018), “the need to manage the double bottom line” is one of the nonprofit CEO’s challenges, which manifests itself in need to satisfy both the target audience’s and the business’s interests (p. 37). Therefore, some differences in views on the activities and means of realizing the goals set sometimes take place.
The role of the board in the organization’s activities is crucial. As Bruneel et al. (2020) argue, CEO-only governing apparatus is an indicator of corporate deviation since such a control model does not comply with the state principles of internal corporate regulation. Moreover, for the organization in question, the members of the board are individuals who are well aware of the firm’s target activities and who support the current policy of promoting social welfare among the target communities. The tasks of establishing communication with the authorities, building partnerships, expanding the sponsorship base, and other relevant objectives are implemented by this body. In the absence of the board, the CEO would not have an opportunity to discuss the prospects for specific interventions within the available resource base, which could cause subsequent financial difficulties. As a result, the board’s functions are critical within the activities of the nonprofit organization due to its wide range of advisory and executive services.
Given the aforementioned functions of the board, one of the potential problems in its relationship with the CEO is based on distinctive views on the financial aspects of the organization’s development. Stannard-Stockton (2008) cites the example of citizens donating funds to support charities, often at the expense of individual welfare. However, the author emphasizes that such a practice negatively affects the reputation of nonprofit organizations, and the task of an effective leader is to provide an environment for interaction with the population in which financial investments through donations come from trusted sources and are not a tool to manipulate the masses (Stannard-Stockton, 2008). For the board, one of the key prospects to realize is to attract as much money as possible to donate them to targeted needs. However, the CEO, being aware of the current situation in the charity market and other reputational aspects, may not approve of such a strategy and offer more flexible mechanisms for attracting sponsorship. Despite the common goals, the methods of achieving them differ, and each side may be unhappy with the decisions of the other with respect to both internal and external communication channels.
Disagreements between the CEO and the board on a personal level are unlikely and may involve mostly professional aspects of the activities. For instance, Worth (2018) mentions the formation factors of nonprofit organizations’ boards as one of the potentially controversial aspects and argues for possible misunderstandings by citing elected, self-perpetuating, hybrid, and advisory boards. In the current situation, with the governing body in an advisory role, interoperability problems are unlikely to arise unless poorly distributed responsibilities are assigned to different stakeholders. Thus, with productive communication and the consideration of various interests, maintaining effective interaction between the CEO and the board is real.
Federal and State Regulations Impacting the Decision-Making Process
One of the main regulations affecting the decision-making process in the nonprofit organization is tax legislation. In particular, benefits related to firms of this profile are determined at the national level, and, according to the Internal Revenue Service, social welfare organizations fall under Section 501 (c)(4) (Reilly et al., 2003). The tax-exempt status of the firm is closely monitored by oversight authorities, and a number of conditions are to be met for this status not to be lost. Firstly, personal benefits for the members of the organization are excluded, and any profit made from nonprofit activities should be recorded (Reilly et al., 2003). Secondly, incorporation requirements are imposed and imply a clear definition of the nature of the work, which, in turn, allows obtaining the tax-exempt status. For firms of this type, the corresponding procedures are simplified, but in the case of registration rules violations, severe penalties are imposed on the management and the whole firm.
Within the framework of the laws relating to state support for nonprofit organizations, the firm has the right to count on grants, thereby planning work activities and determining the range of tasks while taking into account this financial aid. Nevertheless, as Knickman (2007) notes, to receive assistance from the state, organizations must provide a detailed justification for the planned activities, and in case the allocation of funds from the budgets is assessed as irrational, one cannot count on support. Moreover, any fundraising activities are also subject to supervision by the authorities and are required to register. In this regard, according to Daniel et al. (2006), the task of any nonprofit organization is reduced to the preliminary assessment of the possibility of receiving sponsorship. Relevant prospects are considered, market trends and interests are analyzed, and only after that, requests are sent to the relevant departments. Concerning interaction with individuals, the reporting conditions remain the same. Severe penalties can be imposed if personal profits that the firm’s CEO or employees derive from sponsored investments are identified since such a violation falls under the deceptive charities article and is assessed as fraudulent activities.
One of the rights reserved for nonprofit organizations under Section 501 (c)(4) is an opportunity to participate in political campaigns. Under the official law adopted at the state level, such firms can support specific candidates financially and act with public endorsement or opposition (Reilly et al., 2003). However, several restrictions also govern this area of nonprofit organizations’ activities. Firstly, transferring money to politicians’ personal accounts is prohibited because only donations to foundations are allowed. Secondly, if the government considers the organization to participate in a political campaign for individual gain rather than targeting its main goals, sanctions may be imposed. Finally, such work may be only one of the aspects of nonprofit firms’ general activities and cannot constitute all of their work. This is crucial to take all these factors into account to establish interaction with policymakers and plan to cooperate with the authorities to promote relevant ideas and find the necessary support. In an open dialogue with government agencies and departments, decision-making requires attention and approval by the board, but this practice is potentially beneficial for the organization and can contribute to solving its key tasks.
Financial Management Method and Reporting Mechanisms
Given the many regulations and constraints, managing the budget of the nonprofit organization requires careful thought. The analysis of objective strategies to control financial flows is associated with strategic assessment and constant monitoring to avoid claims from the supervisory authorities and maintain a stable budget. As a financial management method, the total return approach is a convenient form of planning. Worth (2018) describes this practice and characterizes it as the one used by many nonprofit firms. The principle of this approach is to maximize total return when “any additional investment returns are left in the principal, enabling it to grow over time” (Worth, 2018, p. 677). This mechanism can help legally accumulate capital through risk assessment and sound strategies to add value to the investment. While having enough capital, the organization can plan further financial activities by assessing the share of dividends and distributing them in accordance with the planned needs. This practice is safe and suitable for large-scale operations since assets from sponsors from different countries form a credible background for the firm’s work and prove its popularity in the target market, which is the essential marker of success.
To eliminate errors and violations in the process of financial activities, the organization needs to involve a special audit service. Due to its international activities, the firm operates with relatively large assets, and to assess the range of work efficiently, this is optimal to engage independent accountants as auditors. According to Worth (2018), outside accounting firms are widely available, and large organizations may be in dire need of such cooperation. For the firm in question, this practice is relevant due to its status as a social welfare organization that conducts international activities and uses money raised through endowment funds both domestically and abroad. Moreover, as Worth (2018) remarks, some countries require mandatory reporting of audits in financial statements, and any fundraising activity is impossible without these procedures. Identifying potential weaknesses in the firm’s financial policy and obtaining adequate recommendations are valuable perspectives to involve such independent accounting services. Consequently, to avoid mistakes and claims from the supervision authorities, the transparency of all investments and donations can be proven through third-party verification because independent auditors are not considered interested parties and are viewed as authoritative control performers.
As an additional reporting tool, the organization, like most other social welfare firms, is to complete an annual return. Reporting to the Internal Revenue Services is a mandatory procedure to follow in accordance with fiscal regulations (Internal Review Service, n.d.). This practice is the only way to maintain tax-exempt status, and any changes in the organization’s policies, including its investment flows, are to be reflected in such a report. The reviewed mechanisms of independent external audit and an annual return are valid reporting practices as they are included in the list of those that comply with federal standards. By using such procedures, the firm can avoid any accusations of fraud and maintain its tax-exempt status. Therefore, different types of reporting are convenient approaches to ensure the safety of assets and prevent claims from both national and foreign financial agencies regarding the improper distribution of budget funds.
Fundraising Strategies
Funds for successful work to improve social welfare, particularly support for children in difficult life situations, can be raised in different ways. Hommerová and Severová (2018) draw attention to the most common types of fundraising strategies and distinguish three categories: public funding, nonpublic funding, and individual donations. While considering the peculiarities of the organization’s work and its international range of activities, nonpublic funding and individual donations are viewed as the most acceptable forms of fundraising for several reasons.
The choice of such strategies is justified by the goals and objectives that the nonprofit organization sets for itself. As Hofland (2007) notes, the interests of the CEO and board members are central to fundraising decisions. Consequently, with consistency in development priorities, specific fundraising approaches are defined. One of the factors why public funding is not a targeted strategy is the firm’s international activities. By interacting with partners from different countries, the organization cannot ensure the flow of funds from their governments. At the federal level, all aid is limited and often fails to meet both short-term and long-term development plans due to rare investments. Thus, individual donations and nonpublic funding are more convenient and reliable fundraising mechanisms.
Individual donations in the form of financial aid through public collections, advertising, membership fees, and other channels are a traditional and acceptable fundraising strategy. The organization is constantly expanding its range of influence and interacting with new partners in different countries. People and communities that express an individual interest in contributing to the work of the firm are concerned about child vulnerability, and investing in social welfare is a tool for them to achieve personal goals, which, as Porter (2007) argues, is one of the main drivers of assistance. Since the key objective of the organization’s work is to address social welfare, donors themselves are indirect consumers of such services. Moreover, given the different channels through which funds can be collected, this increases the value of the strategy and enhances the convenience of interacting with the public. Ensuring transparency in fundraising and providing open access to the information carried out by the organization are the prerequisites for successful investment attraction.
The strategy of nonpublic funding is also a potentially effective approach. By organizing corporate donations and foundations, the firm can count on stable investments by building a sustainable sponsorship base and distributing financial receipts based on the share of the collection. According to Zweibel and Golden (2007), understanding the principles of interaction between nonprofits and funders is one of the most reliable factors for successful work. The firm cooperates with different communities in several countries, and the increase in the number of sponsors directly depends on how effectively the ideas and goals of targeted activities are communicated to all interested parties. While having enough resources to develop mechanisms for remote interaction, the organization can conduct continuous work to establish the activities of the funds. This practice does not contradict the federal fiscal legislation and can be implemented freely, provided that all reporting measures are followed. Thus, nonpublic funding and individual donations are the most convenient and effective fundraising strategies due to a wide range of activities, the social welfare profile, and limited financial investments from public agencies.
Conclusion
The comprehensive assessment of the nonprofit organization’s performance supports the idea that effective fundraising strategies and reliable reporting mechanisms are essential components of productive activities. To maintain its tax-exempt status, the firm has to follow a number of regulations and rules of fiscal legislation. In the course of work, some challenges may arise associated with the establishment of partnerships, accountability, limited resources, as well as difficult communication with stakeholders. In addition, operational disagreements between the CEO and the board can arise, which are nonetheless preventable if the entire management team has an identical view of the organization’s development. The total return approach, outside independent auditors, and completing annual reports on time are the essential aspects of the firm’s smooth running and advancing its social welfare goals of helping children in difficult life situations.
References
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