FINANCIAL STATEMENT ANALISYS FOR NONPROFIT
ORGANIZATIONS. AN ITALIAN PERSPECTIVE FOR
VOLUNTARY ORGANIZATIONS AND OTHER THIRD
SECTOR ENTITIES IN ITALY FOR A BETTER
ACCOUNTABILITY
Claudio Travaglini
Department of Management
University of Bologna in Rimini
Piazza Teatini 10 - 47900 - Rimini – Italia
claudio.travaglini@unibo.it
Recognition of Italian third sector - Accounting and financial
statement settlement – A first analysis model for financial
statement in nonprofit organizations and its use for a better
accountability
Recognition of Italian third sector and other entities
During the last 15 years, Italian third sector has demonstrated
its vitality and has gained acknowledgment from authorities and
public opinion visibility.
This is due to a complex set of body of rules and social
developments that have enhanced the importance of nonprofit
organizations and their contribution to the construction of social
capital and to the organization of quality services.
The 1991 national law on voluntary organizations and social
cooperative, the 1997 fiscal reform of non-commercial organizations
and the social promotional organization law of the year 2000 have
determined, together with regional sectorial and specific bodies of
legislation a complex system of nonprofit organizations, which
represent a significant part of the social system.
A lot more has to be done to obtain a thorough study of the
features of these particular organizations, especially concerning the
development of accountability.
After it has outlined the characteristics of the most important
businesses in Italian third sector, communication concentrates its
attention on some hypotheses on how to read their financial
statement and on projects that aim at the transformation of the
information system, in order to obtain a better organization of
accountability.
The first regulated nonprofit organizations, which are often
confused with the entire system, are represented by voluntary
organizations in which the joint and several inclination of third sector
is totally achieved, and in which people spontaneously come
together, without expecting any money, and work in favour of public
utility.
The voluntary organization is a nonprofit organization that is
run democratically. It represents the prototype of a typical and pure
nonprofit organization: all relationships, from the one between the
volunteers and the organization itself, to the one between the
organization and the beneficiaries, are totally ruled free of any
charge, and this is achieved by forbidding all kind of economic
relationships between the voluntary organization and the volunteers,
except for expense refunds.
In this type of organization, all institutional activities are directly
developed with the participation of volunteers and paid
collaborators, that carry out the following functions:
a) service production and supply for the beneficiaries
b) service supply in agreement with public administrations
c) organization of volunteers and organizational support
d) financial resources collection by the organization of events
e) management of commercial and marginal producing activities
f) financial management of all resources
g) organization of general support activities.
They develop their activities in collaboration with other nonprofit
organizations, especially by actions of social control and by the
integration of services run by public administrations, social
cooperatives and other subjects.
Social cooperatives represent third sector managerial dimension,
by running a lot of
services thanks to its entrepreneurial
organization, even if they have to maintain their attention on public
interest and satisfy their members.
The activities of social cooperatives are represented by the
management of social, health and educational services (social
cooperative type A) or by training and job finding for disadvantaged
people (social cooperatives type B); all these activities are
prevalently committed to state and local government or are inserted
in projects financed by them, and expect the social company to be
paid by a sum that reflects the quality and quantity of their services.
Type A cooperative societies develop activities for
a) local governments, through conventions and contracts;
b) their members through self producing and consuming
relations;
c) for individuals on a payment basis ;
d) for non paying third persons, by means of pure solidarity and
thanks to pro-bono donors
in addition to supplementary activities and general support activities.
Type B social cooperatives run agricultural, industrial and
commercial activities all focused on training and job finding for
disadvantaged people.
The law demands that social cooperatives respect all mutual
qualifications that are needed for a cooperative society to obtain
fiscal facilitations, but it also determines the possibility of profit
distribution and the recognition of privileged conditions for members
(higher wages or other benefits).
All of this can be achieved, but it requires an even more
transparent accountability for these social cooperatives, because
this is the only way they can be fully qualified as nonprofit
organizations and they can preserve their reputation in the public
opinion.
Clubs and associations are other nonprofit organizations
operating in sports or cultural and recreational services, that are now
becoming recognized social promotional societies, and that carry out
their activities by operating for development and by helping
members and others in the management of different activities
(sports, cultural, recreational).
Generally these are nonprofit organizations with associative
rules and democratic orientation, that are freely determined by the
articles of association, and belong to sectorial or cultural national
organizations.
Sports and cultural associations develop their institutional
activity by promoting initiatives addressed primarily to members and
to others. Sometimes they even facilitate collaboration from
members by means of favourable conditions (in comparison to the
ones that are determined for others) and they distribute to members
discounts on services and social activities prices, all in favour of a
higher participation from members and for a higher qualification of
their services.
These associations obtain financial resources from membership
fees, providing of characteristic services, from incomes of organized
events or from financial contributions of local government bodies
that organize services and the people and from commercial
sponsorship.
These associations directly run activities that are focused on
social purposes by using the following functions:
a) activities management for production and supply of typical
services (cultural, recreational, sports) that members and
others can obtain free of charge or by paying public financial
contributions
b) events organized to make the public aware of their
associative purposes and to obtain financial resources
c) financial management of resources for the organization
d) general support activities, including the affiliation to umbrella
federations inside this association system
The three groups (voluntary organizations, social cooperatives,
social promotional associations) do not include all possible third
sector organizations, but they represent a good and exhaustive
example of them and they correspond to regional registers that
assign facilitating statuses (in Italy nonprofit regulation has to be
outlined partially by the State Government and partially by the
Regional Government).
Accounting and financial statement settlement
Financial statement regulation of nonprofit organizations is
seriously inadequate, due to a historical lack of attention: nonprofit
organizations didn’t distribute profits and therefore it was not
necessary to regulate them, also because the value of having
transparency in financial statement and economic operations was
considered of secondary importance, even for third sector
participants.
All rules in the Civil Code that concern all kinds of associations
and institutions and that go back to 1941, require that the annual
report be approved yearly by the assembly, without giving any kind
of direction on how financial statement has to be outlined and
without even talking of any kind of publication.
For social cooperatives the application of the body of rules
dealing with ordinary commercial companies force them to draw out
a financial statement in typical form and to make it available to all in
public registers.
The fiscal body of legislation determines rules for cases of
commercial activity management, to identify and tax the profit
produced.
National law on voluntary organizations requires that their
constitution has to indicate annual reports as compulsory; they have
to show goods, contributions and legacies received and the approval
formalities used by the assembly, but it does not present any
particular indication on how to organize the book keeping or present
financial statement.
On the contrary, it lists all economic resources from which
voluntary organizations can obtain resources (contributions from
members, individuals, public sector bodies, and international
organizations, donations, refunds from conventions and incomes
from marginal commercial activities).
For social promotional associations, that are considered to be
the legal form of this association system, it is necessary to insert in
the constitution that economical and financial reports are
compulsory. It is also specified that it has to be approved by
members, even if it doesn’t indicate how it must be presented or if it
has to follow specific rules for publication.
Because of this scarce regulation of financial statement,
accounting bodies have developed patterns to help the drawing up
of financial statements of nonprofit organizations.
We will consider structure and interpretation of the financial
annual report (with reference to qualified accountants
documentation).
The purpose of accountability in nonprofit organizations is to
inform public on the activities developed in accordance with the
institutional mission, whereas its subject-matter is the way in which
the organization has obtained and invested its resources.
The financial report of nonprofit organizations describes how
the residual income is determined by the composition of different
activities or defined on the specific characteristics of nonprofit
organization.
In accordance with our formulation, which is different and more
specific in comparison to the one used in commercial societies,
incomes and costs reports in nonprofit organizations inform on how
resources are obtained and used in a period of time and in reference
to specific areas:
- typical and institutional activities;
- promotional activities and fund raising;
- supplementary and commercial activities;
- financial and patrimonial activities;
- extraordinary activities;
- general support activities;
The financial report describes, in a structured way, gross incomes
and costs deriving from different activities (circuits and flows), and
the residual income determined by comparing the sums of these
values.
The minimal version only presents all settlements of this circuits,
without making any reference to the relevant stakeholders such as
members, government bodies, and other related entities; this
structure can be used in all kinds of nonprofit organizations so that
we can compare values.
In order to have a more complete knowledge of the nonprofit
organization activity, we have to specify that if the nonprofit
organization institutional asset includes partners, members or
associates, it is important to separate all transaction with partners
from the ones that involve others.
Similarly, it’s important to identify, if and when they are present,
government bodies and other members of the nonprofit group as
relevant stakeholders and to separately point out relationships with
qualified subjects in order to create more detailed reports.
The presence of a defined outline (and the gradual creation of
principles that describe how to classify and report incomes and
costs) allows a structural reading of a nonprofit financial statement,
and to create the foundations for financial statement analysis.
The general financial report model can be specified in
reference to different types of nonprofit organizations, but it has to
outline its parts by referring management areas to the reality of the
characteristic businesses considered.
FINANCIAL REPORT ON INCOMES AND COSTS
DIVIDED AND OVERLAPPING SECTIONS
MINIMAL OUTLINE
INCOMES
Incomes from fees, donations, contributions
Incomes from institutional activities with economical relations
Incomes from typical goods-services in ordinary economic
trade
Incomes from fund raising campaigns and initiatives
Incomes from supplementary and commercial activities
Incomes from financial and patrimonial management
Extraordinary incomes
Other incomes
TOTAL INCOME
Negative net income result ( balanced )
COSTS
Costs for typical institutional activities supplied free of charge
Costs for typical institutional activities with economic relations
Costs for typical goods-services in ordinary economic trade
Costs for institutional payments
Costs for fund raising campaigns and initiatives
Costs for supplementary activities
Costs for financial and patrimonial management
Extraordinary costs
Organizational and general costs
Other costs
TOTAL COSTS
Positive net income result ( balanced )
A first analysis model for financial statement in nonprofit
organizations and its use for a better accountability
Being able to have at one’s disposal a defined reporting
outline of nonprofit organization balance sheet, allows us to
establish first models for financial statement analysis.
This way they become tools used to formally observe
accounting values, resulting from different periods in nonprofit
organizations, and to express concise evaluations on the ways
being applied by the organization to obtain and invest resources.
The logic used to read and interpret financial statements,
thanks to a system of indexes, starts from the reading of accounting
values in accordance with the defined prospects: different activities
and qualified subjects that can establish relationships with the
organizations (partners and members, government bodies,
connected subjects inside the group).
This proposal of analysis of non profit organization financial
statement doesn’t represent an alternative to the social reporting,
but the practical assertion that economic and monetary information
contributes to outline the nonprofit organization concrete activities
and performances.
The first values that have to be considered are :
- the proportional incidence of incomes and costs of every
activity on the total income and costs;
- the net income of single activity on total income and costs;
- the incidence of single and significant economical
aggregations, on total income and total costs.
The first index we have to consider is represented by the ratio
between the typical activities incomes and total income of a
nonprofit organization. This gives us the influence that typical
activities have on the complex of different activities that the
organization can undertake.
Inside incomes deriving from typical activities, we can estimate
the incidence of the relationships being carried out with government
bodies, members and other subjects of the nonprofit group, that
contains the organization itself, and the one of the major contract, in
order to determine how much the organization depends on its
stakeholders or on a specific one of them.
In the same way, it can be estimated the incidence of all other
types of incomes on total income; we consider the influence that
fund raising incomes, supplementary and commercial activities
incomes, financial and patrimonial incomes have on total income.
Therefore we definitely describe the resources for the organization’s
own financial maintenance.
The same estimations on proportional incidence can be applied
on costs, describing what is the influence that program related costs
and fund raising costs have on total costs, and even considering the
incidence of a particular type of cost as organizational an general
costs.
This evaluation gives us some information on the financial
perspectives of the organization.
A further evaluation of the incidence of single activities can be
made by overcoming the estimation of the partial net income of the
activities and considering the net result of single activities (positive
or negative, gross profit or loss) on total costs and incomes of that
particular activity.
This way we’ll obtain an evaluation of the incidence of fund raising
result on the total funds collected or the incidence of typical
management outcome on the total of incomes and costs of the
management itself.
Some ratios between different types of costs are partially
informative, as for example the ratio between organizational and
general costs and program related costs, or the ratio between
personnel costs and total costs, that give us a picture of the
influence of structural costs on the total amount of resources
invested by the organization.
Even the incidence of members payment (if and when it’s
expected) and of expense refunds to volunteers gives us some
information on the way the resources are invested and on particular
organizational situations.
These indexes give us the opportunity to start with a structural
reading of a nonprofit organization financial statement; if we insert
them in a more complex outline, we obtain a first “minimum data set
identifying form” of the nonprofit organization we are analysing and
this way we can compare its values to the ones of other
organizations of the sector or to its own values that refer to previous
periods.
Moreover, it’s important to underline the problem of promoting
activities and financial statement transparency in Italian third sector
organizations. It is also necessary to point out that financial
reporting, clear and comprehensible, is directed not only to public
administrations, holders of the registers and consequently of
authorizing powers and facilitating concessions, given to nonprofit
organizations, but also by public opinion.
By doing this, every possible donor and citizen can be
informed on the activities and economical and financial
performances of nonprofit organizations. This is the only way in
which social control can guarantee freedom to nonprofit
organizations to pursue their purposes and to increase trust and
social capital.
Thus, by means of the publication of an essential but complete
accountability, handled by the organization itself with a guarantee
role for public administrations, the necessary information will be
given to all the public, to maintain and promote transparency and
accountability.
FINANCIAL STATEMENT ON INCOMES AND COSTS
DIVIDED AND OVERLAPPING SECTIONS
DETAILED OUTLINE
INCOMES
Incomes from fees, donations, contributions
From members
From non members
From other subjects inside the nonprofit group
Incomes from institutional activities with economical relations
From members
From non members
From government and local bodies for contract and
contributions
From other subjects inside the nonprofit group
Incomes from providing characteristic services in ordinary
economic sale
From members
From non members
From government and local bodies for contract and
contributions
From other subjects inside the nonprofit group
Incomes from fund raising campaigns and initiatives
From members
From non members
Incomes from supplementary management
Incomes from financial and patrimonial management
Extraordinary incomes
Other incomes
TOTAL INCOME
Net income (balanced)
FINANCIAL STATEMENT ON INCOMES AND COSTS
DIVIDED AND OVERLAPPING SECTIONS
DETAILED OUTLINE
COSTS
Costs for institutional payments
Costs for typical institutional activities provided free of charge
For members
For non members
For other subjects inside the nonprofit group
Costs for institutional goods-services in economic trade
For members
For non members
For other subjects inside the nonprofit group
Costs for characteristic services in economic trade
For members
For non members
For other subjects inside the nonprofit group
For government bodies
Costs for fund raising campaigns and initiatives
Costs for supplementary activities management
Costs for financial and patrimonial management
Extraordinary costs
Organizational and general costs
Other costs
TOTAL COSTS
Positive net income (balanced)
FINANCIAL RATIOS FOR NONPROFIT ORGANIZATIONS
Composition of incomes for nonprofit organizations
Incomes from typical activities/ total income
Contracts with government bodies/ incomes from typical activities
Incomes from major contract / incomes from typical activities
Incomes from members / incomes from typical activities
Incomes inside the group / total income
Fund raising incomes / total income
Major donator incomes / fund raising and donations incomes
Supplementary activities incomes / total income
Financial and patrimonial incomes / total income
Extraordinary incomes / total incomes
Analysis of the composition of costs in different classes
Program related costs / total costs
Fund raising costs / total costs
Supplementary activities costs / total costs
Organizational and general costs / total costs
Ratios of costs
Payment costs / total costs
Payment costs / program related costs
Supplementary activities costs / program related costs
Personnel costs / total costs
Costs for partners payment (also indirect) / total costs
Analysis of margins in different activities
Fund raising margin (incomes-costs) / fund raising incomes
Typical activity margin (incomes-costs) / typical activity incomes
Supplementary activity margin (incomes-costs) / supplementary
activity incomes
Financial activity margin (incomes-costs) / financial activity incomes
Other analysis
Management outcome / total income
Different types of incomes from government bodies / total income
Incidence of costs for expense refunds for volunteers