Prediction modelfor the revenue stream of non-prot organizations

Ehsan Alikhani
State University of New York at Binghamton ealikha1@binghamton.edu

Abstract

The world economy system has been divided into three major sectors: public (government), private (market) and nonprot (charity) section. During the last decade, nonprot organizations have grown dramatically in number and economic effects. Although these organizations are highly variable in regards to the program area in which they are operating, they still show a meaningful similarity in terms of dynamics modeling. Previously, nonprot organizations have been discussed excessively from socio-cultural perspectives. However, adequate and applicable mathematical analyses are lacking in the literature. The challenge is this: nonprot organizations Zs are faced with numerous social, cultural and economic variables that affect a donatorA philanthropic motivations and consequently, their annual budget. The proposed model is focused on advertising expenses as an independent variable. Specically, this model addresses how much should be spent on advertising expenses in order to maximize revenue. A concern however, is that although more expenses lead to a better reputation and greater donations, donators may be disappointed considering they expect funds to be allocated to their philanthropic ideas. For a case study, dynamics behavior of this complex social system has been captured by systems dynamics methodology and validated by implementing in a charity organization.

I.

Introduction

n the last three decades, Non-For-Prot charitable organizations became one of the most important sectors in world economy. They receive enormous amount of money from individual and corporate contributors for fullling their philanthropic goals. Charity, is not a good dened concept but as a start point we can give this one: a charity is an organization whose purpose is charitable by reference to case law developed by court decisions (Balabanis, Stables, & Phillips, 31,8). The dening characteristic of charity organizations is nondistribution constraint (Fisman & Hubbard, 2005). To avoid confusion, the terms charity and nonprots are used interchangeably within this text in spite of their little difference. Non-for

prot organizations are in wide variation regarding the program area in which they are operating (Gue, 2005, p. 35). Their operations are in areas such as human services, public society, educational institutes, health, art and culture, environmental organization, religious institutes and others (Gue, 2005, p. 33). In every organizational size or program area, the main role of charities is to attract nancial resources and volunteers, establish social program and to allocate resources to beneciaries (Mokwa, 1990). Previous researches make a great effort to reveal the different aspects of NPOs. They have studied NPOs from many different perspectives like economical problems (Garrow, 2008; Yetman & Yetman, 2009), psychological sights (Supphellen & Nelson, 2001; Wright, 2001) and cultural issues (Gruber, 2004). Nev-

This

is a part of term project-Not for publication

ertheless, among these expensive researches, internal structure and functioning of NPOs has attracted a little attention and NPO rm were treated as a black box (Helmig, Jegers, & Lapsley, 2004). The proposed model at this paper, tried to establish a perspective into NPOs structure via system dynamics approach. This model may helps organizations to attract resources more efcient. The charitable resource contains governmental grants, private giving and commercial revenue that will explain in the next section at this paper. In economics, nonprot sector that sometimes called volunteers sector is often understood by its difference and similarity with the public sector (Government) and business sector (Market). Identifying the relationship between them and nonprots organizational structure, makes researches more complex. Obviously, governmental policies (Duncan, 1999) alongside the business environment have an essential impact on donators and social behavior related to charitable values. In addition to achieve a comprehensive recognition, we have to take some social and psychological factors into account. Fortunately, previous researches are accessible in these major areas: charitable giving in marketing literate and sociological studies on helping behavior and altruism (Brockner, Guzzi, Kane, Levin, & Shaplen, 1984). The nal objective is to develop a System Dynamics model, which can offer a holistic view of variables that have relationship with annual charity revenue. The model has been built in a general analysis manner so we can answer to a critical difculty of charities about when they can commerce. In more specic arrangement, this research provides a basic material to develop a System Dynamics model-base decision support system in helping nonprots to predict the impact of commercial incomes such as service fees on the total annual revenue and the nal mission fulllment. In actuality, we made an effort to develop the model at the most generalization that is possible. Thus every other organization can follow the proposed method to obtain a customized model. 2

As the nal point, we have developed a DSS for Mahak Institute (One of the most important Iranian charity against childs cancer), based on the proposed solution. The system can reply this problem in each possible condition: We would like to maximize the total revenue and maintain the critical level of annual budget. Systems must be dened as the following: The advertisement system of a particular charity organization. It has some inputs as socio-cultural parameters which will be discussed in next section of this paper. It has some outputs based on advertisement expense like methods of advertisement, target group and assigned resources. It is critical to take into account that the this inputs and outputs are totally social and cultural parameters that we try to represent them which some statistical well-known parameters and numbers. Project scope is to go forward up to preliminary systems design. We are not planned to design the nal systems in computer software. The problem is just time pressure and possibly, we can do it later.

II.

Literature review

A charitys ability to fulll its mission -as the nal purpose- depends critically on its fundraising capacity. Without a steady stream of income, a charity cannot continue its philanthropic tasks. So charity organizations are very sensitive to their revenue oscillation. Nonprot organizations have three principal revenue sources (Kim, 2002, p. 20): 1: public support: governments usually support charity organization by tax exempt policy or sometimes direct grants. 2: charitable donation: individuals and companies donate money or their time (volunteers) as contributions. 3: commercial transaction: its important for us, to elucidate the meaning of commercial incomes. Toaday, numerous charitable organizations merchandise a wide ranges of charity branded products, that are not directly connected with their philanthropic activities (e.g. credit and

retail loyalty cards, insurance policies, foreign holidays, confectionery, CDs, bank accounts, burglar alarms (Bennet & Gabriel, 1999). The incomes that came from these activities are not assumed as the commercial revenue. There is another activity that often called as commercial income but fees-for-services has supposed as commercial transaction. During the time, commercial incomes may create some serious conicts with organizational function (Bennett & Savani, 2004). Being nonprot has a large importance. An organizations behavior, whether nonprot, for-prot or government is at least in part determined by its source of nancial support. Nonprots uniqueness in addressing social goals in mostly related to its lack of prot-making motives (Weisbrod, 2004) .A sociological approach allows us to understand the importance of maintaining the organizational structure and remain nonprot. Actually, in the nonprot world, the goal of the organization is to be nonnancial (Gallagher & Weinberg, 1991). In addition the use of commercial incomes is inversely related to receipt of governments fund (Stone, Hager, & Grifn, 2001) and also may become the cause of private giving decline (Gue, 2005, p. 17). In summary, the commercial incomes will increase the total annual budget, but in long time period, may jeopardize the organizational reputation and disturb the donators reliance so the end result is total revenue reduction. We need a model that can predict the nal impact of commercial income on the total revenue. Its a Dynamic model, has been developed to conduct charity organization at this complex condition. A general path model can be used to study dynamics phenomena although it has many limitations. To achieve a holistic view, that can guide us into reality, we utilized some parts of Cavana methodology (Cavana & Maani, 2000). The general model developed based on the previous researches. Then we expand the model by new elements and rearranging the components to attain logical system. The nal outcome is a structural dynamics model that brings us a holistic insight about the NPO.

Essentially a Nonprot organization consists of several fundamental aspects, which include: an economic aspect, a mission-related aspect and an operational aspect. How these fundamental aspects interconnect is what has created the distinctive nature of the Nonproft organization (Olson, Belohlav, & Boyer, 2005) .these is the main idea of nonprot modeling. A charity organization, as a whole consists of three subsystems (g 1, see attachment). We assumed this classication of elements as the rst stage of analysis. All 3 subsystems have dynamic relationships that should recognize in the next step. The focus of this research is on the economic component. This model can satisfy the charity organization denition. A charity should attract resources (economical elements), establish priorities for social action programs (operational elements) and allocate resources to beneciaries (mission elements). (Balabanis, Stables, & Phillips, 31,8)

III.

System description

Systems An overall perspective of systems has provided by previous section of this paper. Systems itself, in most general perspective can be assumed as a charity organization with three sub-systems. Sub-systems The next stage is to expand the general model by analysis subsystem to variables. Recently, a doctoral thesis, has worked on the charity and the goal of research is to prediction the prot sectors future (Gue, 2005). The thesis offers a platform of variables and a general path model. Here, we rearranged some of the key variables of that model into a new structure in keeping with our purpose. In gure 2 the model has been shown in more specied details. Restating this point is necessary that, all of these elements and components have dynamic relation with each others. Governmental Funding (GF) includes governmental grants and contracts. Some governmental assurance are consider as governmental grants and some of charities organizations has 3

tax exempt and other contracts with governments. Private Giving (PG) includes donations from individuals, endowments and foundation grants that generally exist in charity organizations. Commercial incomes (CI) are essentially different from those of governments and philanthropic sources that usually came from membership dues (fees paid by individual members), service-related fees (fees charged from service programs that are considered intrinsic to the organizations mission) and investments into the market. Governmental funding and private giving beside commercial incomes are the main sources of organizations annual revenues. Annual cost is another element to balance the economical section. In the mission section, there is Output System (OS). Output system is really one of the subsystems of charity. Output systems contain number of volunteers, number of donators, reputation, mission fulllment, self sufciency and service delivery. These variables have dynamic relationships and the goal of output system is to fulll the mission of charity. The casual loops and dynamic relation will discuss in the next section. In the Operational section, we have Charity organization system (CS). We can withdraw the Operational Element without losing model generality. At the general condition Operational elements can consider as a black box in the simulated dynamic model. There is so varied variables that can generate a dynamic system to predict a decision aftermath. The relations have been identied and a system dynamics model will generate to utilize as the main material of a decision support system for the mentioned problem. Here I have tries to describe the model by systems dynamics notation. Economical section includes GF (Governmental Funding), PG (Private Giving), CI (Commercial Income) and AC (Annual Cost). There is another concept: Annual Budget that increases by revenues and the costs will decrease its level. In this article 4

we ignore the relations between ingredients of each element and also ingredients of one element with another element and considered them as a whole. As it is observable in gure 3, triplet variables of economical section -GF, PG and CI- have positive effect on annual revenue, it means that an increase in each of three element will cause increase in the amount of annual revenue but this is not all the story and each of these elements have a feedback effect on the other ones. As it is shown, an increase in PF amount will encourage the government to contact more with the institute and so the more money will earn. As you get more money from the government, after a delay it would act on the reputation of organization so Donors population and organization receivings from this group will decrease. In the case of operating element, every organization may have its particular structure. Here we dont want to focus on this stage since it is highly related to the special case and in customization of product we may consider it again to modify the model for special customers. The third element of the organization is mission sector which is output of the system. In this model we used the variable Revenue cost gap as a main variable in connecting different parts of the model it means that we have assumed that when we have the money everything is right and there is no problem with operating sector interrupting it. Figure 4 display the dynamics of this section.

IV.

Methodology

As it has been classied by Benjamin S. Blanchards classication model (Benjamin S. Blanchard, 2012), out systems is a human made, conceptual, dynamics and open system. So rst of all, we need those classes of methodologies that deal with dynamics natures of systems. Here we have chosen the Systems Dynamics Approach provided by John Sterman in his well-known book (Business Dynamics, 2000). The other methodology is rule based systems design approach that has made the hybrid knowledge engineering possible (Rudi Studer,

1998). This class of methods is been discussed under the broader concept of expert systems. The main job in this paper has been dened as systems analysis rather systems engineering. It means we are going to use systems techniques and methodologies for analyzing a complex problem rather that to go throw the planning, design, evaluation and maintenance (Klir, 2001, p. 56). In the following, more explanation about these approaches is been provided. 1. Systems Dynamics modeling: System dynamics is an approach for understanding the behavior of complex systems over the time. It deals with internal feedback loops and time delays that affect the behavior of the entire system. Effective decision making and learning in complex and dynamics environment of todays businesses and industries require us to develop into systems thinking to expand the boundaries of our mental models and develop tools to understand how the behavior of complex systems. The main domain of this scientic inquiry includes policy making and strategic planning with focus on business applications. So it best matches with our problem which is a business domain needs to be modeled regarding its dynamics nature. In also, systems dynamics modeling can best represented by computer modeling which is included as a main objective of this project. Actually, we need to design our expert systems as computer software to be utilizable by managers across the organization. Systems dynamics cause and loops can be shown by different softwares. This software works based on its internal embedded deferential equations and simply simulate the behavior of dynamics systems regarding the initial condition and the rate of changes. My preference is to use the software Vensim provided by Bob Eberlein at Ventana Systems. Its main advantage is that it allows serious data use and calibration capabilities. Finally, the systems dynamics modeling can best represent the natural resistance in spending money for advertisement. The role of advertisement in charity organization is a dual and sometime contradicted with each other. If you spend more money for advertisement,

your nal budget will decrease (which is in conict with maximization goal) but during the time you may earn more money since more and more people hear about the charity. On the other hand, by spending more money in advertisement, donators may feel that the charity dont spend their funds for their special purpose. In a more clear view, donators dont like to see the organization spend their money for expensive billboards in streets or in media since they are seeking a sense of personal satisfaction of their philanthropic values. 2. Rule based systems The nal designed system is supposed to work based in the following inputs and outputs: As the input, systems should contain some information about initial condition and change rates. Additionally, it must contain some interrelationships between different extracted variables represented by differential equations. We call the systems as an interpreter of this information and the output is assumed to be an insightful knowledge. Rule-based systems in denition automate problem-solving know-how, provide a means for capturing and rening human expertise, and are proving to be commercially viable (Hayes-Roth, 1985). The system has to have four basic components: 1. A list of rules which are basic information of system. This rule has been derivate from general comprehension of dynamics systems based on the conceptual modeling. 2. An inference engine which is the main processing part of the system. In our case, the inference engine works based on Vensim software modeling. So we dont need to develop special software for the processing part and it saves money. 3. Conict resolution that can be considered in execution phase, If no productions are satised, the interpreter stops the processing calculation. 4. Act which leads us toward the interpreted solution derivate from processes information. 5

The nal result of this paper would be as the below: An expert system (which is a classical example of rule-based system) that helps us to decide about the level of advertisement in a charity organization. The system consists of three parts: 1. Basic information and initial knowledge: A survey or statistical experiment should be conducted to extract the parameters values. 2. Model which is the heart of system. This is a SD model represent all socio-cultural aspects of the system. 3. Outcome that can be whether qualitative or quantitative.

V.

Experimental result and analysis

According to our analysis, the system can be classied into 3 subsystems; each one has its own components. Figure 5 shows the nal result of the analysis. For each subsystem, some components have been selected to represent the reality. Here is necessary to emphasis on this point that extracting such a straightforward hierarchy has not been a simple job. They have been extracted by looking at different literature in anthropology, sociology and psychology. Such a highly multidisciplinary task does not seem to be simple at least at the rst glance. We discarded the subsystem; Operational elements. Actually, it is highly based on the organization itself. It must be designed based on the nature of those organizations that we will try to apply this model to solve their problem. So this section does not have components play role in our model. Here, a criticism may arise: How can we generalize the model while we already have skipped such an important part? The answer is that, those elements that may be classied under subsystem; Operational elements have direct effects on other components modeled under the other subsystems. So when we design an experiment to nd the special 6

values of some cultural components like fulllment, we have already cached the effect of operational elements. Additionally, we can propose a better order for classifying our nal components. Actually, the initial modeling of subsystems played a role for extracting those components. Now, this particular classication has done its task. Now we have a better categorization for components not based on their origin anymore but based on their nature. This new classication has been modeled in Figure 6. So here we have three classes of extracted components: nancial, social and cultural elements. The point here is that we are not required to have all of them in the nal model. Since some of them do not have signicant effect on our result. So the number of elements may decrease for the nal model. The computer based systems has a general architecture of software systems with three subsystems: Data base, processing engine and interface. The architecture has been shown in Figure 7.

V.1

Data Base

Data base is a container of initial numbers and records. It must be designed by SQL server 2008. Additionally, it saves the transactional records for each time use of machine and practices it for further trainings. The data base contains two segregated type of contents: Deferential equations made by design of experiments that represent the observed reality and initial numbers of values. Since for the rst part means deferential equations we can use Vensim software, it is possible to neglect that part and make a data base just by these elds. A general view of the designed data base must be as Figure 8.

V.2

Processing Engine

Processing engine works based on Vensim. Vensim is used for developing, analyzing, and packaging dynamic feedback models which are main part of the system. The software specially designed for systems dynamics modeling and

it is not plausible if we develop such an engine in our program again. So we can use the software as an Intermediate for processing part of the nal product and subsequently it makes the design process much easier.

V.3

User interface

User interface is very critical for this product. Since end users are mostly managers and people who do not have substantial computer skills. Se we have to design the user interface as friendly as possible. It is a part of system requirement specication in business analysis. A single transaction from business analysis perspective would be as Figure 9. It is easy to show that the process is generally closed loop. The model has been made by BPMN language. So the user interface may be designed just through a one page form. UML visual paradigm may be useful for this design. Visual Paradigm for UML (VP-UML) is a UML CASE Tool supporting UML 2 from the Object Management Group (OMG). In addition to modeling, it provides report and code generation. Alongside with this feature, business analysis can design a user-interface prototype and it gives developers to choose their favorable developing tool. The nal result for user-interface may be as Figure 10. It is easy to use, and ha just one form. Financial elements have quantitative values, in contrast social and cultural elements must be described qualitatively.

money that charity organization spends for advertisement has a dual and conicting effect. First, it can attract new donators and it encourages donators to support the organization. But at the same time, on the other hand it may give donators this sense that their money is not going to spend to the right direction. Donators do not like to see that their donations are being spending for advertising billboards on streets. So the question is incredibly critical for most charitable organizations. First of all, a massive literature review was done in related area. We realized this point that literature in this topic is quite poor. Specially, there is no comprehensive research that has tried to model the issue mathematically. So we had to start from the rst. By analyzing the organization based on general denition of charity and non for prot organizations we identied subsystems and components of systems. Then, in order to capture the dynamics essence of that system, we established a systems dynamics model by using Vensim software and nally we designed a basic architecture for nal computer based software. For future works, rst of all, we can nd a charitable organization as the case study. Then we might deign an experiment to determine two aspects of dynamism of the systems: Deferential equations that represent relational cause of effects between element and initial values of systems parameters. So we have a customized system for the particular case study. The next step is just to bring the software in use: ll the form and press the calculation button. The result would we the recommended policy. At this point, a system is not completely designed. First, we need assistance of some computer engineers. Next, we need to design a procedure for experiment. Then, the nal step would be systems validation and verication. So the nal product would be a computer based simulation system help managers of nonprot organizations to have a better insight about the social status of their associated organizations. 7

VI.

Conclusions and future work

The research has been done to study the possibility of revenue predictions in non for prot organization. Then the main question is that how can we establish a prediction model? A bunch of questions may arise by proposing such a model since the nal solution would be an interconnected network of elements that provide us with the possibility of studying the effect of every single parameter on behavior of systems itself. Accordingly, the nal question has been dened as the following: How much should we spend for advertisement? The

VII.

Figures

Figure 3, Economical Elements Casual loop

. Figure 1-Components of Charity Organization

. Figure 2, Charity Organizations Model

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. Figure 4, Mission Elements Casual Loop

. Figure 5, System and subsystems

. Figure 6, Component View

. Figure 7, System Architecture

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. Figure 8, data Base

. Figure 9, System Business Model

11

. Figure 10, Fina User Interface

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VIII.

References

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