NPVS= Social Value/ (1+Ks)t

Report on Business Finance

Topic:
Financing of Non-Profit-Organization
Submitted to:

Submitted by:

Sir Sadiq Shahid Malik.

Mudassara Hassan
BBC-08-16

What is NPO?
An

organization that does not distribute its

surplus funds to owners or shareholders
Non Profit organization is an association that
is given tax-free status.

NATURE OF NON PROFIT ORGANIZATION

NPOs

are often
Foundation
Trust
Endowments
Voluntary Association

GOAL AND ROLE OF NON PROFIT ORGANIZATION

Serve

as and is served by a number of stakeholders.

Goal of a not-for-profit business is stated in term of
mission statement.
Motive of social welfare and social benefits.
Most important motive is public serving.

PROPERTIES OF NON PROFIT ORGANIZATION

Important property is tax-exempt property

501(c) (3) Corporation.
Control rest in hand of Board of Trustees
Residual earning is reinvested for the benefits of
society

STRUCTURE OF NON PROFIT ORGANIZATION

Two

major types of nonprofit organization structure

1: Membership Organization
Non-profit

2: Board-only Organization

organization structure usually includes

Board of Director
Programmed director

FORMATION OF NON PROFIT ORGANIZATION

1: Write out a business plan
2: Write out a mission statement
3: Bylaws
4: Apply for a nonprofit designation from the IR
(i): Application for Recognition of Exemption
(ii): Determination Letter
5: Articles of Incorporation
6: Look for grants and corporate sponsors
7: Hold fund-raising events
8: Sponsorship packages and letters

DIFFERENT TYPES OF NPOs

Charitable
Trust (Charitable Trust)
Educational
Scientific
Religious

SOURCES OF FINANCING
1: Long-term financing decision

Long-term debt financing:

Not-for profit business can issue tax-exempt, or
municipal, bonds, generally Munis.

Municipal

issues are not required to be registered

with Securities and Exchange Commission (SEC).

Municipal Bond

SOURCES OF FINANCING
Equity

(fund) Financing: [Fundraising]:

Fundraising is the process of soliciting and
gathering money or by requesting donations from
individuals, businesses, donor agencies, charitable
foundations, or governmental agencies.

COST OF CAPITAL ESTIMATION

Not-for-profit businesses raise the equivalent of equity capital,
which is called as fund capital.
Three positions with regard to the cost of fund capital:

Fund capital has zero cost.

Fund capital has some cost but that is not very high.
Finally, others have argued that fund capital to not-for-profit business
has about the same cost as the cost of retained earning.

COST OF CAPITAL FUND=Opportunity Cost=Cost of retained earning

CAPITAL STRUCTURE DECISION

Not for profit businesses do not pay taxes

and hence cannot reduce the cost of debt
by (1-T).
Cost of Debt for investor owned firm:
Cost of debt= Kd (1-T)
Cost of debt for NPO:
Cost of debt= Kd
[Because they are tax-exempt]

CAPITAL BUDGETING DECISION

There are three elements of capital

budgeting:
1: Appropriate goals for project analysis.
2: Cash flow estimation/ Decision
method.
3: Risk analysis

Cash flow estimation/ Decision Method

NPOs are expected to provide a social value in addition to a

purely economic value, project analysis should consider value
along with financial, or cash flow, value.

TNPV=NPV+ NPSV
NPV=Standard net present value of the projects cash flow stream
NPVS= Net present social value of a project

NOT FOR PROFIT VERSUS FOR

PROFIT
Not for profit
Investor owned firm
1:Dont distribute its surplus 1: Distribute its surplus
to
to owners.
owners.
2: no profit maximization
2: Profit maximization.
purpose.
3: No dividend
3: Dividend
4: Tax-exempt
4: Taxation
5: Cost of debt=Kd (1-T)
5: Cost of debt=Kd

NPOs Of Pakistan
Edhi

Foundation
The trust of voluntary organization
(TVO)
The Pakistan Poverty alleviation (PPAF)
SOS

Thank You