A FINANCIAL MANAGEMENT THEORY OF THE NONPROFIT ORGANIZATION

Certain unique operational and financial characteristics of nonprofit organizations prevent the transfer and successful application of orthodox economic and financial management theories to financial management decisions in the nonprofit context. These characteristics include a dual management structure composed of professional and financial managers, multiple objectives, legal restrictions on the disposition of earnings and assets, and the constant threat of illiquidity as the result of the uncoupling of organizational goals and cash flows. The financial management theory presented here separates the financial management goals from the professional goals and allows the finance practitioner to concentrate on keeping the nonprofit organization operating as a going concern. The theory is designed as a ‘partial’ theory of the firm and is completely consonant with accepted economic orthodoxy. Hence, by employing financial decision rules based on the new theory, a nonprofit organization can survive financially through time while its professional manager pursues utility‐denominated goals delineated by the organization's tax‐exempt status.