NPVS=∑ Social Value/ (1+Ks)t

MUNIS

1:Revenue bond

3:Special tax

bonds

4: Serial form

2: General obligation

bond

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.

NPOs are often Foundation Trust Endowments Voluntary Association

NATURE 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.

GOAL AND ROLE 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

PROPERTIES OF NON PROFIT ORGANIZATION

Two major types of nonprofit organization structure

1: Membership Organization 2: Board-only Organization

Non-profit organization structure usually includes Board of Director Programmed director

STRUCTURE OF NON PROFIT ORGANIZATION

1: Write out a business plan 2: Write out a mission statement 3: Bylaws4: Apply for a nonprofit designation from the IR

(i): Application for Recognition of Exemption(ii): Determination Letter

5: Articles of Incorporation6: Look for grants and corporate sponsors7: Hold fund-raising events8: Sponsorship packages and letters

FORMATION OF NON PROFIT ORGANIZATION

Charitable Trust (Charitable Trust) Educational Scientific Religious

DIFFERENT TYPES OF NPOs

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). 

SOURCES OF FINANCING

MUNIS

1:Revenue bond

3:Special tax bonds

4: Serial form

2: General obligation

bond

Municipal Bond

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.”

SOURCES OF FINANCING

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 ESTIMATION

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

Not for profit businesses do not pay taxes and hence cannot reduce the cost of debt by (1-T).

CAPITAL STRUCTURE DECISION

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]

There are three elements of capital budgeting:

1: Appropriate goals for project analysis.

2: Cash flow estimation/ Decision method.

3: Risk analysis

CAPITAL BUDGETING DECISION

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.

Cash flow estimation/ Decision Method

TNPV=NPV+ NPSVNPV=Standard net present value of the project’s cash flow

streamNPVS= Net present social value of a project

Not for profit Investor owned firm1:Don’t distribute its surplus 1: Distribute its surplus to to owners. owners.2: no profit maximization 2: Profit maximization.purpose.3: No dividend 3: Dividend4: Tax-exempt 4: Taxation5: Cost of debt=Kd (1-T) 5: Cost of debt=Kd

NOT FOR PROFIT VERSUS FOR PROFIT

Edhi FoundationThe trust of voluntary organization

(TVO)The Pakistan Poverty alleviation (PPAF)SOS

NPOs Of Pakistan

Thank You