Sample Article Review On Understanding Non Profit Capital Structure

Following the American Psychological Association’s Guideline

Q1. In a well developed paragraph, give a very thorough and clear and concise summary of the article context and content.
Every organization has a capital structure; some have it on massive way and some in a smaller way. In case of a healthy organization, an optimum capital structure is required to meet its long term capital commitments as well as day to day operating needs. A non profit organization capital structure always has an impact on mission and program of the organization. Due to a restraining environment in a non trading organization on accumulating profits, it is difficult for such organizations to maintain a healthy capital structure and it creates the problem of illiquidity. Funders for a non trading organization shall provide money but do not contribute to achieve the mission and values of the organization. Land & Building, Plant & Machinery, Receivables, Cash are the important constituents of Capital Structure which is required both by for-profit and non-profit organization. The major setback for these non profit organization is the margins of net profit are frequently thin and are bound by government contracting rules and thus it is difficult even to afford the ongoing improvements necessary to maintain effective and efficient operations. Capitalization as a concept is not typically a part of the current non-profit lexicon— nor that of funders.
Q2. What is your personal opinion of the article? Thoroughly describe your personal reaction to the article; includes discussion of the relevant issues within the article.
At the outset I would like to set it clear “not-for-profit” doesn’t tantamount to “no surplus allowed”. As already mentioned in the article, I feel an optimum and adequate capital structure is the lifeblood of any organization be it profit or non profit. To reach long term financial goals such as acquisition of land, construction of building, lease financing, acquisition of plants & equipments, manage receivables. A non-profit organization cannot earn surpluses i.e. income over expense which means they lack adequate capital reserves. An organisation faces in numerous contingencies which without funds cannot be met. Illiquidity creates cash distress, hurdles in decision making programmes, lack of working capital, difficult for continuing the critical operations of the business.
The restrictions imposed by government and regulatory norms governing these non profit organization somehow succumbs these organisation in achieving their Vision, Mission and Values.

Q3. What is capital structure and why is it important to non-profit organizations like hospitals?

Capital Structure can be regarded as framework of finance to fulfil the long term and short term financial needs of an organization. The three important constituents of capital structure are Assets, Liabilities and Working Capital i.e. Net Assets.
Non profit organizations like hospitals need to have an optimum capital structure to achieve its objective, and to meet its operating goals per se. Health Care is a critical and capital intensive industry, and huge capital investments are required to start a hospital and even to maintain and run the hospital. Traditionally investment decision was focused on acquisition of fixed assets like acquisition of a leasehold land, construction of hospital buildings, setting up plants & equipments etc. under cost based reimbursement system. Little or no attention was paid on financial assets; these financial assets offset the interest expense under cost based reimbursement system with the interest income of financial assets. But as there was decrease in capital expenditure, focus on financial assets gained importance among not for profit hospitals.
Q4. Comment on the quote from the article - ". . . non profit culture discourage(s) the development of operating surplus
The financial flexibility and sustainability is distressing majorly because of two major constituents’ i.e. government contracting rules and non profit culture which is ebbing the working flow of non profit organizations. These organizations are bound with restrictions of creating surplus, have to face number of challenges imposed by governments; they are guided with governing norms set up by governmental authorities. All these restrictions are creating a tyranny for these non profit organization to successfully run their business and achieve their organisational goals.

References:

Paula H. Song, Ph.D., Assistant Professor and Kristin L. Reiter, Ph.D., Assistant Professor,
(2010, June 2), Trends in Asset Structure between Not-for-Profit and Investor Owned Hospitals,s
Retrieved from: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3014217/