Organizations play a critical role in modern society as they promote economic growth and subsequently benefit the entire human community. While many forms of organizations exist, most research on economics focuses on the role that for profit organizations play and their effects on a nation’s economic outcomes. However, the activities of non-profit organizations (NPOs) also have major relevance in society.
These organizations impact the society as they attempt to satisfy some of the human necessities in a different way, or in a way that complements the for-profit organizations or governmental organizations. The number of NPOs is growing to tackle the growing societal needs in different areas. NPOs are likely to become increasingly important over the next few decades even as the welfare contributions made by governments decrease. This paper will set out to discuss the significance of NPOs in the society and describe some of the NPOs in existence.
The non profit sector is diverse making it hard to provide a uniform description of NPOs. Bahmani, Galindo and Mendez (2012) define NPOs generally as “a body of individuals who associate to perform public tasks through direct delegation by the state or to perform public tasks for which there is a demand but other parties are unwilling to fulfill” (p.272). From this definition, it can be seen that these organizations act to satisfy human necessities in various ways.
In most cases, NPOs operate in an environment that is significantly different to that of the for-profit organizations. Steen (2014) illustrates that in the non-profit sector, market forces are subdued and the organizations have no owners and often no competitors.
Non-profit organizations fall under two broad categories. The first is the public benefit organizations, which aim to enhance the welfare of the collective community. The second is the mutual benefit organizations, which aim to benefit a specific group of individuals. According to Steen (2014), this distinction is not clear cut since a mutual benefit organization might end up benefiting the general public. Donated resources are one of the ways through which NPOs are able to continue providing unprofitable goods or services (Shu-Hui, Guych, & Withz, 2014).
These donations can be obtained from members of the community and profit-making organizations. The organization’s management ensures that the funds obtained from the various donors are used for activities that are within the strategic plan of the NPO. For most NPOs, donations only account for a small percentage of the total revenue. The government plays a major role in ensuring the survival of these organizations. NPOs are offered tax breaks and often exempted from local property taxes thereby reducing their expenditure significantly.
There is a common misconception that NPOs do not have the ability to make a profit. Steen (2014) explains that NPOs can and often make profits, but these organizations are characterized by the inability to redistribute profits to managers, board members, founders or other claimholders. The profits made by the organizations may be donated to outside parties or used to cater to some expenses for the benefit of the organization. NPOs are subject to government supervision in order to ensure that these organizations live up to their non-profit objectives.
The Financial Benefits of NPOs to the Economy
The economy is one of the primary indicators of the success of a society. Governments are therefore keen to ensure that their nations’ perform optimally from an economic standpoint. For-profit organizations are the primary means through which the modern economy is developed. Bahmani et al. (2012) observe that the modern economy is primarily built on for-profit organizations. However, non-profit organizations also play a critical role in the financial growth and development of the economy.
NPOs contribute to the financial growth of the economy by creating employment opportunities for members of the community. Just like other organizations, NPOs require employees in order to operate. These employees include skilled and unskilled workers. Members of the community are therefore recruited by the organization to provide the needed labor.
By providing employment opportunities to individuals, NPOs contribute to the economy by reducing the unemployment numbers and providing gainful employment. Since these organizations are not seeking to make a profit, they can employ the maximum number of workers needed to carry out organizational activities. The employees are able to earn a salary and hence increase their purchasing power. A high purchasing power by community members increases consumption of goods and services therefore stimulating the national economy.
The economic growth and development of the society is enhanced by NPOs since they contribute to the development of a skilled labor force. Skilled workers are a key driver of economic growth in a country. Skills can be obtained through education and by work experiences in organizations.
NPOs increase the number of skilled workers by making use of volunteers who would otherwise not have the chance to work in an organization. While these organizations employ paid labor, they may also rely on volunteers to provide the needed services. Volunteers are individuals who provide unpaid help for the benefit of other members of the society on their own volition.
While the individual volunteer does not get any financial reward for his activities, volunteering contributes to the economic prosperity of the society. Dolnicar and Randle (2007) state that individuals attain some benefits by being involved in volunteer work. Most volunteers do not possess specialized skills. The NPOs provide training opportunities for these individuals in order to increase their efficiency in the organization. In some cases, formal training opportunities are given hence increasing the value of the individual volunteer.
Dolnicar and Randle (2007) agree that most non profit organizations build the capacity and capabilities of the volunteers to offer their services to the organization. The volunteers are also given a chance to work in an organizational setting therefore increasing their chances of future employability. Dolnicar and Randle (2007) confirm that many volunteers are able to become gainfully employed after their stint as volunteers at NPOs. These organizations therefore contribute indirectly to the economic prosperity of a nation by increasing the human capital in the society.
The activities undertaken by some NPOs enhance the economic growth of a nation. The non-profit sector is diverse and some of the companies contained therein deal in production. They produce goods that are sold for a profit. The organizations make use of various strategies to increase production levels. Bahmani et al. (2012) state that some non-profit firms increase the production of goods and services in the community. The economic wellbeing of the society is enhanced by this surplus production since it promotes commerce.
Another indirect way in which NPOs enhance the nation’s economy is by reducing government expenditure on welfare services. The government is expected to provide some welfare services to vulnerable members of its population. The provision of these services requires significant financial resources and personnel.
A considerable amount of government resources would be freed up if the State did not have to provide community services. As has been noted, NPOs exist to fulfill some societal role and most of them are driven by a community purpose. These organizations provide community services that are traditionally expected to be provided by the government.
In so doing, NPOs reduce the demand on government resources. This enables the government to channel its resources to other activities including the development of the infrastructure of the country. Without NPOs, governments would have to dedicate significant resources to the provision of welfare services. By having NPOs take up this responsibility, the State is able to concentrate on activities that can foster economic growth.
Social Benefits of NPOs
In addition to the financial benefits of NPOs, these companies provide a number of social goods. Shu-Hui, Guych and Withz (2014) declare that NPOs are economic institutes that have a mandate to advance the economic and social welfare of a society. The management of these organizations often cares deeply about the community being served. As a result of this, the NPOs are keen to ensure that the goods or services provided reach the targeted groups in the community.
Bahmani et al. (2012) note that unlike for profit organizations that aim to maximize profits, NPOs aim to maximize utility. As such, these organizations seek to provide the best services to the society without regard for profitability. The primary measure of success for NPOs is the achievement of the organization’s mission. The financial returns are not a measure of success and as such, an organization can be considered successful even if it runs at a loss.
The community benefits from an up scaling of the quality of services provided. Nonprofit organizations emphasize on providing quality services to the consumers. Providing quality services often means that an organization has to incur higher expenses and this leads to a decline in the profits. For this reason, profit-driven sellers are not always keen to provide quality services especially when the consumer is not well-informed about quality.
NPOs will not compromise on the quality of services if the funds are available since the objective is not to make profits. Steen (2014) explains that with few exceptions, nonprofit firms are not allowed to distribute their earnings to managers or owners. Any violation of this restriction leads to negative consequences for the firm as it might face fines from the government and lose benefits such as tax-exemption. Since managers are unable to personal prosper from the funds available to the firm, they are less likely to cut costs by reducing quality.
Some NPOs are established to perform necessary public tasks that the government and profit organizations are unwilling to engage in. The State might be unable to provide the necessary public tasks due to lack of finances or there not being enough officials to provide them. Bahmani et al. (2012) reveal that some NPOs are established by individuals who wish to provide essential services that are not being provided at the particular time. Without the contribution of NPOs, the society would suffer from limited or the complete lack of access to the needed goods or services.
Traditionally, NPOs have taken on the responsibility of providing the disenfranchised and vulnerable segments of the society with basic human services (Shu-Hui et al., 2014). This responsibility has been undertaken in instances where the State lacks the capacity to provide these services or where the State can only provide the services to a limited extent. NPOs must demonstrate their commitment to their community-purpose in order to remain relevant in the society. For this reason, these organizations endeavor to engage in the activities that are beneficial to the community members.
NPOs contribute to the advancement of the society by increasing the level of access to basic education. Education is universally acknowledged to be a major building block of a successful society. Shu-Hui et al. (2014) states that all around the world, educated people are the basis of economic development. Access to quality education is not guaranteed for all members of the society. Individuals from low socioeconomic communities often find it hard to pay for educational services.
NPOs that provide education services assist by providing education for free or at a subsidized rate. The organizations therefore contribute to the well being of the nation by providing access to basic education to the poor members of the society.
Types of Non-Profit Organizations
Non-profit banks were initially established to bypass ordinary banks and serve the credit needs of low income famers and workers. These financial institutions follow the non-profit organization structure in that they have several stakeholders, but no particular group or person that can legally claim ownership or receive excess earnings from them. Non-profit banks can be saving banks or microfinance organizations which are specially designed to supply banking services to the poor.
Mersland (2011) declares that the doctrine behind non-profit banks is self help. The banking organization focuses on encouraging the target population to save and offers credit facilities to this group. Non-profit banks are able to extend loan facilities to less wealthy customers. Most commercial banks require formal collateral before providing a client with a loan. This places less wealthy customers at a disadvantage since they might not have this formal collateral needed to access loans. Non-profit banks do not require the formal collateral since these institutions do not emphasize on loan safety.
The financial management of non-profit banks is similar to that in the commercial sector in many respects. However, rather than having a primary goal of increasing share-holder value, non-profit banks aim to provide for some socially desirable need on an ongoing basis. To enhance the financial sustainability of non-profit banks, the cost of operations is kept at a minimal. Non-profit banks rely on subsidies from the government to maintain their operations.
The banks do not obtain enough finances from their customers since they have low service charges and reduced interests on loans. In addition to this, the risks provided are often unsecured which makes the banks vulnerable to losses when a customer is unable to repay the loan. Mersland (2011) notes that without subsidies, many non-profit banks struggle to become financially sustainable
Non-profit insurance companies are basically insurance companies operated on a nonprofit basis. These organizations promote, using their members’ subscriptions, activities of providence to the benefit of the members. Non-profit insurance companies differ from for-profit insurance firms in some important respects, aside from the fact that they are nonprofit.
To begin with, they charge their premiums according to the income instead of other factors such as age and risk. As such, the premiums of the less wealthy clients are subsidized by the contributions of the wealthier participants (Coe, 2011). Secondly, the non-profit insurance companies manage some programs that aim at improving the social security of the participants.
These insurance companies provide unique insurance policies that for-profit companies avoid providing due to the high risk involved. For profit insurance firms consider the risk level when setting the premium for a particular insurance product. Due to this risk consciousness, the insurance firms might set premiums for high-risk enrollees at prohibitively high levels or even deny insurance to these enrollees.
Nonprofit insurance firms offer reduced premiums for high-risk enrollees since their primary concern is not to make a profit or avoid making a loss (Coe, 2011). Without the availability of non-profit insurance companies, these services might be unavailable to a large proportion of the population that needs them.
Just like other NPOs, if profits are made by the non-profit insurance firm, they cannot be distributed to members. Instead, the surpluses are distributed in the form of reduced premiums in the following year (Coe, 2011). Non-profit insurances aim to provide added value to the individuals or companies they insure. They do this by providing highly discounted products and risk management resources that enable their clients to pick the most appropriate insurance cover. Since the companies are not motivated by profits, they give their clients the best advice on the best insurance cover.
The educational organization is dominated by public and not-for-profit schools. Not-for-profit schools are operated under the ideologies of NPOs. The primary objective of these institutions is to provide quality education services to the students with little consideration for profits. The lack of a profit motivation has a number of significant advantages. To begin with, these entities are more likely to provide students with the necessary resources to encourage positive learning outcomes.
Hill and Welsch (2009) assert that education is an extremely labor-intensive industry where over 80% of the school budget is dedicated to wages. As such, a majority of the cost-cutting strategies would entail making personnel cost cuts. In for-profit schools, the personnel cost cuts are undertaken by employing more part-time teachers or teachers who have less experience and therefore require lower salaries.
In addition to this, the for-profit schools can increase the class sizes or reduce the school days in order to cut on personnel costs. While these cost cutting strategies result in higher profits, they are detrimental to the learning outcomes of students. On the contrary, non-profit schools maintain full time staff and hire experienced teachers since their goal is to provide quality education even if at a cost.
The profits made by non-profit schools are used to improve school resources and for instruction purposes. With for-profit schools, the profit is either distributed among the school owners or used for promotional purposes. According to Hill and Welsch (2009), for profit schools advance themselves through intensive marketing and band identity.
These activities are expensive and the school ultimately ends up using resources for promotion instead of for instruction. Non-profit schools do not need to engage in expensive marketing endeavors. The available resources can therefore be channeled towards improving the schools to provide better education to the students.
Non-profit schools play an important role in providing education to special needs students. Special education needs students require specialized educational services. Providing these education services is expensive and from an economic perspective, the profit margin is low. Hill and Welsch (2009) state that the labor needs of special students are greater than those of typical students leading to higher costs for the school. Most for-profit educational organizations have little incentive to cater to this costly group of students.
They are therefore less likely to select students that have special needs. Non-profit schools provide this necessary education services to this student group even if doing so makes the school incur a loss.
Nonprofit hospitals are health care institutions that offer services that provide a community benefit. These institutions are established to provide quality health care services to the population at a reasonable rate. As with other NPOs, the hospitals do not have any owners and they can obtain funds from donors and the government.
The hospital is pushed to act in the direction that promotes the welfare of the patients and the donors. Plante (2008) explains that community groups, particularly donors are always demanding lower prices and more services from the non-profit hospital. For this reason, it can be argued that non-profit hospitals are controlled by the needs of patients and donors.
Since non-profit hospital exempt from paying taxes since they are NPOs, they are required to engage in charitable activities that provide a broad public benefit. These hospitals therefore actively engage in tasks that address community health needs. Plante (2008) declares that non-profit hospitals continue to be of great importance even as the society struggles to contain unsustainably escalating healthcare delivery costs.
These institutions offer health care services at subsidized rates making them accessible to individuals who cannot afford the high costs demanded at for-profit hospitals due to their low incomes or lack of insurance cover. In addition to this, some patients are provided with free care at these hospitals. According to Plante (2008), non-profit hospitals provide greater uncompensated care than for-profit hospitals.
Healthcare literature suggests that in similar healthcare settings (that is hospitals of similar sizes and providing the same services) the quality of care provided by for-profit organizations is lower compared with that of NPOs. The property rights theory reveals that for-profit organizations are likely to provide lower quality of care since this attribute is difficult to measure and monitor (Plante, 2008). The for-profit hospitals are therefore more likely to cut corners and limit services since the patients will not notice this. The end result is lower quality outcomes compared with not for profit hospitals.
In addition to providing healthcare services at reduced costs, nonprofit hospitals also provide services in areas that would be considered unprofitable by for-profit hospitals. For profit hospitals have a tradition of focusing on areas where profits can be reaped. Due to the profit maximization rationale, these hospitals avoid areas that have low profit margins or are unprofitable.
Non-profit hospitals are guided by the doctrine of providing for societal needs and they therefore step in and offer the unprofitable services. For example, they offer trauma care which is expensive without aiming to make a profit (Plante, 2008).
This paper set out to provide a detailed discussion on non-profit organizations in order to highlight the important role they play in the society. From the discussions made in this paper, it is evident that NPOs play a major role in the society and their behavior enhances economic growth. These organizations not only provide essential services to the community but they are also major employers. They also engage in welfare services ensuring that all members of the society have access to basic services.
As long as the society faces problems of inequality and unemployment, NPOs will continue to be important tools through which greater welfare can be achieved. NPOs are likely to become increasingly important over the next few decades even as governments scale back on their welfare contributions. It is therefore critical that individuals play a part in ensuring the success of non profit organizations.
Individuals can contribute to the success and sustainability of NPOs in a number of ways. In a direct way, people can invest in these organizations by providing monetary donations. Individuals can also volunteer in non-profit firms and in so doing donate their skills. Indirectly, community members can become frequent customers of these organizations.
When a person makes use of the services of an NPO, he benefits himself and the society as well. The individual benefits since NPOs provide better quality of services since they are not motivated by profits. The society benefits since the profits made by the NPO are used for charitable causes or to subsidize the costs of goods and services being provided by the NPO. Such efforts would ensure that non-profit organizations are sustainable and this would enable them to continue playing their important role in our society.
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