Concept of profit centre in NPO
By law NPO are allowed to make profit but are restrained from distributing it to owners and management This way they are non profit making organizations (from the owner's point of view). Such organizations include religious, charitable and educational trusts. Prime goal of management control systems in such organization is enhancing the service spread first and if possible then cost control rather and than operating efficiency. On the financial front, they enjoy many concessions from the government such as taxes, subsidies,grants etc so also they attract special control from these assisting institutes.
:1. Absent of profit performance measure leads to problems in assessing the efficiency of the organization. If the organization shows large net income it may be because that NPO may not be providing the services to the extent possible/ expected. If the organization shows net losses it may show the NPO facing risk of bankruptcy. Hence non availability of clear-cut performance yardstick makes the problem of control worst.
2. NPO's have contributed capital Plant: NPOs do not have shareholder as its stakeholder. The capital contribution to the business comes by way of contributions to assets such as building and equipment. Second kind of contribution could be in the form of monetary assistance, which entitles the organization to reap the interest on it keeping the principal amount intact.
3. Operating Assets represents the resources used for running day to day activities. And the contributed assets are not allowed to mix up with the operating assets.
4. Fund accounting: NPO need to keep two types of financial statements one set for contributed capital and another for operating capital. The nature of the contributed capital is beyond control of the management and therefore management concentrates on controlling the operating assets/investments.
5. Governance: Usually NPO are managed by trusts, who exercise less control on operational matters. Hence performance control is less demanding from owners' point of view and difficult from the point of view of management.
These characteristics pose difficulty in pricing of the product/services - what could be appropriate price? Usually it is set at total/full cost. The more stress expected on allocation of scare resources. Though not stricter control, but a sense of control can be built among the managers by way of using budgets for various activities and expenses. Non profit basis makes performance evaluation quite impossible. But one can make the things easier by concentrating on adherence to costs budgets, and enhancing the service base.