Indian Trusts Act
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This article is written by Aditi Sahu, pursuing Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

For any successful business organization or enterprise, either profit or non-profit company, financial stability plays a role of a foremost element. It is more important than generating revenue but the organization should maintain a balanced budget for their continuance. This is applicable for both profit-making and non-profit organizations. 

The main aim of the profit-based organization is to maximize their profits i.e. increasing revenue because the business is more stable if the cash reserve is high in the organization. The companies face less risk if they have a large cash reserve and strong cash flow which allows them more access to debt and equity markets for expansion. 

Similarly, in the case of a non-profit organization, financial stability is the main objective for them, but here profit maximization is not the primary focus of the company. For a non-profit organization, the main goal is not to generate profit but to provide goods or services to the customers that meet their required needs.

Providing community-based goods and services to the customers in society that meet their required needs be regarded as the mission of the non-profit organization. They also seek a large number of funds or donations from like-minded people whose main interest is to uplift society and to achieve this goal, they give donations to the non-profit organization, which may properly utilize the given resources from donors for public goods. For achieving these objectives, the non-profit organization should have proper financial strategies i.e. how they allocate their funding (stages of funding) or; the amount of the funds that they allocate for public benefits or; for which public goods and services, the organization would invest or raise donations from donors, etc. 

What is meant by a non-profit organization?

A non-profit organization (NPO) refers to an organization that is not driven by profit, however, it focuses on the welfare of society by dedicating all its income to charity, environment protection movements, cooperatives, and religious groups, etc. 

Most NPOs have non paid staff and they act as volunteers. Generally, non-profit organizations (NPOs) are availing tax exemption. NPOs that may consolidate for Charitable or religious purposes are availing tax exemption under the Income Tax Act, 1961. The charitable or religious purposes include relief of the poor or distressed people, medical relief, environmental protection (such as forest and wildlife protection, groundwater and other water bodies protection and preservation), education, advancement in public utility services, etc. 

In India, the terms NPO and NGO (non-government organization) are also often used simultaneously because most of the NGOs are non-profit organizations but both they are different to some extent. Generally, NGOs are separate from the government and don’t require a government council but they depend on the government for funding.

In India, there are three legal forms of NPOs. These are Trusts; Societies and Section 8 Companies (under Companies Act, 2013).

  • Trusts

Trusts are classified into two types, one is a private trust and another one is a public trust. The Public charitable trust may be designed for the benefit of an uncertain and fluctuating class, such as the general public or class of public which could be the potential beneficiary. The Public charitable trust may be established for certain purposes, such as education and medical relief, poverty relief, a recreation of General Public Utilities, etc. Although there is no central legislation that governs public charitable trust, many regions such as Maharashtra, Gujarat, Rajasthan, and Madhya Pradesh have their Acts on Public Trusts. 

In India, generally Public charitable trusts are irrevocable, but if the trust is inactive for a longer duration due to the negligence of the trustee, then, the Charity Commissioner may take steps to revive it. 

In the case of Trusts, the Doctrine of Cypress i.e. “as near as possible” was applied mainly for changing the purpose of the trust because it is difficult to carry out its objectives. 

  • Societies

Societies are regulated under the Society Registration Act, 1860 for charitable purposes. It is a membership organization having a managing committee and governing council to regulate its activities.

As per the provision of the Statute named, Society Registration Act, 1860, Section 20 states that the society might be registered as;

  • Charitable society; 
  • Society established for the promotion  of science, arts, literature, education, or fine arts; and 
  • Society established for public art museums and galleries, etc.

Also, the governance of society differs from trust, unlike trusts, societies may dissolve. At least, 3/5th voting of the society’s members is required for the dissolution of society.

  • Section 8 of Companies Act, 2013

These Section 8 companies are registered under the Companies Act, 2013 for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any other Object. 

The profits and any other income are applied for promoting only the object of the Company and also no dividends are paid to its members. 

Like a society, a Section 8 company may get dissolved. 

Financial strategies and their components

In an organization, financial strategy deals with the procurement or utilization of funds. The primary concern is to ensure that the organization should have an adequate and proper supply of funds to meet their present and future needs and also they must accomplish their desired goals. Also, financial strategy refers to one of the critical components of the business organization. 

Therefore, we can say, the financial strategies ensure the source of funds & their usage and try to manage these funds appropriately. It focuses on the appropriate alignment of financial management and business objectives of an organization for their strategic advantage and it leads to business growth.  

As per the theory of Thomas Wheelen and David Hunger;

“Financial strategy deals with the financial aspects of the organization and ascertains its possible course of action. It also provides a competitive advantage at low-cost funds and flexibility to raise capital to support business policies. Thus, the financial strategy focuses on maximizing the financial value of a business of an organization or an enterprise.”

There are certain components of financial strategy which enable the company for better financial management. These components are:

  • Financing decision

The financial position of the company plays a crucial role in any decision-making process. For any organization, either a profit or non-profit organization, funds availability is called freebies for the execution of any strategic plan.

While raising funds, the financial managers are bound to ensure that the funds are allotted at minimal risk. He should decide the nature of the fund, either from external sources (such as raising capital by issuance of equity shares, preference shares or debentures, and borrowed money as term loan) or internal sources (by reserving or retention of profits and depreciating the value of fixed assets). 

Based on the financial position, some of the strategic decisions are taken by the organization;

  1. What are the sources and in what proportion the long-term funds were allocated?
  2. To what extent the long-term debt has resorted?
  3. Can a firm employ commercial credits? If they can, then to what extent the firm may employ commercial credits?
  4. Should the firm take recourse to capital lease (a source of medium and long term funding where the lessor (the owner of an asset) gives right to the lessee (user of an asset), to use these assets against periodical payments made by the user)?
  • Investment decision

Investment may refer to a path for wealth creation, which helps to accomplish the financial goals and also stabilize the future in terms of financial aspects. Investment may occur by advancing our money for purchasing the securities, i.e. shares, bonds and debentures, investment in real estate, mortgages, etc. 

In an organization, one of the vital components of the financial strategy, i.e. Investment. It plays a major role in the present and future aspects, because any investment made by the company may result in a boon or bane for them.  An organization should make a prudent decision while making any investment because it involves a high percentage of risk.  That’s why, investment decisions play a major role for the present and future aspect, because any investment made by the company may result as a boon or bane for them. 

The investment decision may be considered as profitable and successful only when the investor consider certain important measures, such as-

  1. Hurdle rate– The hurdle rate refers to the minimum rate of return on any project or investment. It also describes appropriate compensation at every level where risks are present. The financial strategy of an organization always seeks wealth maximization, that’s why, if the expected returns are higher than the hurdle rate then the investment may sound worthy and vice versa.
  2. Capital rationing- Capital rationing places certain restrictions or sets limits on a company’s investment against funds availability in an organization for a particular time interval.
  3. Risk factor- It is considered an important factor while investing, therefore, the finance manager must analyze the risk factor whether the investment contains high or low risk. For better investment, the financial strategy gives clear guidance regarding the risks involved in the investment.
  • Dividend decision

For better strategic planning, a dividend decision made by an appropriate authority in an organization plays a prominent role. Here, the appropriate authority is referred to as the finance manager or other higher-level managers, who determine the amount of dividend out of profit which is paid to the shareholders of an organization and also decides what amount should be retained for further growth, expansion, and development of an organization for striking a good balance between both of them. 

  • Working capital management

In an organization, the working capital is referred to as the current assets of the management which is required in day-to-day activity. If the working capital is managed efficiently then, it maximizes shareholders’ wealth. The major sources of working capital are bank loans, overdrafts, trade credits (also known as financial credits), etc. Thus, the strategic decisions are highly influenced by the working capital which makes equilibrium between liquidity and profitability. 

  • Cash flow management

When an organization strikes a perfect balance between liquidity and financial cost, then it is referred to as cash flow management. The finance manager must adopt such financial policies due to which the financial cost will reduce and the organization leads profits. It was also seen that several multinationals, as well as small companies, struggled to reduce their taxes. Thus, any organization when dealing with cash flow must take strategic decisions carefully. 

  • Managing growth and risks

It is very rightly said that business growth is very expensive in nature because it consumes capital which should be managed carefully. Investment of capital is a very high-risk appetite, thus, an organization must collect all the relevant information before making any investment. Therefore, the strategic decision must be taken carefully.  

Need of financial strategy in the non-profit organization

As a profit-making organization, the non-profit organization must be financially secured and stable for meeting its goals and objectives. But, unlike a profit-making organization, the non-profit organization doesn’t have a mission to make any kind of profitable business. They tried to be financially stable for providing social and community-based goods and services which is an altruistic need of an organization. They also seek donations to achieve their goals and thus, they need a financial strategy for making a successful delivery of societal goods and benefits to the underprivileged.

While approaching financial strategic management, they will provide clear guidance for decision making in respect of which business activity will be prioritized for making any welfare charity. However, they not only assist in the decision-making process for the company’s target but also create a platform for planning and tackling the hurdles along their way. 

Financial strategy maximizes an organization’s market value and due to which the long term and the short term goals of an organization get accomplished. It also ensures proper guidance in respect of financial decisions, investment decisions, and cash flow management, etc.

Financial strategy for a non-profit organization

To get success, both profit and non-profit organizations must require an effective financial strategy. Perhaps, both organizations have different approaches but, both need financial stability for operational activities in the organization.  Thus, a non-profit cannot ignore some essential elements which maintain financial stability in the organization. Thus, the elements for a financial strategy for non-profit organizations are:

  • Set a budget according to previous year data and performance as well as future goals 

Budgeting matters a lot because it provides financial information which supports future planning. Several organizations make default in budget planning because they overrate their potential for fundraising and underrate their non-profit expenses.  

To prevent these problems, the budget should be set under previous year data and past performance as well as future goals because it gives clear guidance during formulating a budget.

  • Consider overhead expenses while formulating goals and objectives

Mostly, individuals who worked for non-profit organizations ignored overhead expenses. It seems overhead expenses lead to cost-cutting in their mission. They usually give uttermost importance to their mission that is providing societal products and services to the underprivileged or welfare of society. But the overhead expenses are also an important factor for the growth of an organization. An overhead expense includes employee expenses and office expenses. 

Also, an organization must take an appropriate approach for striking a perfect balance between overhead expenses and raising funds for the welfare mission.

  • Rely on and create an organized system

For any successful non-profit organization, there should be effective organizational techniques. If an organization has organized financial data, then it will be easy for them to stick to their financial plan as well as easy to execute the same. 

The organization may also ensure that the data shall be secured safely and it will get easily accessible. Thus, it is necessary to store the data in software and it must be regularly monitored to avoid any mischief. 

  • Making an effective decision

The non-profit organization thinks that its missions are not affected by economic turmoil, but, this doesn’t happen. They may get affected and to avoid the circumstances, the non-profit always seeks consultancy with professional accountants. The professional accountant of our organization helps in making an informed decision and they also advised us on;

  1. Best pace for allocation of funds in the economic turmoil;
  2. Whether an organization is financially capable or not to make funds for a large welfare campaign; and
  3. The type of campaign is suitable for an organization, etc.
  • Making transparency with donors

The donors have the right to get a piece of appropriate information regarding the funding of a non-profit organization because of the amount which they donated as a result of their hard work. Therefore, the organization must be financially transparent with its financial strategy in front of donors or supporters.

If the organization makes an inappropriate statement regarding the campaign, then it will lead to an adverse impact on their goodwill.  Also, it makes them financially weak and it leads to the non-fulfilment of their welfare campaign. Thus, financial transparency with donors and supporters is very important for the growth and development of an organization as well as for the organization’s mission. 

Financial strategies to increase non -profit funding

Asking for a donation is one of the difficult aspects for the non-profit organization, but it is an important need also. Undoubtedly, it is a big challenge but it can be resolved by adopting a financial strategy and standing fast thereto on the plan. 

  • Step 1

At the very initial stage, the organization has to appoint one financial coordinator who assesses all the financial work and has control over the funds raised from donors and supporters. 

  • Step 2

The finance committee has to be introduced within the organization that keeps an eye on the activity of the financial coordinator as well as look into the financial matters of the company.

  • Step 3

Setup parameters for the usage of the fundraised. Committee of senior staff or volunteers or employees may together develop a creative idea for the campaign or charity by those funds.

  • Step 4

Establish an association with government projects, NGOs, charitable trusts, etc. for the contribution of their funds raised by the donations. It also gives a clear view or transparency to donors and supporters in respect to where their money gets contributed. 

  • Step 5

The organization needs to identify the fundraising method for the upcoming year. The method includes a donation, grants, crowd-funding, events, sales, membership, and sponsorship (community-based partnership). 

  • Step 6

Set a timeline for receiving the donations.

  • Step 7

The organization should have an effective administrative system that records all credit and debts of the business.  Also, the system should be regularly monitored. 

For example, after every fundraising or at once a month check the transactional activities. 

  • Step 8

Say always thanks to donors and supporters as well as acknowledge the CEO, Directors, and Chairpersons in the social events of the organization, in the newsletters, in the advertisement, etc. 

  • Step 9

At the end of every financial year taking the review and suggestions from the donors, supporters, CEO, Board members, etc. on the matter of what the organization did in the previous year? What kind of improvement is needed in the organizational activities? And what organization has to do in the upcoming year?

Golden rules for fundraising in a non-profit organization

Fundraising is one of the most important aspects of the growth of a non-profit organization. As such, this is not an easy task because no one donates their hard-earned money to an unknown organization. Fundraising is the most important source for the non-profit organization for contributing to any welfare campaign and charity, etc. Thus, it is a very crucial aspect for the management to introduce themselves in front of donors for their successful fundraising. To accomplish this fundraising goal, the organization has to adopt some rules which are particularly known as Golden Rules for fundraising in a non-profit organization. These rules are:

  • Know your donors

To know the donors very well is the most urgent aspect for the organization. The contributing habits to donate and the nature of the donor help us for effective communication with them. 

  • Educate the donors

The organization must ensure that they educate their donors as well as supporters regarding their contribution to the social need. It seems to be true that an educated donor will be a happy donor because it builds trust which helps them to donate money to your organization. 

The donors can be educated and be aware by sending brochures and testimonials of an organization as well as past performance records, etc. 

  • Help donors by fulfilling their personal needs

The donors eagerly come to donate their money when their fulfilment gets accomplished due to their support of your cause. Everyone wants their personal benefit even if they are doing any charity work. Thus, if your organization ensures them that they will get personal benefit on their support. 

  • Build a healthier and trustier relationship with donors

The organization must have to build a healthier and trustier relationship with donors and supporters because they are the primary sources of raising funds. Be honest and transparent with the donors and supporters. They never create a feeling of deception or cheating due to any kind of confidentiality by your end. 

  • Respect the donor’s emotions

This factor is very important because if you do not respect your donors then it will cause you a huge setback. If the organization wants their donors to donate for the long term, then it is necessary to respect their emotions and value to them. 

Conclusion

In the concluding statement, we can say that financial stability is the uttermost important aspect for profit, as non-profit organizations irrespective of their goals and objectives are different from each other. For survival, the non-profit organization has to raise funds and strike a balance between the growth of the organization and contribution towards the welfare program. 

It is also clear that the main source of fundraising in non-profit organizations is donors and supporters. Thus, the organization must be financially transparent regarding its financial strategy and be honest with them. Also, the organization needs to make donors and supporters happy with your performance and always respect them because it will build the brand image of an organization as well as new supporters will join your campaign. 

Therefore, to achieve these goals, a proper strategic plan needs to be developed as well as implemented within the organization for better growth.

References


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