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Understanding Capital Structures: NFP vs. For-Profit Organizations

This chapter explores the fundamental differences in capital structures between not-for-profit (NFP) and for-profit organizations. It outlines the key learning objectives including the various legal forms of business ownership, the lifecycle of firms, and funding sources available to managers. Specifically, the chapter highlights how NFPs primarily rely on external funding and philanthropy due to their operational limitations, differing significantly from for-profits that can utilize equity financing. Understanding these differences is crucial for effective management and decision-making in both sectors.

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Understanding Capital Structures: NFP vs. For-Profit Organizations

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  1. Chapter 13 – Learning Objectives 2 of 32 • LO1: An understanding of the different legal forms of business ownership • LO2: An overview of the evolutionary process that firms transition through over the course of their life cycles • LO3: An analytical assessment of the different sources of funds available to managers as they seek to define the capital acquisition options available to their organizations • LO4:A recognition of the “sources of funds” differences that exist between for-profit and not-for-profit organizations Chapter 13 – Introduction to Capital and Financial Markets (c) 2012 McGraw-Hill Ryerson Ltd.

  2. NFP Source of Funds 29 of 32 LO4 • One of the key fundamental differences between not-for-profit (NFP) and for-profit organizations lies in their capital structure • NFPs can use cash available from operations as well as debt financing but not equity financing • However, many NFPs do not generate revenue but rely on funding totally from outside sources such as government; they are, in essence, expense-driven organizations • NFPs can fundraise; the concept of philanthropy and the ability to accept donations represents a core fundamental source of capital for many NFPs • Unlike their for-profit counterparts, NFPs in general will prefer to undertake philanthropic initiatives as a viable source of funds prior to exhausting current internal reserves or undertaking new debt • The achievement of its social mission and the delivery of its programs represents the NFP’s “raison d’etre” - it is the distribution of wealth and benefits through the NFP’s activities, even in the absence of generating a surplus, that must drive its management team’s decision-making focus Chapter 13 – Introduction to Capital and Financial Markets (c) 2012 McGraw-Hill Ryerson Ltd.

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