ACCA Applied Skills · Financial Management

Financial and other objectives in not-for-profit organisations: formula sheet

Full chapter guide

Key formulas

Economy: Economy = spending the least to obtain inputs of the right quality; Looks at the cost of inputs, such as paying less for supplies at the same quality.
Efficiency: Efficiency = maximum output from given inputs (or minimum input for given output); Example: cost per patient treated, or patients per nurse.
Effectiveness: Effectiveness = extent to which outputs achieve the organisation's objectives; The hardest to measure. It compares results with the stated aim.
Surplus: Surplus = income − expenditure; Reinvested in the mission. It is not distributed to owners.
Economy: Economy = spending less on inputs of a given quality (actual input cost vs budgeted or benchmark input cost); Looks only at input cost. Quality must be held constant, or cheap can mean poor.
Efficiency: Efficiency = output ÷ input (or input ÷ output, such as cost per unit of output); Examples: patients treated per nurse, cost per student. Compare with a target, past period or similar body.
Effectiveness: Effectiveness = outputs or outcomes achieved compared with objectives set; Examples: percentage of target met, exam pass rate, reduction in crime. Needs a clear objective.
Link between the Es: Inputs → (efficiency) → Outputs → (effectiveness) → Outcomes; economy applies to the inputs; Use this chain to place any measure in the right E.
Economy: Economy = spending the minimum on inputs of suitable quality; Looks at input cost only. Example: price paid per unit of supplies.
Efficiency: Efficiency = output ÷ input (or the same output for fewer inputs); Example: cases handled per member of staff, or cost per case.
Effectiveness: Effectiveness = actual outcome achieved compared with the objective set; Example: percentage of target beneficiaries actually helped.
Cost per unit of service: Cost per beneficiary = total cost ÷ number of beneficiaries; A simple efficiency measure. Compare over time or with similar bodies.
Administration cost ratio: Admin cost ratio = administration costs ÷ total income (or total expenditure); Donors watch this. A low ratio is not always good if it means under-investing in control.

Quick revision

A not-for-profit organisation exists to provide a service or support a cause, not to reward owners with profit.
Typical examples are charities, public sector bodies and member-run organisations.
Their funding often comes from donations, grants or government, not from selling shares.
Objectives are usually multiple, and many are non-financial.
Common financial objectives are to break even, stay within budget and use funds well.
Economy means obtaining inputs at the lowest suitable cost.
Efficiency means getting the most output from the inputs used.
Effectiveness means achieving the stated objectives or outcomes.
Value for money combines economy, efficiency and effectiveness.
Low cost alone is not value for money if the objective is not met.
Performance is hard to measure because outputs are hard to quantify and objectives may conflict.
Always apply your answer to the organisation in the scenario.

Common mistakes

Saying NFP organisations cannot make a profit. Fix: Say they can make a surplus, but it is reinvested for their purpose and not distributed to owners.
Saying a mutual has shareholders seeking a return like a company. Fix: Say members own it and are also users. Benefits come as better prices, bonuses or services.
Saying the main objective of an NFP is to maximise profit. Fix: State that the mission comes first. A surplus is a means to fund the mission, not the end.
Saying NFPs have no financial objectives. Fix: Mention solvency, cost control, budget limits, funding and value for money alongside the non-financial aims.
Treating economy as the same as cost cutting of everything. Fix: Economy is about buying inputs of the right quality at the lowest cost. State that quality must be kept up.
Mixing up efficiency and effectiveness. Fix: Efficiency is output per input. Effectiveness is achieving the objective. Doing things right versus doing the right things.
Saying NFPs have no financial objectives at all. Fix: State that NFPs must still control costs, stay solvent and use funds well. Their financial aim is usually to break even or meet budget while delivering the service.
Mixing up economy, efficiency and effectiveness. Fix: Economy is input cost, efficiency is output per input, effectiveness is achieving objectives. Check which one the example describes.

Exam tips

Always organise comparisons under ownership, funding and purpose. It gives structure and earns marks quickly.
In OT questions, watch for absolute words such as never and must. NFPs can make surpluses and can have financial constraints.
Name the type of NFP first, then apply its features to the scenario.
Link this topic to value for money and non-financial objectives, as later questions often build on it.
Always open by stating that the NFP's primary objective is its mission, not shareholder wealth.
In written answers, split your points into financial and non-financial objectives under clear labels.
Use scenario details such as names, services and funders. Generic lists score less.
For stakeholder conflicts, state both sides of each clash in one sentence each.