A company knows how well it is doing: its profit and its share price tell it. A hospital run by a charity, a state university or a foundation that feeds school children cannot be judged by profit, because profit is not why it exists.
Its purpose is to benefit people, and it faces the same problems as any other organisation: money is limited, costs must be controlled, and someone has to decide whether the money is being used well.
This topic covers what a not-for-profit organisation is, the kinds of objectives it has, why it still needs financial management, the idea of value for money and its three elements (economy, efficiency and effectiveness) with a worked comparison, and the difficulties and methods of measuring achievement. The next topic covers macroeconomic policy targets, gross domestic product and fiscal policy.
The syllabus asks for the objectives of a not-for-profit organisation and the ways of measuring achievement. The topic also prepares the ground for the course on public sector accounting and finance. Read evaluating corporate objectives first, to see by contrast how a company measures its objective.
In 30 seconds
A not-for-profit organisation operates for public benefit and its main objective is not financial: social, environmental, research, educational or health aims. It still needs financial management to survive, budget, keep spending within funds, monitor efficiency and measure performance.
Value for money is to a not-for-profit organisation what profit is to a company: the best possible outcome for the lowest possible cost, judged by the three Es: economy (inputs bought at the lowest cost for the quality needed), efficiency (outputs for inputs) and effectiveness (outcomes against objectives). Measuring achievement is hard because of multiple stakeholders, multiple objectives, unclear targets and limited funds. Methods: financial and non-financial targets, benchmarking and budgeting.
What a not-for-profit organisation is
A not-for-profit organisation is an entity whose main objective is not financial. It operates for the public benefit and not to generate profit for shareholders or owners. Its purpose is to address social, economic or environmental issues and to benefit prescribed groups of people. Examples are charities, foundations, advocacy groups, community organisations, and government departments and agencies.
Schools and universities provide education, a health service provides health care, and a charity provides aid to a chosen group.
| Category of objective | Focus |
|---|---|
| Social | Improve the quality of life or address issues such as poverty |
| Environmental | Protect and preserve the natural environment; address climate change |
| Research and development | Conduct research in specific fields |
| Educational | Provide education and training to individuals or groups |
| Health | Improve access to health care services |
Why financial management is still needed
These organisations have no major financial objective, but they need financial management to help them achieve their main objectives, because:
- they need to survive;
- they need to budget and plan their spending;
- they need to compare actual spending with the budget;
- their spending must not exceed the funds available;
- they need to monitor how efficiently resources are used;
- they need to ensure the funds are well used; and
- they need to measure performance against their key objectives.
When the main objective is not financial there is always a financial constraint on it. For example, an organisation has a grant of ₦120m. Spending of ₦126m is an overspend of ₦6m, 5% above budget, and it has to be funded from reserves or by cutting services.
Value for money
Value for money is to a not-for-profit organisation what profit is to the financial management of a company. It means the optimal use of resources to achieve the intended outcomes, getting the best possible outcome for the lowest possible cost. It is judged by three elements, the “3 Es”:
- Economy: are the appropriate quantity and quality of inputs bought at the lowest cost? The key issue is the cost of the inputs.
- Efficiency: how well are inputs converted into outputs? The key issue is output per unit of input.
- Effectiveness: how well do the outputs achieve the objectives? The key issue is whether the intended outcomes are achieved.
Value for money is an appropriate framework because it reflects both the cost of providing a service and the benefit achieved.
A worked comparison
Two clinics, Lekki and Ikeja, each employ 12 nurses of the same qualification. Lekki’s nursing cost is ₦48m, it treated 9,600 patients and 80% recovered. Ikeja’s cost is ₦60m, it treated 7,500 patients and 90% recovered.
| Lekki | Ikeja | |
|---|---|---|
| Economy: cost per nurse | ₦4.0m | ₦5.0m |
| Efficiency: patients per nurse | 800 | 625 |
| Efficiency: cost per patient treated | ₦5,000 | ₦8,000 |
| Effectiveness: recovery rate | 80% | 90% |
| Cost per patient recovered | ₦6,250 | ₦8,889 |
Lekki is more economical and more efficient, because it buys the same nurses for less and treats more patients with them. Ikeja is more effective, since a higher share of its patients recover. Taking all three together, Lekki gives the lower cost for each successful outcome (₦6,250 against ₦8,889). But the managers should ask whether the quality of care at Lekki is being compromised by the volume.
Measuring achievement
Measuring the achievement of objectives in a not-for-profit organisation is complicated, because:
- there are different, powerful stakeholder groups, not shareholders as in a company;
- there are usually multiple objectives, so it is hard to identify a single main one;
- it may be hard to define targets that are clearly linked to objectives and measurable; and
- limited funding may restrict the objectives that can be achieved.
Methods include setting financial and non-financial targets (for example a maximum cost per beneficiary and a minimum pass rate); benchmarking, which compares performance with similar organisations and best practice; and budgeting, for planning and monitoring spending. Value for money measures give the common framework.
The ideas in more depth
Why no single ratio is enough
An organisation can be economical and efficient but ineffective, running a cheap programme that does not work, or effective but wasteful. A cost per pupil of ₦2,000 is meaningless without the pass rate. The three Es must be read together, with a judgement about quality.
Why the stakeholders differ
A charity answers to donors, beneficiaries, regulators and staff, each wanting something different. A donor wants to see the money reach beneficiaries; a regulator wants compliance; beneficiaries want services. There is no owner whose single interest sets the objective, so the organisation must be explicit about its priorities.
Sources and references
- No accounting standard governs this topic. The principles apply in the not-for-profit and public sectors; see the course on public sector accounting and finance for the reporting rules.
These points are stated as at 5 November 2026.
Worked examples
Example 1: efficiency. A clinic with 12 nurses treated 9,600 patients and spent ₦48m on nurses. Required: patients per nurse and cost per patient.
- Per nurse.
9,600 ÷ 12 = 800. - Cost per patient.
₦48m ÷ 9,600 = ₦5,000.
Example 2: cost per outcome. The same clinic had a recovery rate of 80%. Required: the cost per recovered patient.
- Recovered.
9,600 × 80% = 7,680. - Cost.
₦48m ÷ 7,680 = ₦6,250.
Example 3: a budget constraint. A grant of ₦120m; actual spending ₦126m. Required: the variance.
- Variance.
₦126m − ₦120m = ₦6m overspend, 5% of budget.
How to answer in the exam
- State the objective of the organisation and say why profit is not the measure.
- Define economy, efficiency and effectiveness and give a measure of each from the facts.
- Compare two organisations or two years and say which is better and why.
- Add the difficulties of measurement and a method such as benchmarking.
Common mistakes in the exam
- Saying that not-for-profit organisations do not need financial management.
- Confusing efficiency (outputs per input) with effectiveness (outcomes against objectives).
- Equating economy with the lowest cost without regard to quality.
- Using only cost measures.
- Forgetting the multiple stakeholders.
- Not recommending a measure for each E.
Quick revision
- Objectives: social, environmental, research, educational, health; subject to a financial constraint.
- Value for money = economy + efficiency + effectiveness.
- Difficulties: multiple stakeholders and objectives, unclear targets, limited funds.
- Methods: financial and non-financial targets, benchmarking, budgeting.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. A not-for-profit organisation is one whose main objective is:
- To maximise profit
- To pay dividends
- To benefit prescribed groups of people, not to make profit
- To raise share capital
Show the answer
C. It operates for the public benefit.
Question 2. Value for money is to a not-for-profit organisation as:
- Cost is to a company
- Profit is to a company
- Dividends are to a company
- Tax is to a company
Show the answer
B. It is the framework for judging performance.
Question 3. Economy is concerned with:
- Buying the right quantity and quality of inputs at the lowest cost
- Outputs per input
- Achieving objectives
- Raising funds
Show the answer
A. The key issue is the cost of inputs.
Question 4. Efficiency is concerned with:
- The lowest price
- Meeting the budget
- Donations
- The relationship between outputs and inputs
Show the answer
D. Output per unit of input.
Question 5. Effectiveness is concerned with:
- The cost of inputs
- Whether the outputs achieve the intended objectives
- The speed of work
- The size of the budget
Show the answer
B. For example the pass rate of a school.
Question 6. A not-for-profit organisation needs financial management to:
- Survive, budget and keep spending within the funds available
- Pay dividends
- Issue shares
- Maximise profit
Show the answer
A. And to monitor how efficiently resources are used.
Question 7. A difficulty in measuring achievement is that such organisations:
- Have one clear owner
- Have no stakeholders
- Usually have multiple objectives
- Have unlimited funds
Show the answer
C. It is hard to identify a single main objective.
Question 8. Benchmarking means:
- Setting a budget
- Counting beneficiaries
- Auditing
- Comparing performance with similar organisations and best practice
Show the answer
D. It is a method of measuring achievement.
Question 9. Which is a not-for-profit organisation?
- A listed bank
- A private manufacturer
- A charity or a government agency
- A trading company
Show the answer
C. Also foundations and community organisations.
Question 10. Limited funding may:
- Restrict the objectives that can be achieved
- Remove all objectives
- Raise the profit
- Remove the need for a budget
Show the answer
A. It is the financial constraint on the objective.
Section B style: written questions
Question 11 (10 marks). (a) Define a not-for-profit organisation and give FOUR examples of its objectives. (5 marks) (b) State why it still needs financial management. (5 marks)
Question 12 (15 marks). Two training centres each have 10 teachers of equal quality. Centre A spent ₦1.8m on teachers, with 900 students and a pass rate of 60%. Centre B spent ₦2.4m, with 600 students and a pass rate of 90%. (a) Calculate the cost per student for each. (4 marks) (b) Calculate the number of passes and the cost per pass for each. (6 marks) (c) Evaluate economy, efficiency and effectiveness. (5 marks)
A further written question
Question 13 (20 marks). A charity has a budget of ₦150m. Its health programme cost ₦45m, treated 1,500 people and 70% recovered. Actual total spending was ₦165m.
(a) Calculate the cost per person treated and the cost per person who recovered. (6 marks) (b) Calculate the budget variance and its percentage. (4 marks) (c) Explain the three Es using the figures. (6 marks) (d) State TWO difficulties in measuring the charity’s achievement. (4 marks)
Model answers
Show the model answer to Question 11
(a) An entity that operates for the public benefit, not to make profit for owners (2). Objectives (0.75 each, any four): social; environmental; research and development; educational; health.
(b) (1 mark each) To survive; to budget and plan; to compare actual spending with budget and not exceed the funds; to monitor efficiency and use of resources; to measure performance against objectives.
Show the model answer to Question 12
(a)
- A: ₦1,800,000 ÷ 900 = ₦2,000 (2).
- B: ₦2,400,000 ÷ 600 = ₦4,000 (2).
(b)
- A passes 900 × 60% = 540 (1.5)
- B passes 600 × 90% = 540 (1.5).
- Cost per pass A ₦1,800,000 ÷ 540 = ₦3,333 (1.5)
- B ₦2,400,000 ÷ 540 = ₦4,444 (1.5).
(c) A is more economical (lower cost per student) and more efficient (more students per teacher) (2.5). B is more effective (90% against 60% pass rate) (1.5). The two produce the same number of passes, but A at a lower cost per pass (1).
Show the model answer to Question 13
(a)
- Cost per person treated ₦45m ÷ 1,500 = ₦30,000 (3).
- Recovered 1,500 × 70% = 1,050
- cost per recovery ₦45m ÷ 1,050 = ₦42,857 (3).
(b) ₦165m − ₦150m = ₦15m overspend (2), 10% of budget (2).
(c) Economy: the cost of inputs, which is the ₦45m spent on the programme (2). Efficiency: 1,500 people treated for ₦45m, ₦30,000 each (2). Effectiveness: 70% recovered against the objective (2).
(d) (2 marks each, any two) Multiple stakeholders and objectives; unclear or immeasurable targets; limited funding restricting what can be achieved.
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