After reading my post yesterday about how the federal government is requiring that non-profits receive at least 10% of grant/contract funding to cover indirect costs, you may be wondering how to accurately determine direct and indirect costs for your programs.
Getting an accurate picture of program costs is not only important for making sure you get proper allocations from government funded programs, but also for working toward a larger goal of providing boards of directors, funders and the general public with an accurate picture of the true costs of programs.
Providing an accurate picture is key in the campaign to diminish the use of overhead ratio as a measure of non-profit effectiveness.
In a piece on Social Velocity, Nell Edgington, emphasizes the need to present an accurate picture of costs and “break out of the nonprofit starvation cycle”
She also notes that it can help decide what programs really needs to be cut.
But don’t stop there. Turn this new knowledge about the financial impact of each of your programs into a strategic tool. Once you figure out what each individual program fully costs, you can compare the financial and social impact (how well it contributes to your mission) of each program to each other, like this in order to understand how well your entire program portfolio contributes to the money and mission of your nonprofit. Through this analysis you can determine what programs you should expand, which you should continue, and which you may need to cut.
She provides links to a rather detailed guide to determining the true costs of programs published by Bridgespan.
It isn’t an easy process. The estimated timeline in the guide is at least a month. Smaller organizations with fewer programs will take less time.
The guide discusses each stage of the process in detail, suggesting what staff roles need to be involved. It also provides some clear definitions and examples for what needs to be considered.
For instance, indirect costs:
Indirect costs can include general administration and management expenses (e.g. management staff salaries and benefits), infrastructure costs (e.g. rent and utilities, transportation, equipment depreciation, technical licenses), and other costs that are incurred for the benefit of all the programs within the organization (e.g. marketing costs, advocacy expenses).
It addresses questions about determining whether some salaries like those of the executive director and human resource personnel should be allocated across different programs or not.
(Just a note – The guide is about six years old and some of the internal links to templates and examples no longer work, but don’t be discouraged, most of them may be found in the appendix.)
Since there seems to be a slowly developing trend toward removing the stigma of overhead costs (that may evolve into a demand for a high level of transparency), nonprofits may want to start to invest in practices that will allow them to evaluate the true costs of their activities.