We continue our series on developing a strong financial leadership model. This month, we are looking at what should be done in your nonprofit’s operations to ensure such a model.
Determining your nonprofit’s true costs
An important, but sometimes complex, aspect of ensuring nonprofit financial success is to understand the true costs of the organization’s programs. When determining the true costs and impact of a program, you should look at the direct and indirect program costs.
What are the direct and indirect costs? Direct costs are those that are directly used to carry out the mission of the program. They are most likely only used by, and allocated to, specific programs. Namely, training materials or program-specific software. These costs could also be shared between other programs.
Indirect costs are expenses that benefit all areas of the nonprofit. These are commonly referred to as “overhead” or “G & A” (general & administrative) costs. To illustrate, some examples include utilities, rent, or an outsourced IT contract.
Many organizations that receive government funding can obtain a negotiated indirect rate. This can be included in grant proposals if allowed by the funder. This helps to offset the overhead costs of the nonprofit organization.
Evaluating your nonprofit’s programs
We work with nonprofit clients that calculate an indirect rate and charge that rate to all programs, regardless of the allowance by the funder. Because of such, this provides a presentation of the true cost of the program.
In evaluating a program’s effectiveness, it is important to look at the total costs compared to the impacts made by the program. Additionally, it is important to look at them throughout the project, not just at completion.
An easy way to do this is to work with your nonprofit’s program manager to create a budget. Then, prepare regular reports that compare actual program costs to the program budget. Finance and program staff should have regular meetings to discuss the budget and program deliverables to ensure both are on track to meet the goals of the program.
To find more articles on how to strengthen your nonprofit’s financial leadership, click here.