Although nonprofits generally have a good understanding of their revenues, knowledge about costs can sometimes be less robust. This is particularly the case when it comes to the true, all-in costs of providing services, running programs and otherwise operating the organization.
Lacking this information, nonprofit executives often must make important resource-related decisions on the basis of intangibles such as intuition, the skills and knowledge of the program staff, or the preferences and inclinations of the organization’s funders. As a result, they run the risk of undermining their organization’s mission (however inadvertently) by failing to allocate resources to the most appropriate programs and services. Given the limited resources available to nonprofits (especially during financially challenging times), gaining economic clarity around costs is critical to inform key strategic decisions.
Most organizations have a good understanding of the direct costs incurred by each of their programs. But since traditional accounting breaks down indirect (or overhead) costs by functions (e.g. administration, marketing, operations), rather than by programs, it fails to capture the relationship between these costs and the organization’s activities, and consequently, its mission. The result is a cloudy economic picture that blinds nonprofit leaders from truly understanding the financial health of each of their program areas.
The process of understanding the true costs of each program area within an organization can seem somewhat complex for anyone conducting this analysis for the first time. This toolkit has been designed specifically to help guide nonprofit leaders through this process, which consists of six steps:
Determine purpose and scope
Gather financial data
Allocate direct costs
Allocate indirect costs
Check your data
Apply this knowledge
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