Realistic Strategies Calculating Analyzing amp Communicating the Full Cost of Your Programs November 5 2015 CalNonprofits Annual Policy Convention Cosponsored by California Community Foundation ID: 598497
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Real Costs Realistic StrategiesCalculating, Analyzing, & Communicating the Full Cost of Your ProgramsNovember 5, 2015
CalNonprofits Annual Policy Convention
Co-sponsored by:
California Community Foundation
Center for Nonprofit Management
First5LASlide2
About theFunded by:California Community FoundationCenter for Nonprofit ManagementFirst5LAIrvine FoundationOur unrestricted funders: Weingart, Packard, CalWellness
Our 9,400 membersSlide3
Why Overhead? Understanding how to allocate shared costs allows you to manage allocations to maximize recovery of the full costs from fundersUnderstanding “fully loaded” costs of various activities give you the financial analysis to inform decision-makingSlide4
Why now?OMB Uniform Guidance mandates 10% or more indirect cost rate in nonprofit-government contracts that include federal moneyReal Cost Project of Northern California, San Diego and Southern California Grantmakers
Rising influence of the online charity raters which rely heavily on “overhead rates” as a proxy for excellenceSlide5Slide6
How do you decide between a Starbucks latté and a Peet’s latté? Slide7
The myth about nonprofit overheadOverhead rates are a good indicator of whether a nonprofit is effectiveLower overhead = good nonprofitHigher overhead = bad nonprofitSlide8
Real Costs Realistic Strategies Determining the full cost of providing servicesReality-based communicationsNonprofit Overhead ProjectSlide9
Set pricesChoose mix of productsPick locationsEvaluate future investmentsSlide10
Why does it matter what a program really costs?Key factor in setting “price”If market price is lower than actual cost, must find subsidy to close the gapIf no source to close the gap between price we are paid and full cost of providing services, nonprofit diesSlide11
Closing the gap between full costs and priceFunders and donorsThird-party payersLow wage staffClients and communitiesCustomers willing to pay more than costSlide12
Language RealityWe (nonprofits, funders, others):Call the same costs by different namesCall different costs by the same name
Confuse & deceive ourselves and othersSlide13
Confusion of termsSlide14
Frameworks for expenses: Form 990: program, management & general, fundraisingDirect costs and indirect costsDirect program costs, shared costs, admin costs and fundraising costsSlide15
Form 990 classification of expenses: ProgramManagement & GeneralFundraisingSlide16
Direct Costs & Indirect Costs
Directly associated with a function
Lunches for the senior lunch program
Tree
scientist for tree
planting
program
Not
directly associated with a function
Benefits more than one function
A fair share needs to be allocated to each function
Rent
IT expenses
Audit costsSlide17
Both Direct & Indirect Costs are legitimate components of: Administrative functionsFundraising functionsProgram functions Slide18
Administrative FunctionsBoard supportFinancial managementHR managementIT management Slide19
Administrative CostsBoth direct & indirect costs of performing administrative functions:Admin costs that benefit whole agency function as indirect costs
Administrative costs that benefit a single cost objective may be treated as direct costs
(program management costs)Slide20
Fundraising FunctionsPreparing & making unsolicited requests for contributionsSoliciting donors, businesses, foundationsGenerally does not include submitting requests to governmentSlide21
Fundraising CostsDirect Costs: cost directly associated with soliciting contributions &Shared Costs: costs associated with performing multiple functions for which the benefit to fund raising efforts must be estimated through allocationSlide22
Program FunctionsProviding services or activities designed to achieve your missionSlide23
Program CostsDirect Costs: cost directly associated with delivering a program &Shared Costs: costs associated with performing multiple functions for which the benefit to a specific program must be estimated through allocationSlide24
Differing Definitions of Overhead CostsAgency-wide administrationAgency-wide administration plus facilities and other shared costsAny cost that cannot be directly attributed to delivery of a specific serviceSlide25
Real Costs = Full CostsDirect costs + Fair allocation of shared costs + Fair allocation of admin costs = Fully loaded costSlide26Slide27Slide28Slide29Slide30Slide31
Bases for allocation of shared and indirect costs Proportionate to specific measures (square footage use, copier counts)Proportionate to total direct costsProportionate to direct personnel costsOtherSlide32Slide33
Tactics to improve cost recoveryMake overhead costs invisible by converting all to direct costsUtilize a strict definition of overhead as admin costsBenefit from new federal approaches in OMB Uniform GuidanceConfront realityEducate donors & fundersSlide34
Strategy development based on knowing full costsSet prices to cover costs of a program and/or know how much subsidy it will requireInclude full costs in grant proposalsMake the case to government funders for higher than 10% indirect cost rateBased on knowing what surplus or deficit each program generates, make strategic decisions about where to subsidize, cut, investSlide35
Overhead issue is:Management issueNonprofit sector structural issue & normsGovernment contracting issue
Messaging challengeSlide36
Many more resourceswww.calnonprofits.org/overheadSlide37
www.calnonprofits.org/overheadSlide38
Your role in the Overhead ProjectContribute your stories and resources to the websiteTell your staff, board and funders about the Nonprofit Overhead Project and the Real Cost ProjectDo not publicize your Charity Navigator ratingHelp CalNonprofits identify & celebrate funders & donors who get it
Join us to change the narrative