A not-for-profit organization (NPO) tries to run its programs effectively and efficiently, not as a by-product of their main objective, but as the main objective itself. The Canada Revenue Agency (CRA) and many donors consider the amount spent on administrative costs (including fundraising) to be a significant indicator of effective management. The higher the proportion of administrative costs compared to programming costs, the less effective the organization appears to be at utilizing its resources.
There is no exact science to measure what donors will consider an acceptable amount to spend on admin expenses. CRA, though, has its own thresholds of acceptability.
For a more in-depth look at those thresholds, check out “Do you know your cost of fundraising ratio?”
Is an overall breakeven good enough?
Many organizations undertake a number of different initiatives. Since all its programs fall under the same general mandate, isn’t an overall breakeven acceptable? Individual funders might not think so. While the organization may be breaking even, if one of the programs is losing money, the others must earn enough to subsidize it in order to achieve an overall breakeven.
Suppose your NPO runs Program A and Program B. If Program A is losing money, but program B is making enough to cover the losses, the people who help fund Program B may not be pleased to know the money they’ve given you to fund Program B is being used subsidize Program A.
Determining the total cost of each program will now involve an allocation of indirect costs amongst the various projects. Ideally, different types of indirect costs will likely have different methods of allocation, such as salary based on time, and rent based on square footage. Whatever method of allocation is applied will have to stand up to scrutiny.
Include indirect programming costs
The first task is to determine if any of the indirect costs can actually be considered programming costs. For example, if the executive director is actively involved in running some of the programs, a portion of their salary should be allocated directly to that program. If office space is dedicated to a particular initiative, a portion of rent should be allocated directly to that program as well.
The second task is determining how the remaining truly indirect costs are to be allocated to each of the programs. Many organizations have limited resources. Time spent monitoring the expenditures is time away from delivering programs. The benefit of accurate allocations has to outweigh its cost. A simple basis of allocation will sometimes be the most beneficial, provided it remains rational, objective, and supportable. Whatever you choose must fit within both CRA’s acceptable thresholds and the reasonable expectations of your most important resource, your organization’s funders.Adam Aronson is a supervisor, assurance & advisory services at Ginsberg Gluzman Fage & Levitz, Chartered Accountants, in Ottawa. Adam has worked on a variety of assurance engagements while specializing in real estate and audits of not-for-profit organizations. Contact him at email@example.com, visit the firm at www.GGFL.ca and follow on Twitter @GGFLCA for the latest accounting news and information.