This article was originally published on npEngage.
I once interviewed for a job with an organization in Atlanta that sold coupon booklets door-to-door to support a children’s wheelchair basketball league. It sounded like a worthy cause, until I asked what percentage of sales actually went to the league. The answer was 7%. Ninety-three percent of the proceeds went to pay salaries and overhead for the organization doing the selling!
That sounds pretty terrible… but how can we know for sure?
Let’s look at two very different types of costs or expenses that your organization will incur: Program costs vs. Administrative costs.
- Program costs are why you exist as a nonprofit; the term denotes the money that you spend to further your mission. It doesn’t matter if your mission is educating your members about the artwork in your museum, providing scholarships for children to attend your school, or buying warm coats for homeless families; when you spend money on those activities, you’re justifying your own existence by improving your community.
- Administrative costs, on the other hand, are how you exist as a nonprofit. Admin costs are incurred as you direct and control the organization itself. Employee salaries, purchasing office supplies, and paying the electric bill so the lights keep working are all examples of the admin costs that you incur in the process of remaining a going concern.
(Want more fund accounting resources? The Chart of What Counts is your source for information on nonprofit reporting, grant tracking, project and expense management, and more!)
There is no federally mandated maximum percentage of total expenses that may be spent on administrative items, and different types of nonprofits will naturally incur admin costs at different rates. So, how do you know if you’re spending “too much” or “just about enough” on admin costs? Charity Navigator presents a ratings table that takes into account the differences in the costs inherent in, for example, running a museum (which must pay to maintain its collections) versus running a food bank (which generally deal with very little cash or overhead). This table, or a similar peer-reviewed tool, will give you a rule of thumb by which to gauge your organization’s admin costs according to the type of service that you provide.
To continue our contrast between the highest-overhead organizations (museums) and the lowest-overhead organizations (food banks), a museum which spends 15% of its total expenses on admin costs is doing very well, while a food bank spending the same 15% on admin is not. So, as you evaluate your organization, remember that you’re not operating in a vacuum; why you exist will have a bearing on how you exist. (You’ll notice in reviewing the chart that in no case is it okay to allow your admin costs to hit 93% of total outlays, as in my earlier example!)
Both your internal and external stakeholders should be focusing on your admin costs. Obviously your board should compare admin costs with program costs to ensure you’re properly fulfilling your mission. Additionally, in this age of sluggish economies, savvy donors (not the mention granting agencies!) are keeping a close eye on the percentage of total expenses that nonprofits spend on admin, to ensure they’re getting the most “bang for their buck” when it comes to making a difference in their communities. Your organization should be able to generate, on demand, a Statement of Functional Expenses that clearly segments and analyzes admin costs.
Finally, don’t forget that some admin costs will be necessary. If we don’t pay salaries and utilities, for example, we won’t be in business for long, and then nobody in our community will benefit. So, determine what you’re currently spending on admin, and determine whether that percentage is reasonable given what other organizations of your type are doing. My next post will discuss some strategies you can use if you determine your admin costs are higher than they should be. If your admin costs are already under control, then please continue to do a great job serving your community!
Want to learn more about you can reduce costs? Check out this short video.