Funding based on rate X volume - What do you need to know to apply for funding requiring this formula

Many of you receive funding that either has or will soon move to a procurement model where the funding is based on the cost of the unit of service.

This is also referred to in a formula as FUNDING = RATE X VOLUME. This essentially is the cost per service provided per program.

What is required to estimate the rate and volume of the services your organization provides?

You need to know the true and full costs of the programs. This method is referred to as True and Full Cost Accounting (TFCA).

Establishing the true and full costs may seem easy at first but I have often seen that organization’s calculate the cost of programs incorrectly as they are not incorporating the true and full cost of programs.

Let’s explore the benefits of TFCA, the 4 tests, and some tips on how to calculate TFCA correctly…

Benefits of TFCA for new programs
True and full cost accounting (TFCA) will allow you to:

  1. know how much revenue you will require to operate a new program
  2. assess funding opportunities more objectively
  3. seek the type of funding the program requires
  4. allows you to assess how much a new program will draw on existing management and administrative expenses

For new programs with outcomes based funding TFCA allows you to determine your break-even minimum requirement for funding.

Benefits for existing programs
True and full cost accounting (TFCA) will allow you to:
• Provide concrete data to educate funders on the true cost to operate a program
• Understand the costs associated with scaling for natural growth and for expansion
• Use a lens that integrates finance with strategy
= mission resilience
• Strengthen decision making about programs (is it time to revisit the program model and the funding structure?)

For TFCA to be applied over time it must pass these four tests:
True and full cost accounting (TFCA) will allow you to:
1.Consistently applied and over time
2. Reasonable choice of allocation bases (per service, per service recipient)
3. Flexible and practical
4. Conforms to funder and industry standards (if any)

Source: Streetsmart Financial Basics for Nonprofit Managers, Thomas McLaughlin

Calculating the True and Full Costs of programs:
Understanding the true and full cost per service (rate) and the number of service-participants (volume).

What does the true cost entail?
The true cost to deliver a program entails the full costs of direct service (example, front line salaries and benefits, training, supplies, etc.) and the operational component including a proportion of all costs such as (but not limited to): occupancy costs such as utilities, rent/lease, cleaning, security, snow removal), accounting and audit, supervisor’s time, insurance, etc.

How much?
In order to estimate the true proportion of these costs - calculate the actual: use of space, supervisor’s time, office supplies etc. per program. Asses all staff time based on actual time spent in each program.