Nonprofit Finance Q&A - Ask your questions to Betty Ferreira live today, April 17, 2019

finance
(Betty Ferreira) #1

Hello folks,

Feel free to pose your questions to me on nonprofit finance here today. I will be live 9:30am - 11:30 am and 1:30 - 3:30pm to answer your questions.

Every question is a good question, don’t be shy, chances are if you have a question on a particular topic others do as well.

Ask away!

Betty

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April Host: Betty Ferreira FCPA, FCMA of ReStructure Consulting
(Adeliu) #3

Hello Betty,
How much of an administrative (overhead) cost should a non-profit organization have? How would they evaluate if the costs are too high or maybe too low to support their operations. Is there any benchmark they can compare themselves to?

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(Betty Ferreira) #4

That’s a big question! Unfortunately we live in a time where operating expenses such as utilities, rent, salary to the Executive Director and Accountant are considered overhead and almost demonized by the public even when they are necessary costs to operate an organization.

I can tell you that single digits is too low. Also, I would like to refer to these expenses as operations instead of administration and overhead as these terms have taken a negative tone that is not helpful for nonprofits.

Here are some things that need to be considered when assessing the “proper” overhead amount:

  • Assessing the amount of operational expenses can be determined in different ways as operational costs should be allocated to programs and therefore the remaining amount of operational expenses not allocated to programs will be lower for one organization compared to another that does not allocate a portion of all operational costs to each program. This creates an apples to orange comparison that you need to be aware of. If one E.D tells you they have a 10% overhead rate you can bet that they’ve allocated a good amount of expenses to programs - as they should.

  • The amount of money required for operations in a new organization will be higher than one that has been operating for some years.

  • The amount of money required for operations for an organization undergoing a transformation will be higher

  • The amount of money for operations in urban and rural settings an also be higher due to differing costs for rent/leases, etc.

  • I find that nonprofit organizations that truly have a 15% operations rate are thin and may not be resourcing functions, technology, staffing to the extent that might be required

  • Your funders may determine the maximum amount of operational expenses they will fund. Do not take this to mean that this is the maximum amount that you should allocate to operations as funders are not funding programs or the operational expenses at 100% now anyway.

  • The only way you will know what is an adequate amount to allocate to operational expenses is to start with true and full cost accounting to asses what infrastructure, staffing, systems, etc. is required to operate in an effective and efficient manner.

Anecdotal feedback is that an organization requires 15 - 30% of operational expenses to function but remember that it is likely that more than half of these expenses should be allocated to programs as the operational expenses support the operations of programs.

Allocating the appropriate amount of rent/lease, bookkeeper, insurance, utilities, internet, office equipment leases…should be calculated using true cost accounting which means that a true assessment of the use of office space, the bookkeeper’s time, the proportion of insurance, etc., must be allocated to each program.

Never divide the total amount of operation expenses evenly by the amount of programs, this is not true cost accounting.

Here are some links to articles that will provide you with context on overhead rates, I hope this discussion is helpful to you:

Why Low Overhead Is Such a Bad Proxy for Efficiency

https://nonprofitquarterly.org/2018/12/18/why-low-overhead-is-such-a-bad-proxy-for-efficiency/

Rethinking the “Scarcity Thinking” That Holds Back Nonprofits

https://www.forpurposelaw.com/rethinking-scarcity-thinking-nonprofits/

Why Funding Overhead Is Not the Real Issue: The Case to Cover Full Costs

https://nonprofitquarterly.org/2018/09/12/why-funding-overhead-is-not-the-real-issue-the-case-to-cover-full-costs/

10 Reasons Why the 15% Charity Overhead Myth Prevents Social Change

https://nonprofitquarterly.org/2017/01/31/10-reasons-15-charity-overhead-myth-prevents-social-change/

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(Adeliu) #5

Thank you! This is very informative.

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(HelpingYouth) #6

Run a grassroots youth-led organization. Many are not incorporated. What advice would you give young people about incorporating both as a non-profit or a charity? I have shared the link below with them on the differences. What would you say about the burden of registering as a charity?

https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/about-registered-charities/what-difference-between-a-registered-charity-a-non-profit-organization.html

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(Betty Ferreira) #7

That’s a very good link to share with them!

Youth organizations have traditionally been difficult to financially sustain. Funding for youth initiatives comes and goes, comes and goes. When a nonprofit or charitable organization is setup there is an immediate need for money to fund areas that receive little to no funding from funder and donors - namely costs related to accountability (accounting, reporting, audit, Exec. Dir. salary and benefits, etc.) and operations (rent/lease, utilities, cleaning, internet, training, insurance…) and thus the organization needs to have sufficient funding to pay for accountability and operations in addition to the programs and services.

Operating a nonprofit is challenging and therefore it is vital that the organization has the right level of financial planning and fiscal foresight processes and competencies within the staff team as well as on the board.

It is vital for organizations to focus on getting the right business model in place and adapt it over time and that they focus on both short-term and long-term financial planning to ensure their initiatives are oriented to sustainability.

*A quick summary of the elements of the nonprofit business model can be found below

- the revenue structure: what mix of government funding to autonomous/donations is appropriate and possible? what amount of revenue should be multi-year versus one-shot program funds to ensure stability?; what is the requirement to report on funding (sometimes this can take months of someone or more than one person’s time each year)? what skills are required in-house to manage and report on government funding? does the funding from government come with restrictions?

- cost structure: An understanding of the true and full costs of the program and the amount of funding expected will allow you to understand which programs/services produce a deficit, break-even, or surplus. It is critical that the accounting system is setup to allow for this analysis and information; Knowing the cost structure and the bottom-line is imperative. In order to understand this you need to invest in an accountant that has experience doing this work

-capital structure is an understanding of the mix of assets and liabilities required for sustainability. This structure refers largely to reserves. Setting reserves for emergency funds (ex. 3 months operating expenses), working capital (funds to offset deficits in funding to operate programs), and capital upgrades and renovations (ex. vans, HVAC, new computers, desks,). It is vital that an organization set targets for what is required in each of these three reserves and then develop strategies to implement each year that will generate unrestricted funds that can be put away in these reserves.

Also, the reserves should be unrestricted and liquid (available for use at any time) so that you can use them for the purposes you require and desire.

  • Infrastructure An understanding of what infrastructure, technology, accounting and database systems, ongoing training, computer software and hardware, etc. is required to ensure that infrastructure is adequately maintained and upgraded.

Regarding financial planning…
All too often the sector focuses its attention on revenues and expenses in the current or upcoming year and very little on setting short and long-term goals specific to financial resilience and stability. Long-range fiscal foresight planning is an important process and competency.

Regarding the burden of registering for a charity
It is widely known that there is an increased administrative burden for charitable organizations. The organization will need to ensure that it has the skills and capacity in-house to manage the reporting requirements in and of itself.

And finally…it is important to know…

  1. Not every program or initiative should be an organization. We have traditionally built 1000s of nonprofits around single program ideas and the weight of scaling up and sustaining an organization is too great for many and then they close.

  2. There is a social philanthropic deficit in Canada, donations are declining and government funding is declining as well.

Knowing this reality youth initiatives might be very wise to look to partnering with existing organizations as much as possible and until such time that there is sufficient financial strength (accumulated surplus and multi-year committed funding) to venture off as an independent organization.

The sector is moving toward more use of shared platforms, leveraged networks, integrations, consolidations and mergers (some are imposed, some are voluntary) and so developing an independent nonprofit or charitable organization should be weighed against alternate forms before you make the leap. Sustainability and impact are vital and so the form of the organization should be built around those two functions.

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(Daniella McIntosh) #8

Thank you to Betty and those who participated in the Nonprofit Finance Q&A!

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