You say over easy, I say sunny side up…you say indirect, I say overhead. We might call it different things, but the truth of the matter is that, whatever we call it, virtually every nonprofit struggles to understand and manage their overhead. Yes, that includes getting your overhead paid by funders, grantors and donors. From grantors who flat out refuse to pay for any “non-program” costs to individual donors who evaluate nonprofits based on their percentage of overhead costs, this topic has a daily and direct impact on every Executive Director, CFO and Board Member working in a nonprofit today. We believe that needs to change. And, the way we change it is through education, understanding and common terminology. The OMB’s Uniform Guidance provides a roadmap for us. According to the OMB, there are only three types of costs – Indirect, Indirect-Admin (Overhead) and Direct. We want to use this article to clear up some confusion about these costs. We also think the best structure to represent the relationship between these costs is that of an egg. In this article, we are about to crack the overhead egg.
We understand that this is a lot to think about, when most nonprofit leaders are swimming in thoughts of “how do I make payroll”, “how do I take on another grant with limited staff” and “will this whole thing really work”. These are big questions and very relevant questions. All of which, relate back to our discussion regarding overhead. So, let’s get cracking.
IT ALL STARTS WITH
DEFINING COSTS
After spending over 16 years doing cost allocation in the government space, extending the principles of Uniform Guidance to nonprofits seemed to us an easy transition. However, unlike in the government world, nonprofits have significant differences in their accounting structures (everybody does it their way), their financial terminology (overhead v. admin v. indirect) and limiting factors (budgets are tighter and smaller). However, one step is universal. Every organization must define their costs first. Understanding how funding runs through the organization, who touches it, what they do and how they do it serves as a foundation for this understanding.
06 CAPTURE. COSTTREE 2016 Q1 ISSUE
INDIRECT
INDIRECT
ADMIN
INDIRECT
DIRECT
DIRECT
[direct + admin indirect]
THE OVERHEAD
EGG
30K
20K
50K
70K
30K
Indirect
Admin Indirect
Direct
Direct
Indirect
COST ALLOCATION
[direct + admin indirect]