“Full Cost” Is the Way Forward

Jeanne Tedrow, President & CEO, North Carolina Center for Nonprofits

Managing a nonprofit’s finances is no small or easy task. Nonprofits and those who seek to do good while making a difference in our communities are to be commended for their ability to manage resources and revenue. More often than not, nonprofits make a way when many would say there appears to be no way. To make things happen for the good, they become creative as they leverage financial support with in-kind donations and volunteer labor.

In an earlier article asking the question, “What if pizza shops had to operate like a nonprofit?”, we looked at the operating and financial management principles where the pizza shop would be constrained if they could only charge their customers for the “direct” cost of producing the pizza – in other words: subtracting the cost of the ovens, the pizza boxes, and the staff who serve it at the cash register. Oh yeah, and subtract the cost of that cash register because it’s also considered an indirect cost! The pizza shop owner should only charge her customers for the actual cost of ingredients used in the making of the pizza and try to “convince” customers to add in the indirect cost to support the total pizza making and serving operation. Both private and public grantors and the philanthropic community are having a lot of conversations with staff and board and in committees about the more informed and responsible way to fund operations in the nonprofit sector. We are making a little progress!

Recently, a few of us from the Center were invited to join the Triangle Funders Collaborative at a two-day workshop on “Full Cost Accounting”, presented by the Nonprofit Finance Fund (NFF). We had a fast track introduction to NFF’s methodology to understand and ensure that nonprofits have financial data that accurately reflect our true operating performance, share the tools, and increase our understanding on how to use this information. Nonprofit and private foundation executives were in the same room together, working on case studies, sharing experiences, and encouraging each other to understand the true cost of providing products and services by nonprofits.

Heretofore, many in this sector would low ball the cost of a program, not declaring indirect costs, and try to convince the funder that this service really could be done at the low cost in the proposal. Indeed, nonprofit executives and practitioners are often lectured to “run their organization like a business," and then when we try to do so, we experience push back. In this workshop, funders and nonprofits opened up about using the full cost of doing our business.

NFF “has always asserted that creating a strong, well-capitalized, and durable nonprofit sector is crucial to delivering mission-driven programs and services. Organizations using clear, accurate, and relevant financial data in decision making can better understand their ability to handle risk and pursue opportunities; therefore, they are better able to create sustainable and successful business models that deliver effectively and meaningfully on mission.”

To the credit of the Triangle Funders Collaborative, a range of nonprofits including grassroots organizations and the statewide Center were invited to sit at tables together with funders. Inside that room, some true, crucial conversations were held. Issues of equity and access by some nonprofits and the challenge of meeting needs in the community at great personal sacrifice (like taking a big pay cut to begin an organization to help youth succeed in school, or as volunteers while working a full-time day job) were shared.

From this workshop, we became full cost champions and agreed that we would begin to use our voice to advocate for this approach.

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