Next In: Nonprofit Cost Analysis Toolkit
1. Why is cost analysis relevant for me?
Different from traditional methods of accounting, an effective true-cost analysis offers a clearer picture of the financial demand that each of your programs (or geographic sites or particular products) places on your organization. This allows you to make smarter strategic decisions around program prioritization or fundraising.
This toolkit is intended primarily for senior leaders (e.g. executive directors, directors of finance, development directors) of small to medium nonprofit organizations with multiple programmatic areas or sites. It may also be useful for leaders of larger nonprofits, in those cases where this knowledge does not exist already among their staff. Smaller nonprofits with a single program area and only one site are unlikely to require true-cost analysis. This toolkit may also prove useful for foundations looking to understand their grantees’ true cost structure or to help their grantees gain economic clarity.
2. What do I need to get started?
Before you begin, make sure you secure: 1) a staff member who possesses a basic understanding of financial concepts and a strategic purview of the organization, who will take lead on this analysis, 2) cooperation from the rest of your staff, 3) basic financial and operational information. For the third element in particular, you will need recent financial data, including the organization’s budget and other program-specific budgets, as well as staff-related information and resource utilization data (e.g. timesheets, equipment records, job descriptions). Where relevant data does not currently exist, you may need to conduct brief interviews with your staff to acquire this, or make reasonable assumptions about allocation. See section two for more details.
3. What are the most challenging steps in the cost analysis process?
Of the six steps laid out in this toolkit, the first and fourth require the most thought. They are also the ones that generate the most insights. Ensure you invest sufficient time in Step 1 to come up with program definitions that make intuitive sense for your organization, as these will be the basis of your entire cost analysis and will determine how useful your analysis results end up being. Step 4 is often challenging because the concept of indirect cost allocation can be unfamiliar. In this step, pay particular attention to the concept of “cost drivers,” then use your knowledge of the organization to select the most meaningful ones. Reach out to other knowledgeable members of your staff if you feel unsure about a particular cost driver.
4. I am unsure how to allocate out organization-wide expenses such as fundraising or the executive director’s salary across my programs. How should I think about this?
Allocating non-program-specific resources can seem tricky at first, but is manageable once you understand the logic of utilizing cost drivers. The key is to identify factors that can reasonably approximate how much each program demands from a particular resource. For example, for a general finance staff member who might not be able to readily identify his/her hours by program, using “total program costs” (relative to the entire organization’s cost) can be a meaningful marker of how much time each program demands from the finance staff. See section four for more information.
5. What can I do with true-cost information?
Completing this analysis will show you the true cost of operating each of your programs. This knowledge can be used immediately for key decisions related to true costs, such as informing pricing and fundraising or prioritizing cost-saving opportunities. This knowledge about true costs can also be combined with additional revenue and mission-alignment analyses to drive other decisions such as resource allocation and program prioritization/elimination. See section six for more information.
6. How do I get additional help on analyzing or cutting my costs?
Please visit our "Links and Resources" section for additional examples, case studies, and helpful tools and tips for cost-saving.