From our analysis, as a nonprofit becomes more aware of their true costs, they are better able to grow and make decisions that align with their mission.
Taking on funding could cost you more.
2016 Q1 ISSUE COSTTREE CAPTURE. 25
IT
Utilities
Finance
HR
$6,500
ADDITIONAL INDIRECT COSTS PER CAMERA
Only after the creation of a cost allocation plan did it become clear that the nonprofit’s rate from 5 years ago was not reflective of their current operations. As things often change in any nonprofit, knowing what your true cost at all times is crucial in meeting funding goals and maximizing impact. Understanding that reserves were used last year meant that the nonprofit organization’s inadequate funding had already started to put a toll on their operations, drawing concern for the need to outsource some of the critical functions of the new funding. They will still have to play catch up this year, but our recommendation was that they immediately pursue a new indirect cost rate to identify their gap. Unfortunately, they will have to address the funding shortage and seek additional resources in the short term.
Again, we asked if they had a NICRA, to which they responded “yes, we did it two months ago.” We then asked if they did a full cost allocation plan to arrive at their indirect cost rate. They confirmed. As in past scenarios, we asked if they had done this type of work in the past, which they responded “Yes, it is one of our core practices”. After looking at their supporting documentation, we concluded that their rate was accurate and felt comfortable looking at the new grant to try and identify any subsidy. After completing this task, we found there to be no known subsidy. To round out our analysis, we asked if they had any money in their reserve, just in case some unforeseen event occurred The reply was “Yes, but we only use it for training of our staff, as we try not to outsource any core functions, but have it there for any financial needs as they arise.”
This nonprofit understands their true cost and updates their NICRA every year. It gives them the perspective of the changing organization, as well as the costs associated with it. They understand what they do well and target funding opportunities that support their costs, in order to only take on new funding that makes sense. The organization spent their reserves on training, which enhanced the organization’s competencies. Over time, this will build efficiency and allow them to provide greater impact and guarantee long term sustainability. We suggested that they continue to pursue similar funding and to look anytime new funding could be on the horizon to the nonprofit, not just annually. It is important to have a lucid understanding of true costs, what the organization does well and the inherent risk based on reserves and unrestricted funds.
When we asked if they had a NICRA, they replied yes, and admitted that it was 5 years old. We were happy to hear that they had a rate, but were curious if it was still indicative of their true costs? We asked if they had done the work previously that is required for this new funding and they replied “yes, one time, last year”. We found that they were forced to contract out a lot of work, due to the technical skills required. We then set out to run a cost allocation plan with a NICRA as our goal, thus getting a sense of the subsidy for this funding. Understanding that there was a subsidy, we realized that the indirect cost rate needed to be updated to make sure that their reimbursement was still applicable. After a full cost allocation plan was done and an indirect cost rate was created, we realized that there was a significant difference in their current true cost, as compared to 5 years ago. A subsidy that they now were going to have to address, through fundraising efforts or additional funding sources. In order to meet the goals of the funding, additional resources were needed. When we asked if they had reserves, they confirmed, but explained that it was very small, given the fact that they used a significant amount last year. We inquired into the specific reserve amount used the previous year and for what programs. Finally, we asked if anything had changed besides the new funding. They replied “No.”
ANALYSIS TWO:
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SCENARIO THREE:
ANALYSIS THREE: