Program cost analysis…everyone’s doing it (or should be)

Among the strongest themes to emerge in our annual surveys on nonprofits and the recession are the need for and value of program cost analysis.

Most nonprofits have functional accounting systems that break out indirect costs (administration, marketing, facilities operation, etc.) And most nonprofit executives can easily identify the direct costs incurred by each of their agency’s programs. But connecting indirect organizational costs to programs—and consequently, to mission—is a trickier proposition.

The true cost of programs includes the allocation of indirect costs to each of your program or service streams. Understanding this allocation is essential to making clear decisions about your portfolio of programs and services.  Yet most nonprofits have a pretty cloudy picture of true costs, preventing them from truly understanding the financial health of each program area.

Program cost analysis includes calculating how costs like occupancy, technology, communications, fundraising, accounting,  HR, and administrative support are distributed across your programs, as well as direct costs. The true costs of each program are almost always higher than what is stated in program budgets, service contracts, and grant proposals. Usually this difference is subsidized through general operating funds, earned income, or other sources.

How a nonprofit allocates this subsidy is one of the most critical financial management decisions it can make. In addition to a rigorous economic analysis, the process involves a careful evaluation of mission, impact, and strategy. It’s hard work, but time after time, we see the process directly result in financial stability, a sustainable set of programs, and a sound future for our members.

  • Do you know the true program cost of core programs and services?
  • Do you know your essential “per unit” service delivery costs?
  • Do you have adequate subsidy dollars available to support all your programs and services?
  • Have you justified the subsidy you provide each program by its mission fit?
  • Have you connected the subsidy you provide each program to its proven effectiveness?

We’d love to hear from you about how you’ve analyzed programs and what you learned and changed. And if you’re looking for a consultant to help guide the program analysis process, let us know–our management consulting program will help you find a good fit for expert advice and guidance.

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