This is hardly a circumstance of overhead ratios forcing a nonprofit to cut advertising. Some non-profit organizations demonstrate greater accountability by showing donors the direct impact of their fundraising efforts. This accountability may comes in the form of a vote, where the members select a specific program or charity that they would like their money to go to. Another example is put in place a mechanism which allows donors to contraint usage of funds toward a specific purpose and closely monitor/allow spending to ensure proper usage.
More than half of the organizations treat less than 15 percent of their advertising as overhead. For those organizations, if advertising were their only expense, their program spending ratios would be greater than 85 percent—an excellent figure by any standard. Among its over $49 million in advertising and promotional expenses, only 1 percent is treated as overhead; the rest is considered program spending. That is, advertising expenses are actually what boosts their program spending ratio above 80 percent.
Consider, for example, the Wounded Warrior Project, a popular and growing veterans’ charity. From its most recent audited financial statements, advertising and promotions represented over 35 percent of total expenses. Such a high percentage of expenses devoted to advertising is unheard of in for-profit companies, which simply cannot both compete on price and make a profit while carrying such high advertising costs.
This information should be included in the footnotes to the financial statements. It should also include a brief disclosure of the major types of expenses that are allocated among programs and the methodology for the allocation, such as square footage or time reporting. Administrative expenses are the expenses an organization incurs not directly tied to a specific function such as manufacturing, production, or sales. These expenses are related to the organization as a whole as opposed to an individual department or business unit. Salaries of senior executives and costs associated with general services such as accounting and information technology (IT) are examples of administrative expenses.
Even if your organization does not have a specific grant writer or development director, there is likely someone, such as the executive director, spending time cultivating these donations. Because that time is focused on fundraising activities, a portion of that person’s salary should be allocated to fundraising. However, there are some types of organizations that generally do not have fundraising expenses. These include religious organizations, private foundations, or an entity that has no paid staff where most, or all, contributions arise from uncompensated board members soliciting contributions. As can be seen in the chart, only three of the nine organizations treat the majority of their advertising as overhead.
Overhead includes facilities costs, membership and licensing fees and equipment costs. Use receipts, bill payment records and bank statements to help you get accurate numbers for your overhead costs. Program expenses are those expenses incurred in order to deliver specific programs in accordance with the mission of a nonprofit entity. These expenses are distinct from the other main categories of expenses for a nonprofit, which are fundraising expenses and management & administration expenses.
Charities that get most of their donations as gift-in-kind tend to do better here, because the individual gifts are larger and entail little or no fundraising expense. Charity watchdogs like the Better Business Bureau Wise Giving Alliance say charitable commitment should be no lower than 65%. Furthermore, when it comes to advertising, some nonprofits are leading the way.
What is a program service expense?
Program Service Expenses – These are costs related to providing the nonprofit organization’s programs or services in accordance with its defined mission. For established nonprofit organizations, program service expenses generally represent the majority of the overall expense of the organization.
This person is paid a salary like any other employee, and is usually a part of the top management staff of the organization. A second type of campaign is the comprehensive, integrated, or total development campaign, which aims for a longer fund-raising program based on a long-term analysis of the organization’s needs and direction. Events are used to increase visibility and support for an organization as well as raising funds.
Yet, it barely registers with donors of the Wounded Warrior Project, who continue to flood the organization with cash. DONOR DEPENDENCY This is an interesting ratio, measuring how badly a nonprofit needed contributions to break even. It’s also possible to have a negative ratio, which means the charity (often a hospital or museum) had an annual surplus greater than all private donations! The average for the list is 86%, meaning that the typical charity was able to bank 14% of donations for the future.
Interest costs – Interest expense on debt is another expense we see organizations classifying as entirely management and general. Instead, the organization should allocate the cost to the benefiting program or supporting services. Since debt is usually issued for the construction or purchase of a building a reasonable allocation method could be based on square feet occupied. If costs cannot be allocated, the interest should be reported as management and general. In addition to disclosing its expenses, your organization will also be required to disclose the method used for allocating expenses among the functional classifications.
Donors want to see a high proportion of expenses being incurred in the program expenses area, which indicates a high level of mission efficiency. While some nonprofits focus on conducting research with the goal of finding a treatment or cure for a specific disease, others focus on providing services or programs to help the local community. These programs may include donations of clothing or food from the public, while others require funding to pay teachers who offer advice to job seekers or business owners, for example. These programs cost money to operate and will vary depending on the size and scope.
These expenses are the most common operating costs, as a nonprofit organization may not be able to perform general services, programs or tasks without these readily available. Although a nonprofit organization reinvests any incoming profit into its services, research or local programs, it does require funding to operate on a daily basis.
- The second key feature of the argument to unleash more nonprofit advertising is that the reason advertising is currently limited is an unproductive obsession with reducing accounting overhead.
- The idea is that accounting rules treat all expenses incurred by nonprofits as either program-related or overhead (fundraising and administrative), and many donors and watchdogs fixate on what percentage of expenses are program vs. overhead.
A nonprofit organization is similar to a for-profit organization in terms of operations, as it has common expenses, paid employees and general operating costs. Not reporting fundraising expense – If an organization shows more than an insignificant amount of contributions on the statement of activities, we would expect to see fundraising expense included in the functional expense statement.
How to design a new program
What is a program service?
Program services are activities that result in goods or services being distributed to beneficiaries, customers, or members that fulfill the purpose/mission of the organization.
This ratio is highly sensitive to investment results and for many charities varies wildly from year to year. For the other two ratios, all other things being equal, the higher the ratio the better. If the goal is to give to poor and needy charities, a rating above 100 might be considered good. On the other hand, if the search is for charities that better stand on their own, a rating below 100 might be viewed as better.
Classifying Expenses – Is it Program or Supporting Services
One thing this ratio tends to do is identify charities pleading for money that actually have substantial financial reserves or other kinds of revenue. Nonprofits are often ranked based on the percent of money they spend on overhead versus the percent spent on programs. Keeping your organization’s overhead low will help attract more donors during your fundraising campaigns. The term “fixed expenses” refers to those payments that are continuous each month. Rent, bills, utilities, Internet and telephone bills are all fixed expenses.
Organizations raise funds to support capital projects, endowments, or operating expenses of current programs. Fundraising or fund-raising (also known as “development” or “advancement”) is the process of seeking and gathering voluntary financial contributions by engaging individuals, businesses, charitable foundations, or governmental agencies. Although fundraising typically refers to efforts to gather money for non-profit organizations, it is sometimes used to refer to the identification and solicitation of investors or other sources of capital for for-profit enterprises. Overhead expenses are “indirect” costs which are necessary to running your organization but do not directly contribute to profits.
Many non-profit organizations take advantage of the services of professional fundraisers. These fundraisers may be paid for their services either through fees unrelated to the amounts of money to be raised, or by retaining a percentage of raised funds (percentage-based compensation).
For illustration, consider the advertising expenditures of the ten largest US nonprofits (as ranked by Forbes) and the ten largest US for-profits (as ranked by Fortune). The first thing to note is that among the ten largest for-profits, only four view their advertising expenses as material enough to warrant separate disclosure.
At the heart of the argument for greater nonprofit advertising is that for-profit organizations see the growth potential that advertising brings and, as a result, are far more willing to invest in it. Though we may feel that for-profits are much more aggressive advertisers, is that actually the case? After all, since the nonprofit sector is much smaller than the for-profit sector, it may just seem like the advertising footprint of nonprofits is smaller, when in actuality their relative behavior is quite similar.
The second key feature of the argument to unleash more nonprofit advertising is that the reason advertising is currently limited is an unproductive obsession with reducing accounting overhead. The idea is that accounting rules treat all expenses incurred by nonprofits as either program-related or overhead (fundraising and administrative), and many donors and watchdogs fixate on what percentage of expenses are program vs. overhead. Setting aside the question of whether donors pay enough attention to such figures, the presumption by many is that advertising is automatically classified as overhead, so nonprofits are excessively discouraged from undertaking it. The problem with this presumption is that it is not how the accounting rules are typically applied.
More importantly, among the remaining for-profit companies, advertising as a percentage of expenses is not noticeably different from that of their nonprofit counterparts, as seen in the next chart. The more correct approach is the allowance method, since a portion of all sales is reserved against as soon as revenue is recognized. In the latter case, revenues and related expenses appear in the same time period, so one can see the full impact of all sales on profits within the same accounting period.
Operating Expenses vs. SG&A
If an organization’s mission includes a stated desire to raise awareness about an issue or otherwise educate the public, associated costs are classified as program expenses, not overhead. In other words, the presumption that advertising is treated as overhead is not correct. For each of the largest nonprofits discussed previously, the next chart shows what percentage of their advertising costs are actually classified as overhead. CHARITABLE COMMITMENTThis figures out how much of a charity’s total expense went directly to the charitable purpose (also known as program support or program expense), as opposed to management, certain overhead expenses and fundraising.