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Using Form 990 & Cost Allocation to Calculate your Not-for-Profit Success

March 15, 2012

Why your Non-Profit On-Base Percentage (OBP) is your #1 metric of productivity.

In my blog post “Non-Profit Fundraising Efficiency” I discussed the use of sabermetric principles in baseball and indicated that statistical metrics are also being used more and more in evaluating not-for-profit organizations. Since this is Spring Training season, I thought we would continue that thought for another blog or two.

In baseball, OBP is on-base percentage. Many believe it measures the most important aspect about a batter’s productivity. While I grew up thinking one measured a baseball player’s offensive value based on his batting average, number of home runs, and runs batted in, that is all very “yesterday”. OBP is the new metric.

The concept of OBP can easily be applied to the non-profit world. So, what is the not-for-profit OBP? It is the percentage of money that is spent on program activities as compared to the percentage spent on administrative and fundraising costs. Organizations are required to provide financial information in both their financial statements and their publicly available Form 990 on a functional basis. (A functional basis means that there is a total for program expenditures as well as one for administrative expenditures and one for fundraising expenditures). Together these three functions comprise the entire amount of expenditures for a year.

What are the good numbers? The best not-for-profit organizations (the most valuable players) report administrative expenses that are below 15% of total expenses. They also report fundraising expenses that are 10% or below as a percentage of total expenses. Said another way, the best not-for-profit organizations report program expenses that are 75% or more of total expenses. This tells a donor or other resource provider that for every dollar provided to these organizations, 75 cents or more is directed into the program effort.

How does one determine a program expense vs. an administrative expense or fundraising expense? This is accomplished via the organization’s cost allocation system. Of the accounting policies and procedures that you must have in place at your organization, the cost allocation system is one of the most important. It is also the most difficult system to design and implement.

It is said that accounting is part science and part art. Cost allocation is definitely more art than science. When you are creating your cost allocation plan, you want to be assisted by knowledgeable, creative people to help you with the art. If you are concerned that your cost allocation plan is not painting the correct picture of your organization, please contact our not-for-profit services group. We understand and will share the art of cost allocation plans.

KLR is one of the top 10 firms in Boston, and is unique because they service over 220 not-for-profit organizations with compliance and consulting services. KLR’s Non-for-Profit Services Group issues whitepapers on various topics that help our clients with the day-to-day operations of their organizations. Additionally our weekly e-newsletter provides up to date information for nonprofit organizations. Sign up for the KLR E-newsletter now.

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