Many foundation grant applications state or imply that the grantor will not support administrative costs for the organization. That is why they ask for both an organizational and program budget. If your organizational budget and financial statements show a overhead expense allocation that is 50% of your operating budget it can reflect poorly on your grant request. I often receive program budgets from clients that totally (and unintentionally) understate the actual cost of the program.
Far too many nonprofits lump everything that isn’t a clear direct program cost under organizational overhead, also known as administrative or indirect costs. For instance, an animal rescue might cite food costs, veterinary care and adoption event costs as the total cost of the program.
In reality, there are other costs that can be legitimately tied to the program. For instance, let’s look at heating costs. Let’s say that your animal rescue focuses on dogs. You have a building that is 2000 square feet. One-half of that building is dedicated to kennels, food storage, and bathing facilities for the dogs. Your annual heating cost for the entire building is $2800. One-half of that figure is legitimately a program expense, and should be assigned to the program when applying for a grant. If you didn’t have the space and it wasn’t being directly used by the dogs, your heating costs would be lower.
Salary expenses can be similarly expensed. If you have one paid employee, and that person spends six hours a day typing, filing and answering the phone, and two hours a day cleaning cages and feeding and bathing dogs, the two hours is directly attributable to the program. If you are not using time reporting for the employee, have them fill out a timecard that specifically details the time they spend directly working hands-on with the dogs.
Take a couple of hours and review your budget and financial statements. Identify which expense items might be improperly classified as indirect costs. Take the list to your accountant/tax professional, and determine the best way to allocate these costs to the program. Remember, accurate recordkeeping is vital to this process. You must be able to document the division of costs for the IRS, as well as for grantors. You may have to restructure your chart of accounts, or your accountant may be able to do a monthly closing journal entry adjustment to place the costs in the proper area if your records are complete and accurately portray the allocations.
In the beginning, this may all seem rather tedious, but having your costs properly entered will pay off in the form of better grant results, as well as in better financial control of your nonprofit. If you need help with any of the concepts above, please contact me at firstname.lastname@example.org.