Accounting for overheads in project-driven NGOs
Posted by Christopher Brewer
Non–governmental organizations (NGOs) need to allocate overheads to program budgets or risk being underfunded. Here are a few ways to deal with this challenge. Spoiler alert: technology makes the difference.
Many observers take the overhead percentage rate of any organization as an indicator of how well it is run. For any business, an overhead rate of 10-15 percent is considered efficient. Yet the expectation remains that NGOs should have even lower rates.
Not-for-profit (NFP) organizations keep overheads low to build public trust and to appease donors. And NGOs are good at minimizing overhead costs at an operational level, by reducing expenditure on office space, salaries and facilities management.
But there is a limit. And projects need funds. It’s a delicate balancing act for chief financial officers (CFOs) of project-driven NGOs. Because these funds help you deliver the social impact which makes the difference to people in the worst-affected areas on the planet.
True cost: allocating overheads to projects
There’s a tendency for NFPs to allocate as many indirect costs to project and program budgets as possible. This keeps overhead rates low and provides a realistic insight into the true running cost of each project, which informs future program funding.
But there’s a challenge here. Because NFP funding is short-term and based on individual grants and donations, NGOs generally take a short-term view on balancing costs. It goes without saying that, as a CFO, you need a solid understanding of your organization’s cost structure to work out how to allocate overheads to show the true costs of your programs over the longer term.
What to do
As a CFO, your challenge is how to stay in control of your finances, keep track of both funding and costs, and make sure your donors are happy — all at the same time.
To do this you need immediate and easy access to accurate, real-time data and cross-departmental insight by marrying financial reporting with program management. And the best way to achieve this is with an integrated system like enterprise resource planning (ERP).
Assuming your organization uses an ERP, can it do all this? (If you’re looking to invest in an ERP, bear the following in mind.)
Allocate overheads (only for cost recovery)
As you build the program budget, allocate enough overhead costs to it, but only for planning purposes – this is to make sure you recover enough of your overhead costs through funding. You should then remove these costs when you execute the program to evaluate the program’s financial success against the program budget (at the exclusion of overhead costs).
Collect actual costs
Most grants allow for some level of overhead cost recovery via a negotiated indirect cost rate agreement (NICRA). To make sure you can recover these indirect costs through a NICRA, collect actual, program-level costs as well as actual overhead costs throughout the fiscal year.
This is where the right technology is vital. Your ERP needs to capture actual direct costs in the right way (as this is the basis for recovery of overhead costs). These include direct costs of employees, direct program expenses, and subcontractor invoices.
The right solution for cost allocation
To ensure the right level of financial control and the most efficient use of funds, project-driven organizations like yours should look for an integrated solution that combines financial accounting and project accounting capabilities.
As a finance officer in an NGO, you need to report against a double bottom line. The right solution will help you match actual, budget and forecasts against both financial and mission results. It will also allow you to instantly view your organization’s financial health from a single version of the truth which is based on accurate actuals and up-to-date data. You should be able to do this at any time, from any perspective, and from anywhere.
The space to make the difference
It details like this, from tools like these, that gives you the space to make the difference, not only to donors and the public but to the communities you serve — which means improving the lives of the people in areas where it’s needed most.
To learn more about allocating indirect costs, download the white paper: Accounting for overhead in NGOs.