Managing costs is a continuous process.
Graphic 1: Main phases of managing costs
Activities involved in managing costs
- Planning project/program related costs as well as overhead costs
- Comparing actual costs vs. budget costs in order to identify cost deviations
- Determining the causes of cost deviations (price, volume)
- Determining whether it is a temporary or permanent deviation
- Defining and implementing actions that bring actual costs in line with what has been planned (budget, other plans).
- Defining and implementing actions that make processes more competitive.
Costs involved in managing a nonprofit organization
Personnel costs will be the main type of costs for many NGOs. They include:
- Salaries + benefits of staff members working for programs directed towards the NGO´s mission.
- Salaries + benefits of staff members providing supporting services (e.g. bookkeeping, fundraising, maintenance, marketing).
- Salaries + benefits of senior management.
Material costs could have a significant share of total NGO costs if the organization produces or assembles goods. Some examples:
Graphic 2: Costs involved in running a NGO
Traveling costs are caused by project and programs, staff training, off-site meetings or attending conferences. They include:
- Bus, train or plane fares.
- Car rental fees.
Infrastructure costs (technical & physical) are associated with offices, a production hall or similar types of infrastructure. They include:
- Utilities (e.g. electricity, water, heating).
- Telephone, internet, fax.
- Office supplies.
A final group of costs that can contribute significantly to total costs of some NGOs are costs associated with services provided by 3rd parties.
These are for example:
- Legal advisers.
Graphic 3 shows some source of cost information that you can use to develop a better understanding of the cost situation of your NGO.
Graphic 3: Sources of information about costs
NGOs need clarity about their costs
Clarity about its own costs is essential for any nonprofit organization. It helps the NGO to
- Analyze the economics of current programs
- Improve performance
- Identify financial bottlenecks and future financial needs
- Allocate financial and human resources
- Make financial projections (e.g. strategic plan, business plan)
- Decide about prices of products and services
- Increase the trust of donors and grant makers
- Claim reimbursements
Analyzing the economics of current programs
- Does the program require additional funding?
- Does the program generate extra funds?
- Are there programs that have a positive financial impact and at the same time contribute a lot to the mission?
- Are there programs that have a negative financial impact and at the same time contribute little to the mission?
- Which programs or activities or departments show deviations from the budget?
- Why are actual costs higher or lower than planned?
- What can we do to reduce costs?
- Are cost savings permanent?
- How do our costs compare to the costs of other organizations?
- What can we learn from those who have lower costs?
Identifying financial bottlenecks and future financial needs
- How long can we still provide our service before we run out of money?
- How much additional money do we have to raise if we want sustain our program for the next 2 years?
- How much funding do we need next year based on the planned activities?
Allocating financial and human resources
- Which of our programs shall we fund and which should we stop funding?
- Which activities within a program shall we fund and which should we stop funding?
- Which products and services should we continue to sell?
- How shall we allocate our staff?
Preparing pricing decisions
- How much do we have to charge beneficiaries for product or services if we want to recover the full costs of providing them?
- Do we make a profit at market prices?
- How much do we have to increase our prices next year?
- Could we reduce prices if we increased the amount of sales?
- Should we expand to a new geographic location?
Increasing the trust of donors and grant makers
It allows answering questions like:
- What is your cost structure?
- Why do you require funding of X $ for the project?
- What are your operational costs?
- How did you calculate costs?
- What are your core costs?
- Did you include a part of core costs or all of them in the project proposal?
Preconditions for having clarity about costs
You can only gain clarity about cost if
- The accounting system provides an accurate picture about costs.
- Staff members accept that performance related data will be tracked
- Managers have a good understanding of how costs are calculated and how they can be influenced
- Those responsible for managing costs are determined to present a true picture of the cost situation internally aw well as externally
Actions focusing on keeping costs as low as possible
NGOs normally have limited financial resources in form of grants, donations and possibly earned income.
It is essential for their survival as an organization that they make good use of the resources. This involves finding ways to
- Reduce program related costs
- Reduce administrative costs
- Achieve more without increasing costs
Some examples of action focusing on these objectives:
- Learn from others and implement “best practice” (internal and external benchmarking).
- Train current staff members.
- Employ additional skilled, experienced staff.
- Improve your infrastructure.
- Reduce staff turnover, especially of your key staff
- Monitor your performance against a benchmark (costs, output and outcome).
- Renegotiate purchasing prices.
- Substitute inputs with cheaper ones.
- Reduce waste and unused capacity.
Sources / Guide to further reading (available online)
T.Lewis, Practical Financial Management for NGOs, 2009, at: http://www.mango.org.uk/guide/resources/manual.aspx
- The handbook covers the topic costs in an easily understandable way in chapters dealing with accounting, budgeting, financial planning and financial reporting.
M.Garcia, J.Lin, Nonprofit Cost Analysis Toolkit, Six Steps to Finding the True Costs of Programs, 2009, at: http://www.bridgespan.org/nonprofit-cost-analysis-toolkit-introduction.aspx
- The toolkit is meant for senior leaders of small and medium-size NGOs. The reader should have basic knowledge of financial management.
A.Neuhoff, R.Searle, More Bang for the Buck, in: Standford Social Innovation review, Spring 2008, at: http://www.ssireview.org/articles/entry/more_bang_for_the_buck/
- The authors analyze three successful NGOs. They want to understand how to reduce costs without sacrificing the quality of services.
J.Cammack, Building Capacity through Financial Management, 2006, at: http://www.oxfam.org.uk/resources/downloads/buildfincap_book.pdf
- Chapter 10 of the book is dedicated to the topic core costs.
British Overseas NGO's for Development, Guiding Notes No.6: Core funding strategies, 2005, at: http://www.lvsc.org.uk/files/101137/FileName/CorecostfundingstrategiesBOND.pdf
- The report looks at different types of costs summarized under the title core costs and describes funding strategies.
S.Colby, A.Rubin, Costs are Cool: The Strategic Value of Economic Clarity, 2003, at: http://www.bridgespan.org/article/costs-are-cool.aspx
- The authors explain why it is important to know the full costs of its products and services
J.Shapiro, Budgeting, at: http://www.civicus.org/new/media/Budgeting.pdf
- The toolkit defines on pages 7 – 13 different cost related terms and explains how to estimate costs.