As I wrote about in a previous blog, overhead or administration costs are often misunderstood. These expense are actually the core expenses of the organization which allow programs to exist. When budgeting for administration costs of the organization you need to keep in mind that many of these costs are fixed. These expenses exist regardless of the level of program activity.
Many of the expense budgeting decisions in program budgets will be dictated by the number of participants or level of activity. When budgeting administration expenses, once the fixed costs are accounted for, the decisions relating to the balance of the budget are more strategic. Where do you want to invest money to strengthen the organization and where are the resources to support this? Everyone will make a case for investing more in their particular area whether it’s communications, human resources, IT, or fundraising. All the investments would likely be beneficial so which do you choose? Your strategic plan can help you in making these decisions. Once you have your budget complete it’s important to document what you have committed to, along with the rationale. You will need this to present to your board for budget approval. It’s also useful for staff so they understand how the administration of the organization supports their work.
In organizations which deliver many projects and have various project funding, allocating a portion of the administration costs to each program will reflect a more accurate picture of the full cost of running the program. One method to calculate this amount is to take a percentage of the budgeted expenses of the program. Typically the percentage is 10% – 15%.
Throughout the year you have an options of charging the programs an administration charge monthly based on the budget or adjusting the amount charged to the amount actually spent. The second option may be more accurate but this can be very time consuming and since this expense line is not managed in the same way as other expenses it’s usually not worth the extra time and effort except perhaps at the end of the fiscal year or when required by funders.
One point to remember in this method is that the total amount charged to all programs will be less than the total administration of the organization. The 10% -15% is an amount that is commonly allowed by funders when submitting proposals. In reality this does not cover the full costs of organizational administration.
You could decide you want to allocate all of the organization’s administrative charges to programs but keep in mind that the result could be a budget with a high administrative fee that donors and funders would take issue with. Funders often want to see the financial statements of the programs they support, detailing actual expenditures compared to the amount approved. Presenting a statement which highlights administration costs overspent by large amount may not be the picture you want to present to your funders.
Budgeting and accounting for administration costs can become quite complex as you attempt to present a true financial picture of the costs of running programs while dealing with the restrictions that funders place on administration charges. In my next blog I will go into more detail about how you can maximize the amounts you get for what are essentially the core costs of running your organizations and supporting the programs you deliver.