Truth about Funding Full Costs

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5 The 5 Truth about Funding Full Costs Hilda Polanco, CPA, CCSA, CGMA Founder & CEO, FMA February 21, 2018

6 Agenda Agenda Welcome (9:00am) Understanding Full Cost Understanding Your Grantee s Budget Impact to the Enterprise Adjourn (12:00pm)

7 What kinds of grants do you make?

8 What does grantee financial health mean to you?

9 How do you evaluate the financial health of your grantees?

10 The Nonprofit Starvation Cycle

11 The Nonprofit Starvation Cycle The Starvation Cycle Pressure on nonprofits to conform Taking Action to End the Nonprofit Starvation Cycle, The Bridgespan 11 Group, Donors Forum Workshops, February 2011

12 Does your foundation fund overhead (sometimes called indirect ) costs?

13 The Overhead Myth First Letter: To Donors

14 The Overhead Myth Second Letter: To Nonprofits

15 The National Conversation The Nonprofit Starvation Cycle Real Talk About Real Costs Pay-What-It-Takes Philanthropy

16 Understanding Full Cost

17 Functional Expenses Functional Expense Definitions Classification Description Examples Program, separated by major programs The direct provision of goods or services related to the organization s mission and purpose Program supplies, salaries of program staff Support Services: Management & General Activities such as oversight, business and financial management Audit costs, salaries of Finance and HR staff Support Services: Fundraising Incurred in inducing donors to contribute Costs to produce a donor event, salaries of fundraising staff

18 79.2% 8.6% 12.2%

19 Functional Expenses Commonly cited functional expense percentages Classification Common Benchmarks Program, separated by major programs 70% -- 75% Support Services: Management & General 15% -- 20%* Support Services: Fundraising 10% -- 15%* *The benchmark for supporting services (i.e., M&G and Fundraising combined) is 25% -- 35%, depending on the nature of the organization s funding streams

20 In what format do grantees submit program budgets to your foundation?

21 Types of Expenses Natural Expenses Expenses classified by the nature of the expense: Salaries Rent Utilities Supplies Functional Expenses Expenses classified by the type of activity for which the expense was incurred: Programs Management and general Fundraising

22 Types of Expenses Specific Expenses Expenses that can be specifically assigned to one or more program(s) or function(s), based on time or money spent directly in each program or function Shared Expenses Expenses that are shared among some or all programs and functions. These expenses must be allocated among functional areas on the basis of an appropriate methodology Salaries for program personnel Salaries for fiscal staff Fundraising expenses Rent & utilities in a common space Office supplies Depreciation

23 Three Tiers of Expenses Is the grantee raising the funds to cover full cost of services? Tier 1 Specific Program Expenses Tier 2 Tier 3 Shared Program Expenses Management & General and Fundraising Expenses 23

24 Translating Cost Categories How nonprofits see costs How funders see costs Specific Program Expenses Tier 1 Shared Program Expenses Tier 2 Overhead Tier 3 Program Indirect 24

25 Allocation Methodology Allocation Methodology Definition A method by which costs associated with more than one program or support area (administrative or fundraising) are distributed across functions. Purpose To allocate expenses in order to determine the true costs of programs and cost per unit of services

26 Allocation Methodology Allocation of Personnel Expenses Personnel expenses (for full time and part time staff) are allocated based on Staff Level of Effort, can be substantiated by: Timesheets Time studies Employee Attestation Statement

27 Salary Allocations Translating percentages to dollar amounts Tier 1: Specific Program Expenses Tier 3: Specific M&G and Fundraising expenses

28 Allocating Fringe 28

29 Bringing Together Tiers 1, 2, and 3 Tier 3: Overhead Tier 1:Specific Program Expense Tier 2: Shared Costs Allocated to Programs 29 Costs funded by program grant(s) Costs funded by indirect rate from program grant(s) or unrestricted revenue

30 Overhead Rate (aka Indirect Cost Rate )

31 Examples 1. Raise unrestricted dollars 2. Indirect cost recovery 3. Develop an earned revenue stream the covers the full cost of the associated program or more 4. Build an overhead rate into requests for restricted program funding

32 Program Budgets: Critical Questions Does the program budget clearly depict the allocation of staff time to the program? Are funding sources detailed, with committed funds separated from pending and/or to be raised? Does the program budget include an allocation for indirect costs or overhead?

33 Example: Program Budget Specific Program Expense Shared Expenses Allocated to Program Allocated Portion of Supporting Services

34 Activity Program budgets: the good, the bad, and the ugly

35 Impact to the Enterprise

36 Balance Sheet What We Own: Cash What We Owe: Bills due Receivables Investments Property, Plant & Equipment, net = Liabilities Line of Credit Deferred Revenue Debt (short- and long-term) Assets + Net Assets Our Available Capital Unrestricted Fixed Assets Board Designated Other Temp. Restricted Perm. Restricted

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38 Statement of Activities Organizational Performance Revenues by type and restriction Expenses broken out functionally Fiscal year s operating results Revenues Released from Restriction Amount released from restrictions Balance of Temporarily Restricted Net Assets being carried forward into the next year 38

39 Operating Results Reserve Balance TRNA balance going into the next fiscal year

40 Operating Reserves Liquid Unrestricted Net Assets (LUNA) The portion of unrestricted net assets that could be converted to cash relatively easily Funds available for purposes such as supplying working capital, guarding against downturns, and pursuing new opportunities LUNA = Unrestricted Net Assets (Fixed Assets Mortgages) Benchmark: LUNA sufficient to cover 3-6 months of operating expenses is generally considered healthy, but this depends on an organization s business model, plans, and goals.

41 Operating Reserves Balance Sheet: Liquid Unrestricted Net Assets (LUNA) Indicator Months of Liquid Unrestricted Net Assets Calculation Liquid Unrestricted Net Assets Average Monthly Expense

42 Capital for Change and Security Type of Capital Capacity Goal Operating Reserve / LUNA Liquidity Security Facility Reserves Maintaining & Replacing Facilities Growth & Expansion Change Capital Innovation (R&D) Replenishment

43 Activity: Calculate LUNA Using the Sample Audit

44 Strategies for Creating Reserves Budgetary Line Item for Annual Replenishment Re-designation of Special Purpose Funds Annual Surplus Designation Reserves Targeted Foundation Investment

45 Examples of Foundation Investments The Clark Foundation The Freeman Challenges Keeping It in Reserve: Grantmaking for a Rainy Day, Hilda Polanco and John Summers, Nonprofit Quarterly, 2016:

46 Nonprofit Financial Health Assessment

47 Nonprofit Financial Health Assessment

48 Resources

49 Resources The Nonprofit Starvation Cycle, Ann Goggins Gregory and Don Howard of Bridgespan, Fall 2009, Stanford Social Innovation Review (SSIR): Pay-What-It-Takes Philanthropy, Jeri Eckhart-Queenan, Michael Etzel, & Sridhar Prasad of Bridgespan, Summer 2016, SSIR: The Overhead Myth Campaign: An initiative of Guidestar, BBB Wise Giving Alliance, and Charity Navigator: Full Cost Project: A joint initiative of Northern California Grantmakers, San Diego Grantmakers, and Southern California: Keeping It in Reserve: Grantmaking for a Rainy Day, Hilda Polanco and John Summers, Nonprofit Quarterly, 2016:

50 Nonprofit Financial Health Assessment in the Monitoring section Excel Tool for Audits Online How-To Tutorial

51 Resources for Your Grantees StrongNonprofits.org In collaboration with the Wallace Foundation, FMA has created a library of tools and resources to help organizations become fiscally fit Four Topic Areas: Planning Monitoring Operations Governance

52 Resources for Your Grantees Program-Based Budget Template + Online Tutorial

53 Resources for Your Grantees Online Tutorials for StrongNonprofits.org FMA offers complimentary orientation one-hour webinars that feature an overview of the website and drill down on several of its key resources Upcoming webinar dates: March 13, 2018 at 2pm (eastern) May 15, 2018 at 2pm (eastern) To register, or see upcoming webinar dates: For a 15-minute, on-demand webinar tour of the site:

54 Established in 1999 to serve not-for-profit organizations around the country Provides customized financial management, accounting, software, organizational development, and other consulting services Works directly with organizations or through funder-supported management and technical assistance programs FMA exists to build a community of individuals with the confidence and skills to lead organizations that change the world Hilda Polanco, CPA, CCSA, CGMA Founder & CEO (212) /FiscalManagementAssociates /company/fiscal-managementassociates-llc 54 New York Chicago Oakland Los Angeles