So, fellow nonprofiteers, I just read an interesting report from the Annie E Casey Foundation. Apparently they have been doing some thinking about indirect costs for nonprofits and how they can change their giving policies to address this and be more equitable in the support they give to the sector. A very promising premise, and I read the report with great excitement. I was not disappointed!
First off THANK YOU!!! Finally a Foundation, and a big one at that, is recognizing that it actually costs money to run a nonprofit. They call it indirect costs but many of us use the term "overhead." Whatever. They are ready to say that some funding does need to be out towards turning in the lights, paying that accountant to track the funds, vacuuming the carpet, and hiring that ASL interpreter so everyone can participate. Good start.
Second THANK YOU!!!! Finally a foundation, and a big one at that, is recognizing the need to change their funding patterns. They realized that the way they give money could have a positive impact on smaller nonprofits, particularly those run by people of color. They are seeing that maybe, possibly, not all nonprofits work the same way, and maybe they don’t have to work the same way.
This is all good, and after a I read the report I sat back in my chair and sighed. “There is hope,” I said to myself, "that we can get realistic about this stuff."
The really good news is that this Annie E Casey report now offers a guideline about how this allocation to “indirect costs” can go. The study they completed suggested that the percentage of indirect costs might be higher for smaller nonprofits than for bigger ones. Nice. I like it. So, the guideline is that for the smaller nonprofits, under $5 million, the indirect cost percentage could be as high as 25% - meaning that much of your grant can be applied to these indirect costs. This ratio decreases as the annual budget of the nonprofit increases, and the huge nonprofits can only allocate 15%.
So now we have a tool, a reference to cite to the doubters who do not want to see their funds go to these kinds of expenses. I can build that number into the budget and in the budget explanation reference the study by the august Annie E Casey Foundation.
Okay. No. Wait. Why do I have to do that?
It all still relies on that darned pie chart breaking out different types of cost. You know, the pie chart that is based on the allocation of funds you chart out in the IRS form 990 you file each year. The pie chart that has Program, Admin, and Fund Raising. Break out these different cost lines for us, please, because we want to know how much of your budget is devoted to fund raising.
I say it is time to kill the pie. Not all pies, of course, because I do still like a nice warm apple pie with some vanilla ice cream dripping off of it. Get rid of the cost allocation pie chart. Even the Casey Foundation is still saying that the costs of running the nonprofit, of cleaning the carpet and turning the lights on, are indirect. No they are not! They are as direct as can be! It is our responsibility, our job, to make sure people have a clean environment when they come to access the programs we are offering.
And let’s talk about admin. By breaking that line out, you are asking me to say that the Executive Director’s salary, the receptionist’s salary, and others are not direct expenses to the programs. When was the last time you heard of an ED who did the work to be an ED? No, they are an ED in order to help serve the community. They are there for the mission, not the admin. The receptionist is the Vice President of First Impressions, people! That’s who is the first face or voice you encounter. That who helps the clients get to the right resource, who welcomes them and makes them feel comfortable. How much more direct can you get?
So two things, here.
First. Dear Annie E Casey Foundation, thank you for the generous allocation to overhead that you will allow. But please get over it. If you like what we are doing, give us the money and get out of the way. As long as we get the positive impact that we all want, do you really care if the overhead expenses were 27% of what we spent, not 25%? Really?
Second. Let’s change the narrative. As an accountant friend of mine said when we talked about this a while back, the reality is that until we change the accounting rules, until we change the IRS Form 990, people are going to look at our budgets and create an internal image of the pie chart. So we need to acknowledge that and create an alternate image that more accurately reflects how nonprofits actually work.
I am not a graphic artist type by any stretch of the imagination, so coming up with that image is above my pay grade. I need help with this. I had an idea, though, which is the image of a wind surfer. Bear with me here.
The person riding the board is the organization. The board and sail are the program. They are racing across the water, passing buoys that mark the successes being achieved, the goals that have been reached by or on behalf of the community being served. With me so far? Tracking how we are doing through the image of a series of buoys.
The wind that is filling the sails are what the Annie E Casey Foundation would call the direct costs. These are the funds applied to program delivery salaries, materials – the costs that are involved in the delivery of that specific program. We can write those numbers into the image of the wind powering the board and rider along. We can also show the numbers related to funding that is restricted to this program. Fees that we have charged, or restricted grants, or a contract we are working. Funding that is specific to this program.
Under the water are the current and other impetuses that are not as visible but have an equal impact. Sand bars, eddying tides. The currents can be where we show what the Annie E Casey Foundation would call the indirect expenses. The ED salary, the cost of lighting and vacuuming, the cost of the ASL interpreter. How much of each of these costs of running the business helped to make this program work and so should be applied to this program's overall budget. On the income side it can show how much unrestricted funding, reserves, and other revenue are applied to the program.
The sailboard runs smoothly and fast because of both of these engines: the wind and the currents. One above the surface is visible and can be felt by the fans on the shore. One is below the surface and is equally important, but less obvious and visible. It takes both to get to the finish line.
If there is a graphic artist out there who can he’ll me with this, please let me know. If you have a better idea of an image we can use, let me know. In the meantime, talk to your donors, to your legislators, and remind them that there is no such thing as an indirect cost. Everything we do is to help fulfill the mission, unless we are trying to game the system but that’s another story.
Kill the pie, fellow nonprofiteers, kill the pie.
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