The CFO'S Perspective

Just the other day we were working with a client who came to us and said, “We need help with an important grant request. How do we know which expenses to include in our overhead costs? And how should we word those expenses appropriately in our proposal?” We were able to help and now we want to share the wisdom that we offered him to help you the next time you write a grant proposal.

Anyone who has ever worked with grants knows that budgeting can be one of the most difficult parts of the grant request process. To be effective a grant proposal needs to include both the direct costs of running the program(s) that the grant will be used for as well as the indirect costs (or overhead costs) associated with offering programming.

Organizations that do not appropriately account for overhead costs such as payroll, rent, utilities, and technology will not be entirely compensated for the full cost of running the programs that they offer, which can jeopardize their long-term sustainability. Simply put, an organization that cannot cover their overhead costs won’t have the operating budget needed to provide their programs and offerings to their community, which in turn can:

• Reduce reach and effectiveness.
• Negatively affect morale and increase turnover.
• Threaten the long-term viability of the organization.

Over the last decade it has gotten harder to understand and evaluate the indirect cost rates being applied to grants. Nonprofit leadership has struggled to keep up as the requirements and recommendations around indirect cost rate calculations have shifted and changed. And yet, this work remains critically important to the effective financial management of nonprofit organizations because without accounting for indirect costs correctly nonprofits cannot cover their overhead.

Unless the expense of overhead costs such as rent, utilities, technology, and payroll are recouped through funding, an organization cannot be fully compensated for what it costs to run the programs that they offer, jeopardizing their ability to offer not only those programs but maintain other vital initiatives in the community as well. Therefore, properly calculating indirect cost rates is a cornerstone of effective grant management for nonprofits.

One of the most complicated elements of managing a non-profit organization's finances is allocating administrative-related expenses. These are expenses that cannot be specifically assignable to the areas benefited – commonly referred to as Indirect Costs. The methodologies of allocating indirect costs are often complex and situational. Additionally, many funders of non-profits have their own rules, exceptions and limits, creating a spider web of regulations.