Monthly Archives: May 2009

Nonprofit Administrative Costs

Two questions recently got me thinking about administrative and overhead expenses.  Below are the questions and the answers I sent:

Question #1: Should a depreciation expense be included in the calculation when looking at the percentage of administration expenses to total operating expenses with a nonprofit?

Answer: It is a good idea to allocate and include depreciation expense in program(s), admin and fundraising. This helps show the cost of doing the work, as at some point equipment will have to be replaced and it is good to know which program is “using” it the most. If your organization does an audit it will show depreciation as a part of your total expenses and allocate it across all your functional areas.

Question #2: We have two independent contractors doing work for our nonprofit. Is the money paid to these people “administrative costs” straight across, or can we separate it out by program? Doesn’t this all come under administrative costs?

Answer: How you code the transactions will depend on the type of work you paid for. If the consultants worked on administrative tasks, their fees would be an administrative cost, if they worked in program areas it would be program costs. Just because the expense is for an independent contractor does not mean it is automatically an administrative cost.

I’ve linked to this topic in my Q&A section and below is what the IRS says about administrative costs in the updated Form 990 instructions on page 33:


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A nonprofit’s expenses are classified by what they were used for within the three broad categories / functional areas of administration, program and fundraising.  Program costs are considered direct expenses, expenses that have a direct effect on fulfilling the mission of the nonprofit organization.  Administrative costs are indirect expenses, they affect the mission of the organization indirectly.  The organization can’t get by without those expenses but, according to the IRS and others, they have no direct effect on the mission.

This point, of course, can be argued and I think it is where much of the confusion resides when talking about classifying nonprofit expenses.  But this is the world we operate in and those are the rules, so it is best to make sure we understand the rules so we can present our numbers in the most honest fashion to show what it costs to do the work we do.

Another nice breakdown of what administrative / overhead costs are comes from this post from the Nonprofits Assistance Fund.  It links to this pdf of overhead cost definitions which is very handy.  That post also brings up the specter nonprofits face of spending too much on overhead expenses and the focus on the financial ratio of administrative expenses to program expenses.  While that may be a useful figure, I think we need to always keep in mind just what expenses are admin and what are program so we know just what is being measured.  Then we need to make sure that as a sector we are all labeling our expenses the same way.

And while we are looking at those ratios we need to look at the nonprofit’s ability to deliver its mission.  One financial ratio used in isolation is no true measure of any organization.  Only by looking at both the numbers and the program outcomes can we judge whether an organization is effective or not.

Nonprofit Financing Resources

Money money moneyThe Chronicle of Philanthropy and the Nonprofit Finance Fund have teamed up for a series of live web chats, the first of which was today.  You can view a schedule of the chats here.  Today’s chat focused on financing options for nonprofit organizations, here is the link to the transcript of the chat.

One highlight of the chat was a question of when a nonprofit should consider getting a loan:

Question: When should nonprofits start looking at loans?

Answer: The answer to this one is a little counterintuitive: npos (or any borrower) should look for credit–and a banking relationship–in good times, when they don’t have a pressing need for cash. Establishing a good relationship with a lender in good times will help the lender understand the nature of the organization, have faith in management, and be there–with some cavaets–when times get tougher. However, “emergency” and “loan” very seldom belong in the same sentence, because loans require trust, reliable revenue and predictability to be sound.

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Monday Morning News

new-990-imageIn the third and final installment of my news and information updates that clean out my in-boxes (the last two are here and here), I will lead off with two time sensitive items.

1. 990, 990-EZ, 990-PF and 990-N

Is your organization on a calendar fiscal year?  Then your forms are do this Friday, May 15, 2009.  From the IRS:

Calendar year exempt organizations that file Forms 990, 990-PF, or 990-EZ are reminded that their annual information returns are due on May 15. An organization may request an initial automatic extension of time to file its annual information return by filing Form 8868 by the due date of the return. For more information, see Form 8868 and its instructions [a pdf].

Forms 990, 990-EZ and 990-PF for non-calendar year organizations are due on the 15th day of the 5th month following the end of their annual accounting period.

Form 990-N filers cannot get an extension to file.  Information about the 990-N can be found here.

Guidestar has a nice piece on what the governance aspects of the new forms are, you can read it here.

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