How to Create Budgets for Nonprofit Programs or Departments
If your nonprofit organization focuses on a single service, you can skip ahead to read about projecting cash flow, but if you’re like many nonprofit organizations, you manage several programs or departments. Each of these programs has a budget that must fit within the overall organizational budget.
Each program has its own budgetary needs. The specific costs of a program — books, art supplies, coaches — are called its direct costs.
But each of the three programs also depends on materials and services provided by the people who work on behalf of the entire organization, such as the full-time executive director of your agency, the part-time development director, and the bookkeeper.
Each of the three after-school programs also uses the agency offices, utilities, telephones, and printed materials. The costs that the various programs share — such as the executive director’s salary, bookkeeping services, rent, and telephone bills — are called indirect costs. You can think of these shared costs as the glue that holds the agency together.
When you prepare a program or department budget, you want to include both direct costs and indirect costs.
Direct costs are pretty straightforward. For example, you know what you have to pay your tutors per hour, and you know how many hours they work. But indirect costs can be sticky because determining how to divide them accurately among your organization’s activities is difficult.
Many grantmakers are reluctant to pay true indirect costs associated with programs and, if your organization depends heavily on grants, that reluctance can put you in the awkward financial position of being able to pay for a famous basketball coach but not to turn on the lights in the gym.
When your organization is relatively small with just a few programs, you may be able to keep accurate records for how staff members spend their time, how many square feet in a building a program uses, even how many office supplies each staff member checks out of the supply cabinet. Based on those records, you can estimate fairly your indirect costs.
As your organization grows in complexity and number of programs, you may compute indirect costs by using a formula you derive based on your direct costs.
|Program||Direct Costs of Each Program|
|First, add all your direct costs:|
|Tutoring and homework assistance||$46,000|
|Arts and crafts||$60,000|
|Total direct costs:||$270,000|
|Then compute the percentage of total direct costs that each program represents:|
|Tutoring and homework assistance||$46,000 ÷ $270,000 = 17%|
|Arts and crafts||$60,000 ÷ $270,000 = 22%|
|Athletics||$164,000 ÷ $270,000 = 61%|
In many cases, you can reasonably assume that the indirect costs of a program correlate to its direct costs, or that a program that’s more expensive requires more oversight of staff and more use of office space.
|Program||Formula||Indirect Cost Amount|
|Tutoring program||$130,500 × 17%||$22,185|
|Arts and crafts program||$130,500 × 22%||$28,710|
|Athletics program||$130,500 × 61%||$79,605|
Sometimes organizations write a project budget by identifying all the direct costs in detail and then showing the indirect costs as one lump sum at the bottom of the list of expenses. But some funding sources balk at paying for indirect costs when they’re presented this way. The funders want to know what actual expenses contribute to those indirect costs.
A better way may be to show the specific indirect costs item by item rather than lumping them all together.