one of the most powerful tools in better charity’s toolbox is an income growth assessment. it is a 360 degree analysis of a nonprofit’s ability to grow and diversify income, exploring six elements for funding success:

• strategic approach: how you raise funds and what you raise funds for should support your mission
• relationships: relationships and partnerships with funders and partners to achieve our mission
• external positioning: knowing where you fit, how you are different and how to tell people
• financial management: understanding and managing costs, income and risk
• communicating success: being able to show you are making a difference
• income diversity: an appropriate mix of funding sources; including unrestricted and restricted (tied) funds

the assessment (an online survey and interviews) helps identify the barriers to growing money. it could be the lack of a coherent strategy to guide your people and programs. over-reliance on too few income sources. an inability to measure and communicate outcomes. but often a part of the problem is financial management.

i’m not talking about accurate and timely bookkeeping. a trading loss is often caused by a failure to consider true program costs. or to put it another way, a failure of programs to recover (indirect) overhead costs. understanding the true, full cost of delivering various programs and services in the community is a critical piece of the puzzle.

accurate program costings allow nonprofit leaders to plan and manage budgets, make informed strategic long-term decisions about which programs to grow, which ones to cut, and how much funding is needed to cover the full cost of services.

to calculate true program costs you need to:

1. define your programs: identify, classify and group activities as distinct programs (ideally this should be done using cost centres or project codes in your accounting system)
2. identify direct and indirect costs and income:
   a. direct costs are directly attributable to a program (e.g. the salary of a project officer delivering the work)
   b. direct income: restricted funding tied to the delivery of a specific program (e.g. a government grant)
   c. indirect costs: general administrative expenses that support the organisation as a whole (e.g. accounting, insurance, rent etc).
3. allocate indirect costs to programs: use appropriate overhead allocation methods (e.g. allocate public liability insurance by FTE, rent by office space occupied … try to avoid too much complexity).

generally speaking, you can allocate income and costs associated with restricted fundraising to programs. unrestricted fundraising income and costs could be considered as its own program to assess its effectiveness (as a rule of thumb, one dollar spent on fundraising should generate three dollars or more in income).

in this way, you can better understand which programs are financially self-sustaining or even generate a surplus. others may require an ongoing subsidy. deciding whether and how to support those programs is a critical strategic decision for nonprofits.

a good way to analyse the problem holistically is to compare your programs through the lens of sustainability, cost and impact. in this way you can make decisions to grow low cost, high impact programs and review high cost, low impact work.

in the matrix map below, six programs are mapped according to their impact (vertical axis), profitability (horizontal axis) and cost (size of blue circle). as you can see, the map indicates which programs the nonprofit should grow, or control costs, or exit.

in fact, in this analysis, program B was a social enterprise which was barely recovering its direct costs. to sustain this program, the nonprofit was advised to control its direct costs and increase its pricing (direct income) – or consider exiting the market.

note: because indirect costs (such as rental costs) are mostly fixed, cutting a program will not result in short term savings (you still need to pay rent). it does, however, help you to optimise the allocation of resources for long-term financial sustainability.

if you’d like to chart a course for a resilient and sustainable future please reach out for a free consultation.