While it might not make sense that many of the operating costs of nonprofits and for-profit businesses are the same, if you consider the definition of operating costs, it becomes clearer. Operating costs are those expenses that cover the costs of running the business and making a product or service. For nonprofits that don’t make or sell a product, fundraising, or development, costs are considered similar to manufacturing costs. Understanding these expenses will help you create accurate budgets for a nonprofit organization.
Operating costs include overhead expenses such as administrative staff, rent, utilities, phones, office equipment and supplies, insurance and cleaning supplies. These are expenses you incur even when you are not giving out food, clothing, scholarships and grants. The non-overhead costs associated with soliciting funds are also operating costs. If you are a new nonprofit, do not include start-up costs, such as buying office furniture and equipment, first-time licenses and fees and other expenses you won’t have once you are up and running, as operating expenses.
Potential donors to a nonprofit look at how much you spend on administrative costs to determine whether you are a good investment. This is easier for some nonprofits than others. For example, if your goal is to feed the hungry, subtracting the cost of the food you serve from the total amount of money you spend each year will help you calculate the percentage of the your budget that’s spent on feeding the hungry and how much of those funds are spent on administration. If you are an organization that provides scholarships and you raise $200,000 each year, awarding $80,000 in scholarships, your administrative expenses would be 60 percent. This would be lower if you kept some of the funds you raised in the bank, neither spending that money nor awarding it.
When you raise funds, those costs directly related to your efforts are known as development costs. These would include raising funds with a direct mail campaign, golf tournament, silent auction, telethon or sponsorship sales. Those expenses would include printing, postage and the costs associated with holding an event, such as a 5K race or banquet. Whereas a for-profit business might break out overhead costs and manufacturing costs, a nonprofit might break out overhead and development costs. Development costs can also include staff pay, marketing, travel, lodging, meals and entertainment when meeting with potential donors, seminars and training for fundraising staff and any office expenses associated with development.
Fixed vs. Variable Expenses
For bookkeeping and budgeting expenses, divide your operating costs into fixed and variable expenses. Fixed expenses do not change on a month-to-month basis, such as rent or insurance payments. Variable costs change, such as utilities and phones. Dividing your expenses this way helps you create cash flow budgets to alert you to when you will need more money, and shows you where you might be able to reduce expenses during times of budget shortfalls.
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