2 Accounting Issues You Need to Understand
Pay attention. I never thought I would write these words: I wish I had taken accounting in college. I’ve always thought I could focus on strategy and messaging and creative and channels and analytics — the fun stuff — and let other people, you know, count. Little did I know that accounting would play such an important role in our profession. Don’t we spend half our lives calculating percent response, average gift, net yield per thousand, cost per donor and long-term donor value?
However … I regret to inform you that beyond these simple workday calculations, there are now two accounting issues that are about to have a huge impact on our fundraising. Lucky for you, since I didn’t take accounting in college, I’ll spare you the gory details in favor of the 30,000-foot view of two critically important issues for fundraisers: joint cost allocation of fundraising costs and long-term return on investment (ROI) vs. campaign-specific ROI.
Joint cost allocation
Nonprofits have three big buckets in which to categorize expenses: program costs, fundraising costs and administrative costs. Program costs refer to money spent in the delivery of a nonprofit organization’s mission (e.g., feeding the hungry, medical research, rescuing animals, advocacy for veterans). Fundraising costs are the dollars spent raising money for the cause. Administrative costs refer to the cost of managing the organization. When combined, the latter two categories are also known as the organization’s overhead costs.
Brief contextual aside: In the overly simplistic and often misleading view of charity watchdogs and members of the media, program costs are considered good while overhead costs are seen as a necessary evil. They would even say that the lower the overhead (fundraising plus administrative costs as a percentage of income) vs. program costs, the better the charity — and the higher the overhead ratio, the less efficient the charity.