Charities would have a clearer understanding of how resources are currently being used when the full costs of programmes are computed. With this full-cost information, Charities can make, in the words of Mr Ee, better “strategic decisions… as to which ones (programmes) to focus on” and “make them (programmes) sustainable” by recovering their full costs. We will examine these benefits in the following two sections.
Full-cost accounting and resource allocation
Full-cost data allows a Charity to review each programme based on its affordability vis-à-vis its intended outcomes, and decide if scarce resources are being utilised in the most efficient manner to advance its mission. Figure 1 provides a framework that could assist Charities in identifying cost-effective programmes to make better strategic decisions in the allocation of their scarce resources. Following that, the Charity can better make decisions as to whether it should terminate (Quadrant 1), continue or perhaps even expand these programmes (Quadrant 4). In other cases, the Charity, with the knowledge of full costs, would be in a better position to consider the trade-offs between a programme that is expensive but relevant to its mission (Quadrant 2), with one that may be cheaper but less relevant (Quadrant 3).
To illustrate this, a Charity was called upon by many to expand its programme to another region, including one region that was willing to provide short-term funding. However, the Charity declined after a full-cost analysis of the programme as the analysis revealed it to be more expensive than originally believed (Quadrant 2 instead of Quadrant 4). Higher indirect costs would be incurred for the expansion as most of such costs will have to be borne by the programme alone, rather than shared across many. Expansion would have been a drain on the programme’s resources over time and therefore, an unwise strategic decision.
Full-cost accounting and sustainable funding
Charities that can communicate their full-cost information would be more transparent and accountable to stakeholders. Such information will also enable Charities to have more meaningful discussions with donors about their funding needs. With clearer information on funding needs, Charities and donors can then work towards developing a more sustainable funding model.
For a programme to be sustainable, its full cost should be fully recovered. Having economic clarity not only helps Charities to make better strategic decisions in the allocation of their scarce resources, it also allows them to have a defensible basis to justify their level of spending as well as obtain funding for their programmes based on full costs. Donors are more likely to agree if they are able to fully understand the operations and expenses (both direct and indirect) associated with these programmes.
Additionally, knowledge of full costs would also assist Charities in setting the appropriate level of fees to charge beneficiaries for their various programmes. Programme fees constitute another important source of funding for Charities. Such fees allow the level of income received to be proportional to the delivery costs, creating a sustainable model that, at the very least, ensures partial cost recovery. Charging the appropriate programme fees, through a better understanding of their full cost (as opposed to charging only direct cost), will improve financial sustainability. Charities will be better equipped with the ability to provide services of greater quality.
In fact, in the United Kingdom (UK), the government is strongly promoting full-cost recovery, enabling organisations to recover the legitimate portion of overhead costs for the work they do. Otherwise, there is a danger of a Charity running into deficit and becoming unsustainable. The importance of full-cost recovery as a sustainable funding model is encapsulated in the following quote by the UK Minister for the Voluntary Sector, Fiona Mactaggart, “To build a strong, thriving voluntary sector, it cannot be living from hand to mouth.”1
An approach to full-cost accounting
Some US and UK Charity networks have proposed strategies to guide accountants and professionals on full-cost accounting practices for the non-profit sector. One widely-adopted approach, developed by ACEVO, the UK’s leading network for Charities and social enterprise leaders, is illustrated in Figure 2.
The full-cost accounting approach has been lauded as a good way for Charities to make better decisions and obtain sufficient funding. Box Story 2 features a UK Charity that has benefited from the implementation of full-cost accounting.