What’s Admin Got to Do with Effectiveness?
The administrative cost ratio, always the topic of heated discussion, is in the news again. Not-For Profit Accounting blogged on the topic this week, unpacking the accounting jargon and rules:
A nonprofit’s expenses are classified by what they were used for within the three broad categories / functional areas of administration, program and fundraising. Program costs are considered direct expenses, expenses that have a direct effect on fulfilling the mission of the nonprofit organization. Administrative costs are indirect expenses, they affect the mission of the organization indirectly. The organization can’t get by without those expenses but, according to the IRS and others, they have no direct effect on the mission.
This point, of course, can be argued and I think it is where much of the confusion resides when talking about classifying nonprofit expenses. But this is the world we operate in and those are the rules, so it is best to make sure we understand the rules so we can present our numbers in the most honest fashion to show what it costs to do the work we do.
He also contributed his take on what the ratio really means:
One financial ratio used in isolation is no true measure of any organization. Only by looking at both the numbers and the program outcomes can we judge whether an organization is effective or not.
There’s too much at stake right now to use this ratio alone to measure effectiveness, let alone as a way to compete with one another for already diminished resources. Kate brought up a similar question last year in her post, Irrelevant Ratios:
We need a two-step retirement plan. First is to jointly stop using the ratio as a way to distinguish our organizations from others, in an unhealthy type of competition, as in “our administrative ratio only is 5%, so your donated dollar will go farther with us.” The second is to find a better way to convey the quality and effectiveness of the work that you do, which requires a real method of evaluating and communicating the programs and impact on clients.
Administrative costs are part of doing business. It takes time and money to run an effective organization, and being efficient with those dollars is not the same as being effective with them.
End of Session Resources
- Weigh-in on unallotment before Governor acts from MCN’s Nonprofit Policy News
- The Legislature has Left the Building, Pawlenty’s Poised to Make Cuts-What’s a Nonprofit to Do? from Philanthropy Potluck
This Week’s Harvest
- The Cohen Report: Finding Nonprofits in President Obama’s FY2010 Budget
- Philanthropists Set Spending Deadlines from the Wall Street Journal
- New to the Nonprofit Sector? Here’s a BRIEF Overview from Nonprofit Leadership 601
- Survival Strategies for the Arts from Blue Avocado