We continue our series on developing a strong financial leadership model and this month we are looking at what should be done in operations to ensure such a model. An important, but sometimes complex, aspect of ensuring financial success is to understand the true costs of the organization’s programs. When determining the true costs and impact of a program you should look at the direct and indirect program costs. What are direct and indirect costs? Direct costs are those that are directly used to carry out the mission of the program. They are most likely only used by, and allocated to, specific programs, such as training materials or program-specific software. These costs could also be shared between other programs. Indirect costs are expenses that benefit all areas of the organization. These are commonly referred to as “overhead” or “G & A” (general & administrative) costs and include examples such as utilities, rent, or an outsourced IT contract. Many organizations that receive government funding can obtain a negotiated indirect rate, which can be included in grant proposals if allowed by the funder. This helps to offset the overhead costs of the organization. We work with clients that calculate an indirect rate and charge that rate to all programs, regardless of the allowance by the funder. This provides a presentation of the true cost of the program.
In evaluating a program’s effectiveness, it is important to look at the total costs compared to the impacts made by the program. It is also important to look at them throughout the project, not just at completion. An easy way to do this is to work with the program manager to create a budget, then prepare regular reports that compare actual program costs to the program budget. Finance and program staff should have regular meetings to discuss the budget and program deliverables to ensure both are on track to meet the goals of the program.
Check back next month, as we move to part nine of our series on A Guide to Financial Leadership.