How to calculate overhead costs

How to calculate overhead costs

Overhead costs are the sum of two parts, fundraising costs and general/admin costs.

Part 1: Fundraising costs 

To calculate Fundraising costs, follow the CRA Charities Directorate’s guidance (CRA Fundraising Guidance CG-013, April 20, 2012 see sources below)

Fundraising revenues are commonly donations, grants from foundations, special events.

Please note, government funding is NOT included in Fundraising revenues. This is a common misunderstanding in the charity sector. Canada’s policy is consistent with other countries. Government funding is not included in the calculation of fundraising costs per IRS policy in the US. 

Part 2: Administrative costs

Given the CRA tells us how to calculate the fundraising cost ratio, the issue is how to calculate the administrative cost ratio.

Here Charity Intelligence believes that all revenue streams, whether they be fees for service, donations, special events, government funding, should bear an equal administrative cost. No revenue stream should get preferential treatment or a “free ride.”

But math rules say that one cannot add ratios with different denominators. Charity Intelligence is frequently asked how it can add the overhead cost ratios when each has a different denominator:

The work around is the administrative cost formula can be written out long-hand. Charity Intelligence believes all revenue source pay an equal share of administrative costs. With this axiom, the equation is:

As Admin costs are equal for all revenue streams, this creates a global ratio. The global, or overall ratio, means that fundraising revenues has the same administrative cost as total revenues.

Therefore, to calculate the overhead cost:

Notes:

1. Investment income. Investment income is excluded from total revenues as it is standard practice in charity accounting to report investment income earned off investments net of management fees. As such, the admin cost has already been counted. Including investment income with double count.
2. Global ratio: Different fundraising events have different fundraising costs. Some fundraising is expensive and some fundraising is cheap. The exact fundraising cost will vary. The fundraising cost does not show the exact cost of a donor’s individual donation, but the charity’s overall fundraising costs.
3. Taking the global ratio for administrative costs of administrative costs as a percent of total revenues rather than administrative costs just for fundraising revenues produces a lower overall cost percent.

Sources:

CRA Fundraising Guidance CG-013, April 20, 2012