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The ’80/20 Rule’ Balances Funds Given to the Cause vs. General Admin Expenses

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This article appeared in the October 27, 2017 issue of the Baltimore Business Journal.

For a new nonprofit, there are a number of key factors that will determine its future success. As revenue grows, there will be more flexibility in hiring, training, and developing the core personnel to enable it to go from a start-up to a stable, well-established organization. Ideally, this path to a stable nonprofit will focus on solidifying its revenue streams, hiring the appropriate personnel, and budgeting strategically.

Initially, the key is to identify the sources of revenue that a nonprofit will have. Then, how to both grow and maintain those revenue sources year over year. Will you be applying for city or state grants to fund your programs? Will you be hosting events in the community to get your name out there and grow your donor database? Will you have membership dues? Whether a nonprofit is relying on government, corporate, or individual donations, the main objective is to keep that money flowing every year in as predictable a manner as possible.

A budget should be developed and monitored throughout the course of the fiscal year. Can you keep these programs running in a profitable manner in order to keep your doors open next year? If the answer is no, then identifying what expenses are unreasonable or how important they need to be understood. It is not only about bringing in the right revenue but also about understanding where every dollar goes.

That allows us to flow into one of the key metrics that the public often looks for when reviewing a nonprofit’s financials. It’s the 75-80% rule, which is the dollar amount spent on “program” expenses or more simply put, advancing the not-for-profit’s mission. The rest of expenses are typically spent on fundraising and general & administrative (G&A) costs that are necessary to running a nonprofit.  These are arguably not impacting the mission in a way that a donor focuses on, but G&A expenses play an important role. For example, compensation expense, as a type of G&A expense, can be used to hire and train key employees as funding increasing and then you can trend away from using volunteers.

Hiring the right employees is a tricky subject – do you hire based on what you can currently pay? Do you try to lobby an employee to stay on, knowing there could be compensation growth potential as the nonprofit grows? These are decisions that are made at the onset, with the ability to change course as the nonprofit develops. For example, a nonprofit’s accounting staff can easily consist of an outsourced bookkeeper but as more and more complex grant requirements are undertaken, you may need a full team of accounting employees to keep up with the requirements.

Obviously, there are many types of nonprofits with various programs or purposes, that to quantify how to make the transition from new to established is nearly impossible. But, if a nonprofit focuses on budgeting both revenues and expenses closely each year with its board and management, there is opportunity to grow and navigate through the transition successfully.

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