When you develop your nonprofit’s budget, you do your best to project your revenue and expenses accurately. Usually, you’ll base your estimates on past performance, accounting for seasonal revenue variations and recurring expenses that impact your nonprofit year after year.

While this best practice improves your budgeting accuracy, just looking at last year’s program expenses isn’t enough.

To accurately track nonprofit program costs, implement specific strategies that allow you to organize program expense information and fully consider all costs associated with your nonprofit’s main offerings. These tips will help you identify program costs and track them precisely throughout the year:

1. Track expenses by program.

Your accounting system should track and report your expenses by function (program, fundraising, and administrative) and by program and funding source. That way, you can comply with regulatory and funder reporting requirements and maintain an accurate picture of program costs to inform budgeting, fundraising, and operational decision-making.

As YPTC explains, “While you should not create separate accounts for programs, grants, and funders, you may be able to use another function in your accounting software to track them, such as Classes in QuickBooks Online.”

Beyond compliance and decision-making, mapping expenses to programs and funding sources enables you to catch mistakes and monitor costs early instead of waiting until year-end to identify and address any problem areas. Set up your system so that it requires a program tag for each transaction, which will prevent your team from entering expense data without assigning it to a specific program, or either management and general or fundraising expenses.

2. Determine allocation drivers.

Identify and implement specific drivers for your program costs—that is, the metrics that best represent how shared resources benefit each program. Your nonprofit will determine the appropriate drivers for your cost allocation process, but here are some examples to illustrate how the process might work for different expense areas:

  • Rent and utilities. Measure the square footage of your facility dedicated to each program. Apply this allocation to assign rent and utilities costs proportionately to programs. For example, if 30% of your building is used for a tutoring program, 30% of your overall rent and utilities expenses will be allocated to that program.
  • Salaries. Have your staff code their time to various functions and programs using your time-keeping software for a precise time-based calculation—such as time spent on your tutoring program divided by total time worked—and allocate your salary costs accordingly. If you aren’t using timekeeping software, you could conduct a time study (for example, over a typical two-week period) to estimate the percentage of your team’s time spent on program-related activities.
  • Technology. When your entire organization uses the same underlying tools, like Google Workspace and Zoom, you’ll need to determine what percentage of technology costs should be allocated to different programs. You can calculate this number based on labor distribution. For instance, if 10 full-time equivalents (FTEs) are staffing your tutoring program out of 50 FTEs overall, you would allocate 20% of your technology costs to your tutoring program.

Using appropriate drivers to allocate costs to programs will help you improve the accuracy of your budget and financial reports and stay on track with your spending plans.

3. Differentiate marginal cost from full cost.

To scale your programs sustainably, you need to distinguish between the marginal and full costs of running each program:

  • Marginal cost. This is the cost of adding one more participant to your program. For example, if you add just one more student to your tutoring program, it may cost $15 to provide workbooks and handouts and $30 to provide a snack each day, with an overall marginal cost of $45 per month.
  • Full cost. This is the true cost of running your program sustainably. In addition to direct costs, it includes the allocation of indirect costs associated with your program, such as rent and utilities, labor, and insurance. Continuing with the example, when accounting for all the other expenses that go into running your tutoring program, you may find that the full cost of the program per student is closer to $200 a month.

When you use full costs in your fundraising appeals and grant applications, you’ll give donors and funders an accurate view of what it really costs to run and grow your programs, positioning you better to obtain the funding you need.

While you can use marginal cost to make short-term decisions, such as whether you can let in one more student at this time, calculate the full cost and leverage it to make future-driven decisions, such as which grants you’ll pursue to ensure continued growth.

4. Calculate shadow costs.

Some resources don’t cost your organization anything, but if you were to lose them, you would need to replace them—so it’s important to know how much they cost. Tracking these “shadow costs” helps your nonprofit proactively prepare for resource changes so you can quickly pivot when needed.

A common example of a shadow cost is volunteer time. Although you don’t pay volunteers for their time, consider what would happen if you lost your program’s lead volunteer. You might need to hire a part-time program staffer to fill that gap, and you would need to know the value of the volunteer’s time to compensate that staffer appropriately.

Similarly, when you receive in-kind donations, you unlock resources for free. However, let’s say a local business has let you use some of their space for your program for the past three years, but now they’re moving locations and can no longer offer you that space. By calculating the cost you would’ve spent on rent for that space, you can create a realistic fundraising goal for acquiring a new one.

When you know exactly how much it costs to run your programs, you can allocate resources appropriately, run more targeted fundraising appeals, and scale your programs so you can help more beneficiaries. If you need assistance with this process, consider working with an experienced nonprofit controller who can help refine your expense allocation and overall financial strategy.