The most common mistake I see are cost allocation models happens in how an organization assigns time and effort to Management & General. In particular, I see a lot of organization automatically assign 100% of the Executive Director (ED) to the M&G expense by virtue of their position.
The IRS thinks of expenses for nonprofit organizations all three categories:
- Fundraising (sometimes called Development) and
- Management & General (M&G, sometimes called Administration)
Don’t use M&G as a catch-all for the time someone spends in the office or catches up on emails. This is NOT M&G.
I recommend thinking of the categories in this way:
- M&G is limited to all Board-level, strategic planning and issues of the organization, especially as it relates to the corporate entity. So, for instance, legal and accounting services (including your audit), travel and meeting expenses for your Board of Directors, and the strategic planning consultant you hired are all 100% M&G expense.
- Fundraising is limited to activities related to an “ask” for financial supporting, including expenses of a fundraising event, a grant writer, or even an envelope insert in a mailing.
- Finally, Program Expenses are all about your mission and the work you do to accomplish your mission. This includes all of the time you spend supervising program managers, working with constituents about the direction of program and delivering your services.
The Executive Director may spend 5 to 10% of time with the Board, audit and strategy, and maybe another 10% to 25% on Fundraising . . . but every ED I have ever met spends far and away the majority of time creating buzz for the mission, building relationships with stakeholders, working with staff and program implementation and furthering the cause. So it is frightening to see 100% of the ED’s compensation be assigned to M&G.
By refining your definition of M&G expenses, you will improve the accuracy of your cost allocation model and avoid this common mistake.