Full cost recovery an introduction

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Full cost recoveryan introduction

• John OBrien
• Community Accounting Plus

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Three questions to start off

• 1. Who is paying for you to be here now?
• 2. How much does it cost your organisation (per
  hour) for you to be here today?
• 3. What things contribute to this cost?

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Overview

• FCR is about activities links to changes in
  charity accounting and funding arrangements
• How much does it really cost you to do things?
• If you dont use FCR, what else is there?
• Its not just about grants and fees, its also
  about good management

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What do we do at CA Plus?

• Preparation and independent examination of
  accounts
• Payroll bureau
• Bookkeeping
• Employment advice service
• Finance training
• Consultancies
• Administration or support

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Finance training

• Dealing with questions by phone, email
• The website
• One to one visits for support
• One to one visits for training
• Formal courses and seminars
• Every Penny Counts
• Consultancy

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Examples of Support Costs in CA Plus

• Staff supervision, training, subscriptions
• Senior staff reviewing the files, their own
  training, supervision, etc
• The equipment used such as IT, phones etc (what
  about depreciation?)
• Committee meetings
• The heating
• The audit fee
• The redecoration of the office every 5 years

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Some jargon

• Direct costs costs that clearly relate to a
  specific activity
• Support costs (overheads, shared, core etc)
  costs that do NOT relate to a specific activity
• Fixed costs these dont change if you do one
  more thing
• Variable costs these DO change if you do one
  more thing

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Marginal and Average costs

• This is crucial and at the heart of this issue
• Marginal cost is the cost of doing one more thing
• Average cost is the cost of doing each thing.
• An example ..

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Today
Project A B C Total
Costs
direct 10 10 10 30
shared 4 4 4 12
14 14 14 42

Grants 14 14 14 42

Net result 0 0 0 0
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A new project
Project A B C D Total
Costs
direct 10 10 10 10 40
shared 4 4 4 12
14 14 14 10 52

Grants 14 14 14 10 52

Net result 0 0 0 0 0
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Project B comes to an end
Project A B C D Total
Costs
direct 10 0 10 10 30
shared 4 0 4 4 12
14 0 14 14 42

Grants 14 0 14 10 38

Net result 0 0 0 (4) (4)
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What should you have charged funder D?

• Funder D has only paid for marginal cost
• Total support costs were 12 before project D.
  They didnt go up.
• The average cost of project D could, and
  should, have included an amount for support
  costs.
• At 4, with project D, the group wins. When B
  closes, the group survives.
• At 3, with project D, the group wins, but when B
  closes, the group still dies.

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So how much does it cost to do things?

• The average cost of each unit of activity is
  simply the cost divided by the total amount of
  activity
• If you only have one staff member and they advise
  500 clients a year, its simply your
  organisations costs divided by 500, which will
  give you the average cost per client.

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If its complicated

1. identify all your different activities
2. Allocate any direct costs to each activity.
   This might include the salary costs of the
   particular staff involved, the travel costs,
   specific materials, specific audit costs, etc

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• Think about what generates or causes the costs in
  each activity. (For many voluntary organisations
  it will be primarily the employment of staff, but
  you can get more complicated if you want)
• Allocate the support costs, between the
  activities. You can break these down into
  sections. This involves a choice

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Allocating the support costs between activities

• Per person
• In proportion to time spent on the activity
• In proportion to direct costs, floor space,
  funding, salary costs etc
• The point is
• Be reasonable
• Be consistent
• Think about what generates the costs

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What can you do now you know the full cost?

• If you know how much time you spend on each
  activity you can see the cost per hour
• You can move on to ask how you finance this
  activityby grants, contracts, fees, fundraising
  etc
• If you charge fees for some services, you can see
  the minimum you should charge to break even.

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What can you see?

• The output that might be reasonably expected for
  the funding
• The targets for fees as well as the outputs for
  each activity useful for monitoring and
  management
• The activities that are giving you a financial
  problem
• The activities that are keeping you solvent

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Grants fees

• Its unusual to get grants to pay for you to go
  to meetings, but these are real costs that need
  to be covered.
• Most funders want an output or even an outcome.
• You need to make sure that all your support costs
  are paid for by whoever is funding the activity.
  This could be a grant for a project, a fee for a
  service, or a price for a product
• If not, is this OK?

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The problem with accepting core funding

• You may think its good to have pure core
  funding money just to be there. But there is a
  risk.
• It allows you to do other projects or activities
  in return for marginal funding, with these
  funders or clients not paying the full cost
• But what happens when the core funding is reduced?

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Is this all real?

• There are lots of assumptions in all this
• If you dont do this, how do you know whether the
  income is sufficient.
• If you have a financial problem, you need to know
  where the problem lies.

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And finally

• If in doubt, call it 40 an hour