With limited resources, an NGO must make choices to allocate its resources and face different challenges according to priorities. This is why the use of funds is a strategic lever to achieve its objectives. In this sense, understanding and analyzing the costs of different programs and services is an essential asset.
NGOs generally have fairly solid information on income (grants, donations, etc.), whereas their in-depth knowledge of organizational costs is lower, particularly when it comes to spending on services, program delivery or operation. The result is decisions based on factors such as intuition, staff observations, or donor preferences, leading to a potential risk of missing out on their main mission by not allocating resources where they would be most appropriate.
Achieving financial clarity by implementing analytical accounting by project/donor helps highlight strategic choices by fully understanding the details of the actual costs of the NGO.
An effective analysis of accurate expenses classifies and allocates direct and indirect costs in areas that are relevant to the organization's objectives such as programs, geographic locations or missions.
Which project to finance in priority? Should we grow elsewhere? What budget is needed to maintain this program? Analysis by project/donor is an effective tool to easily understand all of the key issues of an effective NGO governance and make the most strategic choices. By providing a more detailed picture than traditional accounting that merely breaks down indirect costs; this methodology highlights the financial needs of each project and reflects the relationship between costs and activities of the organization. In this way, program expenses are clear and the NGO has a clear and accurate overview of the economic situation of each of them.
Funds allocated to an NGO for a specific program cannot be used for anything else. It is important that each resource be allocated to projects and activities in relation with the vision of the NGO. By combining a sharp understanding of operating expenses with a sense of purpose, the detailed data generated by the analytical accounting by project/donor will become key elements in making the most enlightened decisions in terms of resources. Decision-makers thus have a clear idea of projects that cover their own costs, those that require more funds or, on the contrary, generate surpluses. The NGO can determine whether resources are used in the most effective way to further the organization's mission and maximize its impact. By highlighting situations in which the economic aspects of a project do not correspond to the priorities defined by the mission of the NGO and by knowing the programs that contribute positively to the NGO or those that are a net loss; it therefore becomes easier to look at the flow of funds to ensure that their allocation supports the organization's goals.
An NGO could put the brakes on not having the means to implement an accounting system that allows such ongoing cost analysis. But, as Benjamin Franklin said "A penny saved is a penny earned" and for an NGO, big or small, keeping an eye on expenses can have a big impact. Today, the implementation of a digital administrative management offers both the possibility to simplify the creation of analytical trends and relieve teams of time-consuming tasks while allowing real-time monitoring.
Cost analysis data is one way to discuss priorities and how resources are used. The NGO will be able to transform them into visual reports and build on them to explain the gaps and the importance of fundraising, to discuss programs requiring financial support and how this can be done to achieve its objectives.
On the other hand, after identifying and adjusting expenditures to reduce or improve their use, the organization will be able to closely monitor implementation and ensure that the decisions made are the right ones. By continually analyzing costs, it will be easy to see whether the prioritized elements have actually produced the expected results or whether the goal of a project is covered by the planned funding.
This cost analysis is of interest to an NGO that works in more than one area or operates in multiple geographic locations, as it offers the opportunity to understand the expenditure structure by beneficiary and thereby maintain the financial health necessary to carry out its missions.
We can mention two recent examples of NGOs for which the consequences may have certainly been different should modern processes and real-time analysis by project/donor be implemented:
- In May 2019, Terre des Hommes, a humanitarian aid organization for children, had to restructure its HQ following the discovery of a shortfall of CHF 14.5 million in the 2018 accounts and had to fire 45 people.
- In December 2018, the Geneva-based NGO, ICTSD (International Center for Trade and Sustainable Development) ceased its operations following the conclusion of an audit that triggered the interruption of funding.
Analytical accounting by project/donor can help an NGO to make the most strategic choices and increase transparency and trust for stakeholders, as discussed in our article: How to improve donors' trust thans to transparency and technology?
Do you want to know more about how Synergix uses new technologies to address key NGO challenges? Download our related case study.