By definition, the cost per life served is what it costs your organization to impact one person in your program(s). Why does this matter?
Your donors desire to be good stewards of their investment. They want to ensure they are giving to organizations that are well run, successful and sustainable. It's very important to show outcomes, and additionally, what it costs to impact a life. What you need "to know" before you begin calculating cost per life served. from Nolo.com
Nonprofits that file IRS Form 990 must allocate their annual expenses into three categories:
program expenses—expenses directly related to carrying out your nonprofit’s mission, and that result in goods or services being provided-- for example, expenses to teach a class, put on a performance, provide health care, or deliver food or clothing to the indigent
administrative expenses—expenses for your nonprofit’s overall operations and management—for example, costs of board of directors' meetings, general legal services, accounting, insurance, office management, auditing, human resources, and other centralized services
fundraising expenses—including costs for publicizing and conducting fundraising
campaigns, maintaining donor mailing lists, conducting special fundraising events, and any other activities that involve soliciting contributions. Together, administrative expenses and fundraising expenses make up a nonprofit’s “overhead,” or “operating expenses.”
The IRS does not require that nonprofits spend any particular portion of their income on each category. It just wants nonprofits to report how they spend their money. There is no single formula or ratio all nonprofits use to determine how much of their total budget should go to operating expenses. But, the commonly accepted rule most of them follow is the less spent on overhead, the better a nonprofit looks to donors. Charity rating organizations grade nonprofits partly on how much they spend on these expense categories. For example, CharityWatch.com says that it’s reasonable for most charities to spend up to 40% of their budget on operating expenses—in other words, at least 60% should go to programs, and 40% should go to everything else.
However, charities that spend less than 40% get higher grades from CharityWatch, with those spending 25% or less on operating expenses receiving the highest “A” grades. Charity Navigator, which employs a sophisticated rating system, gives bonus points to nonprofits with lower operating expenses. Most nonprofits who spend more than 30% of their budget on overhead get no bonus points. The Better Business Bureau says that no more than 35% of a nonprofit’s budget should be spent on operating expenses.
Unfortunately, the desire to keep overhead costs as low as possible has had pernicious effects on many nonprofits. One study found that the lack of overhead investment has left many with insufficient office space, nonfunctioning computers, and staff members who lack the training they need to do their jobs properly. In one case, a nonprofit had furniture so old and beaten down that the movers refused to move it. In addition, many nonprofits engage in accounting tricks or outright dishonesty to keep their reported overhead costs as low as possible—sometimes ridiculously low. This is aided by the fact that the IRS does not require nonprofits to allocate expenses in any particular way.
A study of over 220,000 nonprofits found that more than a third reported no fundraising costs at all, while one in eight reported no management or general expenses. The researchers concluded that 75% to 85% of these nonprofits were improperly allocating their expenses.Things have gotten so bad that the heads of the three leading nonprofit rating organizations - GuideStar, Charity Navigator and BBB Wise Giving Alliance - created a website called The Overhead Myth. The website includes an open letter from the heads of these organizations denouncing the “overhead ratio” as a valid indicator of nonprofit performance. What you need "to do" before you begin calculating cost per life served.
Pull your last 12-month operating P&L Statement with actual expense numbers.
Your operating expenses should be straight forward. If you are not currently tracking expenses with class codes for each program, it will take a little more time to determine actual expenses per program. Do the best you can. Unless you are using class codes, it will be hard have 100% accuracy (and that is ok, just make it a goal for next year).
For administrative and fundraising costs, you should assign those numbers (or % of total numbers) to each program.
For example: If your organization spent $20,000 in fundraising and $70,000 in administrative costs, and you provided two programs, then you need to determine how to split these two costs.
Perhaps Program A had a fundraising cost of $15,000 and Program B had a fundraising costs of $5,000.
Or perhaps Program B required the entire $20,000 for fundraising.
In a nutshell, you want to be able to calculate operating, administrative and fundraising costs PER PROGRAM.
Bringing it all together.
Fictitious Case Study for Reference
Hope Pregnancy Resource Center provided three programs last year.
Program 1: Mobile Ultrasound Unit Program
2: Prevention Program Program
Each program impacted lives. Program 1: Provided 100 ultrasounds last year
Program 2: Educated 2,500 teens last year
Program 3: Provided 2,000 hours of counseling
Each program spent money. Program 1: Cost Last Year: Operations $200,000, Fundraising $10,000, Administrative $5,000 - $215,000 Total
Program 2: Cost Last Year: Operations $75,000, Fundraising $1,000, Administrative $2,000 - $78,000 Total
Program 3: Cost Last Year: Operations $150,000, Fundraising $2,000, Administrative $6,000 - $158,000 Total
Cost Per Life Served
Program 1: $2,150 per ultrasound ($215,000 / 100)
Program 2: $32.20 per teen educated ($78,000 / 2,500)
Program 3: $79 per 1 hr. counseling session ($158,000 / 2,000) How to use this information.
Post it in your Annual Report
Post in on your website or marketing materials Make it a talking point with donors
Use it in program specific grant proposals
Develop a campaign (ex. Help us raise $215,000 in the next 90 days to provide 100 ultrasounds this year! 75% will choose life as a result. One baby can be saved for less than $3,000)
Use it in your elevator pitch (ex. Did you know that Jackson County has over 2,000 abortions each year? Did you know that 75% of females who receive an ultrasound from Hope Pregnancy Resource Center choose life? Would you be willing to help one pregnant woman in crisis choose life for her baby for a gift of $3,000?)