Organizations often think of their full costs as the sum of direct program expenses and overhead expenses. Because these are the most visible in a budget or financial report, cultural managers tend to set revenue goals with only these costs in mind.
However, the totality of what it takes to run your organization likely exceeds the bills you pay on a regular basis. Full costs also include the following important items that managers often overlook:
- Depreciation expense: Depreciation can be a useful proxy for the annual wear and tear on facilities, equipment and other fixed assets. Some organizations fundraise periodically for systems replacements and fixed asset improvements, but it’s always a good idea to set aside surpluses for future anticipated expenditures. Why should I care about depreciation?
- Debt service: Interest expense runs through the Statement of Activities, but annual principal payments do not. Organizations need to generate enough revenue annually to retire their debts on schedule. When is debt appropriate?
- Savings: While savings aren’t a cost of doing business per se, they can help pay for unanticipated or extraordinary costs in the future. They represent the cash cushion that your organization has to manage unexpected setbacks or to take business and artistic risks. While every organization has different savings goals, all organizations should strive to save. How much should my organization save?
Many cultural organizations are unable to cover all of these costs every year. You may not fully fund depreciation annually, or you may contribute to savings only periodically. However, a comprehensive cost analysis can be a helpful tool for engaging your board members, grantmakers, and donors in dialogue about what it really costs to sustain your organization.
Management Tip: Commit to understanding what these often-overlooked business and savings needs look like within your organization. As part of your annual budgeting, set revenue targets high enough not only to cover direct and overhead costs, but also to generate surpluses that contribute to fixed asset repair, debt service and savings. Be willing to consider cost reduction strategies if your organization consistently fails to meet these obligations.
