Top 5 Best Practices for Indirect Cost Sharing in Nonprofits
By: Rich Uphus | January 18, 2023
ARTICLE — As a nonprofit organization, managing your finances effectively is vital to achieving your mission and positively impacting your community. A critical aspect of financial management is understanding and effectively utilizing indirect cost sharing. This blog post will discuss the top 5 best practices for indirect cost sharing at nonprofit organizations in 2023.
- Understand the basics: Indirect costs, also known as overhead or indirect expenses, are the expenses incurred by a nonprofit that are not directly tied to a specific project or program. Examples of indirect costs include rent, utilities, and administrative expenses. To effectively share these costs among different projects and programs, it’s essential to understand what they are and how they are calculated clearly. The foundation for effective cost sharing is a clear understanding of what constitutes indirect costs and how they are calculated.
- Plan and budget accordingly: Develop a budget that includes a line item for indirect costs and factor in these costs when planning and implementing projects. By doing so, you can better allocate resources and ensure that indirect costs are covered, and your organization can operate effectively. Proper budgeting and planning for indirect costs is crucial to the financial stability of any nonprofit organization.
- Be transparent and consistent: When sharing indirect costs among different projects and programs, your calculations must be transparent and consistent. This means clearly documenting how indirect costs are allocated and using the same method consistently over time. Transparency and consistency in indirect cost sharing are vital for building trust with funders and maintaining the integrity of financial statements. It helps ensure that all projects and programs are treated fairly and that costs are accurately reflected in the financial statements.
- Communicate effectively with funders: Funders must transparently understand how indirect cost-sharing works at your organization. Being prepared to answer questions and provide detailed information about allocating and tracking indirect costs is essential. Review and revise practices periodically to ensure they are effective and efficient, maintain compliance, align with the Negotiated Indirect Cost Rate Agreement (NICRA), avoid potential errors, and deliver consistency. Effective communication and collaboration with funders on indirect cost sharing is essential for building positive relationships and securing future funding.
- Keep accurate records: Keep detailed records of all indirect costs incurred and how they are allocated. Accurate record-keeping is the key to understanding and managing indirect costs over the long term by identifying trends and making more informed decisions about your financial management.
Indirect cost sharing is an essential aspect of financial management for nonprofit organizations. By understanding the basics, you can effectively manage and share indirect costs among your projects and programs, allowing you to spend more time focusing on achieving your mission.
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