Grant Writing Budgets: Direct vs. Indirect Expenses

This is a post from May 2009. After a few fundamental questions from peers and clients, I thoughts I'd share it again with Grant Savvy readers.

When creating a project budget you will need to determine your costs to support the entire program. This includes staff, supplies, building and transportation costs. It can seem scary or overwhelming to create a budget that supports an entire program, but if you break it down into your line items and approach it like you would a personal budget, you will save yourself some sweat and tears.

Usually, your costs will fall into two different categories, direct and indirect expenses.

Direct Expenses are costs that come from the purchasing of goods or services to support or start your program.

• Personnel costs (sometimes called personnel services)
• Supplies (office supplies, paper, pencils, rubber bands, printing, etc.)
• Travel (air travel, bus, car, train, room & board accommodations)
• Equipment (office furniture, cameras, printers, radios, shelves, scanners, etc)

Indirect Expenses are costs that are required to run your organization regardless of the program you want to create or support. It is best to work with your finance department to determine these costs because they can often be tricky to understand and interpret. In the simplest terms, they are usually the administrative and/or overhead costs and can be calculated in one of two ways:

• As a percentage of total direct costs (in my experience, this is most common)
• As a percentage of total personnel costs

Understanding direct vs. indirect costs is important not only because some funders don’t fund indirect expenses. Your budget reflects the financial viability of your program and you must be able to accurately display all costs associated with the life of the project. Yes, ALL costs. Don’t ever attempt to hide any of the costs you will need for your program, no matter how small.

~Cheers!

Proposal Budgeting Basics: Free Training

I've posted several pieces about proposal budgeting during the past few weeks and for those of you who are interested in more than my abridged version, there is a free (yes, FREE) online course hosted by The Foundation Center called Proposal Budgeting Basics.

"This online course is designed to help with the basics of developing a project budget, and it is geared for those who have general knowledge of proposal development. When you complete this course, you will know:

• The basic components of a project budget
  
• Different types of financial documents often required for proposals
  
• How overhead costs and fringe benefits may be incorporated within the budget
  
• How to access resources on the Web, which provide templates of project budgets"

Courtesy of The Foundation Center

It's an informative lesson that provides visuals to support the examples that are discussed. Also included is a section about additional documentation usually required by funders.

For those who are new to the field, The Foundation Center offers several free courses, including a Proposal Writing Short Course and a Proposal Writing Basics webinar.

The webinar is a tool that can be used to train others in your organization about proposal creation. This type of professional development is effective to share with a team of people who aren't famililar with grant writing, but will be part of the proposal process.

~Cheers!

Creating a Proposal Budget: Part 3

How Much Should I Ask For?

Through experience I have learned that the budget is one of the first things that a funder reads, regardless of it's location in the proposal packet. They like to see a where you are taking them.

Knowing how much to ask for in a proposal has a fairly common-sense answer, but the actual "asking" part requires some finesse.

It's hopefully obvious that when you underestimate your costs, you increase your chance for failure. Likewise, when you overestimate your costs, you decrease your chance of building a dependable reputation with your funder.

So, how much should you ask for? A whole project's worth of funding? Or just a piece of the pie? Well, it depends. (classic fundraising mantra...ohmmm) It's about finding your fit.

• Does your funder like being the only supporter?
• Do they like to have reign over possible naming opportunities?
• Do they want to anchor your partnership?
• Has your potential funder taken on entire projects with other organizations?
• Can you provide your potential funder an opportunity to make a multi-year pledge to fulfill a larger gift?

If the answer is "yes", then you can probably be safe approaching them for full funding. Keep in mind, you need to stay in their giving guidelines and have a solid plan for sustainability after a few years of their support. Don't be foolish to ask for $150,000 when their largest gift in the last five years was $15,000. Remember to do your research.

On the flip side, it is more common to find funders who want to be part of your project, but shy away from being the only major funder. It's less risky to know that a particular foundation won't break your project if they cannot come through with funding.

• Has your potential funder noted that they like collaboration?
• Can you make your potential funder a partner in project development?
• Can you connect your potential funder with others who are supporting you?
• Can you find a way to leverage funding from a company's foundation and corporate marketing budget?

Nine times out of ten, I have a question on the grant proposal that asks if and who is also funding the proposed project. Below is an example taken directly from the Minnesota Common Grant:

Additional funders. List names of corporations and foundations from which you are requesting funds, with dollar amounts, indicating which sources are committed or pending.

Be reasonable in your request. Decide what you need to fund and what can be funded elsewhere. Respect the mission of the foundation/funder and don't take advantage of their ability to fund you. Funders are smart folks, they know how the game is played.

As noted in "The Only Grant Writing Book You'll Ever Need", "...they are looking for a budget that's not too high, not too low, but just right." Goldilocks knows her stuff!

~Cheers

Creating a Proposal Budget: Part 2

Budget Narrative

A budget narrative is included with your budget to explain in words what your numbers really mean.

How did you reach your numbers? What is important for the grant funder to understand that your numbers can't fully explain?

Sometimes this document is included on a different page or on the bottom of the budget sheet. It doesn't need to be lengthy, but should be precise and accurate.

It is also a good idea to include an 'introduction' or preface to your budget. Sometimes, this is within the body of the proposal (if called for by the funder's format) or can be at the top of the budget sheet.

Sample excerpt for budget narrative:

'The total cost of running Basic Youth Program is $xx,xxx, and includes personnel costs, nonpersonnel costs, and indirect costs. The full amount is requested from ABC Foundation.

Three YouthOne employees and two consultants are the personnel required for the program. It is estimated that the program director, whose salary is $xx,xxx, will spend 20% of his time in the next year running the program, for a total of $x,xxx.'

The narrative will continue to explain your line items and refer to important points for your funder. Pay attention to any specific questions you need to answer about the budget from your funder's guidelines.

Work closely with your program staff and finance department to get an accurate explanation of how your budget will be spent. Make sure your funder can understand what you are saying and don't assume that they know finance jargon.

Special thanks to Webster's New World Grant Writing Handbook by Sara Deming Wason for the narrative excerpt.

~Cheers!

Creating a Proposal Budget: Part 1

Direct vs. Indirect Expenses
When creating a project budget you will need to determine your costs to support the entire program. This includes staff, supplies, building and transportation costs. It can seem scary or overwhelming to create a budget that supports an entire program, but if you break it down into your line items and approach it like you would a personal budget, you will save yourself some sweat and tears.

Usually, your costs will fall into two different categories, direct and indirect expenses.

Direct Expenses are costs that come from the purchasing of goods or services to support or start your program.

• Personnel costs (sometimes called personnel services)
  
• Supplies (office supplies, paper, pencils, rubber bands, printing, etc.)
  
• Travel (air travel, bus, car, train, room & board accommodations)
  
• Equipment (office furniture, cameras, printers, radios, shelves, scanners, etc)

Indirect Expenses are costs that are required to run your organization regardless of the program you want to create or support. It is best to work with your finance department to determine these costs because they can often be tricky to understand and interpret. In the simplest terms, they are usually the administrative and/or overhead costs and can be calculated in one of two ways:

• As a percentage of total direct costs (in my experience, this is most common)
  
• As a percentage of total personnel costs

Understanding direct vs. indirect costs is important not only because some funders don’t fund indirect expenses. Your budget reflects the financial viability of your program and you must be able to accurately display all costs associated with the life of the project. Yes, ALL costs. Don’t ever attempt to hide any of the costs you will need for your program, no matter how small.

Keep checking Grant Savvy throughout the week for posts about budget narratives, what a proposal budget should look like and figuring out how much money you really need to ask for.

~Cheers!

Community Impact of Transparency

What is the relationship between a financially healthy organization and the community impact on people?

Personally, financial stability can open doors and support our ability to achieve goals such as buying a home, going on vacation, or sending children to college.

The same holds true for a community-based organization. What is your organization's health and how does this translate to your abilty to serve the community and receive funding requests?

The better your financial health, the more stable you become and the stronger impact you can have on the people you serve.

Measuring your health and impact is necessary for many reasons, but it can have significant bearing on your ability to demonstrate your needs in a proposal. Do you have diverse funding sources? What do you operating reserves look like? Do you encourage financial literacy among your staff or is the accounting department the only one who understands it? Do you use realistic assumptions to support your budget?

Equally important is your ability to share who you are. Do you post your information online? Do you send your annual report to donors and grant makers? Do you post your IRS determination letter and 990s on your website?

Bottom line is that a healthy connection between governance, planning, programs, evaluation and finance is really what financial leadership means. Transparency for donors, funders, volunteers, board memers and those you serve is crucial.

Grant makers want to see that you can pass the written, verbal and financial exam before they will fund your program. Evaluation measurements and logic models are parts of the proposal process that reflect this idea. It's nothing new.

Your organization's health creates not only stability, but flexibility to move with the changes in the economy. Funders want the strongest players on their team and need to know you have a plan to share with the people who support you.

Refer to places such as GuideStar to learn more about becoming financially healthy as an organization.

Clarifying Nonprofit Transparency (great new blog!)
Minnesota Council of Nonprofits

~Cheers!