Full Cost: Videos

The Full Cost framework takes a holistic view of a nonprofit’s needs, so both nonprofits and funders can orient funding decisions around long-term outcomes. And because our current funding structures are often shaped by the same disparities nonprofits seek to address, Full Cost is a critical framework for advancing equity in the nonprofit sector and beyond.

The six components of Full Cost are: total expenses, working capital, reserves, debt principal repayment, fixed asset additions, and change capital. All nonprofits need total expenses, working capital, and reserves, while only some nonprofits need debt principal repayment, fixed asset additions, and change capital. Let’s learn more about each of these components.

First, What All Nonprofits Need.

Total expenses are the day-to-day expenses of running an organization. This includes direct (or program) costs, indirect (or overhead) costs, and unfunded expenses.

When your nonprofit should do something that costs money, but doesn’t have money to cover it, that’s an unfunded expense. It’s the difference between day-to-day spending and what it would take to do the current level of work in a way that’s fair and reasonable.

Unfunded expenses tend to show up in people costs. “Sweat equity” – overworking and underpaying staff – is the most common example.

Total expenses include items like employee salaries, phone bills, legal fees, program supplies, measuring impact, and the depreciation of assets that may need future replacement.

Working capital is the money needed to cover the predictable ebbs and flows of cash in the normal course of business. It is cash to keep operations going strong, even when we’re waiting for payments from funders. How much working capital an organization needs can vary depending on your cash flow needs – when and how often money comes into the organization.

You can think about working capital as you would your personal checking account. Organizations with sufficient working capital are able to pay bills on time, even through months when there are no cash receipts.

If working capital is like a checking account, reserves are like a savings account. Reserves are savings that mitigate risk for organizations: the risk of losing revenue, the risk of unplanned expenses; the risk of trying something new; the risk that something may go wrong with a building or equipment; or the risk of an unforeseen event, such as a pandemic.

You can think of these reserves as an umbrella for a rainy day. An organization can set up board-designated reserves with certain conditions that can allow the organization to use reserves with board approval.

Reserves are built slowly over time, then at a certain point they’re spent and begin again to replenish. You might use reserves to cover expenses as you test out a new program. If the program succeeds, you can use the impact data to encourage funders to invest in the new program so it becomes a regular part of your work.

Next, What Some Nonprofits Need.

Debt principal repayment is the money used to pay down borrowings, like lines of credit, mortgages, and loans. Not all organizations have debt. When considering debt, it’s important that leadership can articulate how current or future debt helps a nonprofit achieve its intended outcomes.

This money usually comes from consistent surpluses, which determine how quickly outstanding debt can be repaid, depending on the amount and the needs of the organization.

Fixed asset additions are dollars used to buy new equipment, furniture, leasehold improvements, or other fixed assets.

This money is for purchasing new assets, not for replacing or maintaining existing fixed assets. Once an organization owns fixed assets, they likely will have a facility or equipment reserve to fund repairs or replacements.

Finally, change capital is a large, periodic investment into a nonprofit to significantly change or build the organization. This could be to change the reach of the nonprofit’s mission (in terms of people served, geographies, or programs), or to change how it makes or spends its money.

A change capital infusion should come with an investment in revenue-generating activities to properly structure the organization for its new business model. Change capital will cover the up-front costs of change and deficits until the new business model’s revenue exceeds new expenses.

Change capital is not just for larger, more established organizations. Smaller nonprofits benefit from change capital as well.

Full cost requires that we think long term and acknowledges that the needs of each nonprofit differ and change over time.

Learn more with our Full Cost resources on NFF.org.

Nonprofits led by Black, Indigenous, and people of color often have strong community relationships and knowledge of the issues their communities face. They use this social and intellectual capital to work around a lack of financial capital, which forces organizations to operate from a place of financial scarcity.

Why is that?

Nonprofits led by Black, Indigenous, and people of color not only tend to receive less funding, but also receive less unrestricted dollars. Unrestricted dollars can be used for any purpose or program. They allow nonprofits to invest in infrastructure and programs based on their organizational needs and the needs of the communities they serve.

Who has wealth in our country has been (and continues to be) shaped by racism – starting with slavery, genocide, forced removal from ancestral lands, and continuing through banking and credit restrictions, redlining, disinvestment in communities, gentrification, direct violence and discrimination, and many other forces.

Today, the social location of wealth is furthest away from communities of color. Funding tends to follow existing network lines of well-resourced, white-led nonprofits. So we must actively work to counteract injustices.

More and more grant makers are viewing financial resilience as a social justice issue, seeing the implications of common funding practices and how so-called “color-blind” financial analysis approaches have inadvertently perpetuated inequity. Full cost can create conversations and actions that address some of these inequities, building wealth in communities that have been denied access.

Full cost allows us to take a holistic view of finances to understand and fund for long-term needs and long-term outcomes. It shifts current budgeting practices, which are often shaped by the very disparities we seek to address.

Full cost can inform funding decisions that create a more equitable and impactful social sector.

And full cost shifts the conversation between nonprofits and funders from power to partnership.

Our goal is that funders understand how to invest responsibly and strategically to cover full costs. And that nonprofits are encouraged and equipped to ask for what they really need to achieve their missions.

Learn more about how Full Cost can advance racial equity with our Full Cost resources on NFF.org.

Buy dollars are a regular source of revenue that supports programs. Buy dollars are things like government contracts to provide housing, admission tickets for performances, and philanthropic grants that fund tutoring sessions. They’re reliable, repeatable, and often reoccurring revenue.

In contrast, build dollars help nonprofits grow, adapt, and change. They are not meant to support ongoing work.

Instead, build dollars allow nonprofits to expand, experiment, become more efficient, or change in some other way.

Build dollars can pay for everything from upgrading equipment, to covering a revenue gap as a nonprofit grows, to launching a new program.

(That new program, by the way, will eventually be funded by buy dollars).

Why do we distinguish between build dollars and buy dollars?

Well, if you try to build something new by redirecting money that supports ongoing work, the quality of that ongoing work might decline.

Build dollars are the best way to fund nonprofits quickly to try new things, build resilience, and boost their impact while continuing to deliver on their missions.

A build-buy distinction also helps nonprofits have clearer, more honest conversations with funders about their goals, and what sort of funding is needed to achieve them.

Sometimes you’ll hear folks talking about build dollars as change capital – large, flexible funds to reposition a nonprofit’s business model. Change capital is an important part of Full Cost, which is all the financial resources it takes to run an effective organization for the long haul.

Learn more about change capital and covering full cost with our Full Cost resources on NFF.org.

When your nonprofit should do something that costs money, but doesn’t have money to cover it, that’s an unfunded expense.

Unfunded expenses mean you use outdated software because you don’t have money to upgrade, sit in broken chairs because you don’t have money for new ones, and you work without a needed staff member because, well, you get the point.

Nonprofit leaders might have unfunded expenses and not even know it, or they don’t feel comfortable asking funders to cover these things.

Covering unfunded expenses allows nonprofits to continue working in a way that is reasonable and fair.

Unfunded expenses – and their cousin, underfunded expenses – commonly show up as overworked and underpaid staff.

Here’s a common situation: Angel, Beau, and Cam are called to do the work of four people, but there’s only enough money to pay two full salaries with benefits. The three staff are doing more than their share of work for less than their share of money.

That discrepancy is called sweat equity, and too much of it causes Cam to overwork, burn out, and ultimately leave the organization, which causes more overwork and burnout as Angel and Beau take on Cam’s work – while also spending time and effort to hire Cam’s replacement.

Not employing enough staff to do the work – or not paying living wages – is an often unfunded or underfunded expense for nonprofits.

Nonprofits and funders can address unfunded and underfunded expenses by thinking in terms of Full Cost. Full Cost shifts thinking from “How can I do more with less?” to “How can I employ enough staff and pay them all reasonable wages to do this important work?”

So Angel meets with a funder to talk about the full cost of the organization. They have too few staff now, and not enough funding to cover the work at full capacity.

(Talking about this stuff is scary, for both nonprofits and funders. We have resources on how to do that.)

The conversation goes well, and the nonprofit gets the money it needs to hire two additional folks and to run full steam ahead while paying all staff fairly.

The workload becomes more manageable, and everyone has the supplies and training they need.

Unfortunately, there are times when a funder cannot fund an organization’s full ask. And nonprofit leaders may worry about damaging the funding relationship and future opportunities by rejecting their funding. This can be an opportunity for a funder and nonprofit to talk about adjusting the committed outputs to reflect the funding provided, and provide quality outcomes that properly serve the community. (It also might be an opportunity to seek additional funding from another funder.)

How would our communities benefit from fully funded, fully staffed nonprofits? Both funders and nonprofit leaders should seek to understand what it really takes to accomplish their grantees’ goals – and be honest with one another about what that looks like.

Learn more about unfunded expenses and covering full costs with our Full Cost resources on NFF.org.