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Why your charity needs full cost recovery

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Last editedOct 20222 min read

Twenty years ago, the UK government declared that charities and non-profit organisations need not subsidise their overheads. In practice, this means charities are able to recover more of their overheads and ensure they are more financially secure and can do their good work more effectively.

This is full cost recovery (FCR) in a nutshell. It’s essential for all non-profits to ensure they are getting the most they can out of funding grants. But there is a misconception that FCR can be too complicated to be worthwhile, putting some charities off applying for it.

The reason the protocol exists in the first place is to ensure that charities break even, since they don’t generate profit in the traditional sense. So, if you work for a non-profit company and are unsure how to apply full cost recovery to your next grant, read on.

What is FCR?

FCR means getting charitable projects funded for the complete cost of the project, not just the direct costs but the overheads too. As overheads can be difficult to attribute to specific projects, it’s important to be acutely aware of your overheads.

Identifying direct costs and overhead costs

The first step is to review your cost base and identify which costs are overheads and which are direct costs. Direct project costs include all costs related to a project such as salaries and equipment costs, whereas overheads are often more administrative costs such as legal fees, rent and utilities.

Of course, you might have financial and administrative costs to deal with, which need to be accounted for and recovered. Costing your overheads allows you to see what you need from your funding to break even and build greater financial sustainability for the future.

Calculating overheads for FCR

Calculating overall overhead costs can be quite simple if there’s only one project to account for, but with multiple projects it becomes a lot trickier.

Overheads should be shared between projects on a reasonable basis, commonly based on direct project expenditure, the number of staff members working on each project, the premises used for each project and the number of service users or beneficiaries.

Do you need help?

You might need an accountant to help you achieve this or at the very least, need to invest in some professional accounting software to help you track real-time costs and allocate overheads accurately.

Never try not to make any claims that are too bold, though. For example, if half of a paid employee’s time is spent doing something that relates directly to a project, treat the cost of that time as a direct cost.

It’s something you’ll get better at the more you do it. You’ll find that the added transparency offered by software not only cuts overheads in the first place, but also puts you in a far better position competitively.

FCR for charities – is it worth it?

If you are a non-profit organisation operating today in the UK, you simply cannot afford not to apply FCR to your grants.

Thankfully, because of accounting software like Xero, a lot of the hard work can be done for you, but still always make sure to check the results make sense before pressing on. Also, don’t hide your real costs to give yourself more chances of funding, because those costs will come back to bite you and could end up sinking your project.

Finally, always keep it as simple as possible, particularly if the numbers are quite small. The simpler it is, the less work the potential investors must do, and the more likely they are to fund you and your important work.

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