"Cost per Beneficiary" and What it Means
A key criteria for a nonprofit to be rated as a "BUY" from NPI is the ability to correlate financial input to a nonprofit with programs delivered by the organization. Being able to make this connection is important to allow donors to understand how their donations translate to services and impact. One way to make this connection is to calculate the all-in cost for a nonprofit to deliver services to its beneficiaries. This number ("cost per beneficiary") is relevant within the context of the quality and impact of those services.
What Does this Mean? Cost per beneficiary is not a metric that can be used to compare directly across different nonprofits. For example, two nonprofits providing afterschool programs with the same cost per beneficiary may provide a very different depth of service offering. However, for an individual nonprofit, it is important for a donor to be able to understand how much it costs the nonprofit to deliver its specific services and generate its specific impact.
Calculation. Cost per Beneficiary = (Total Cost to Deliver Services) / (Number of Beneficiaries Served), where time periods for numerator and denominator must match.
Cost to Deliver Services. At a high level, the cost for a nonprofit to deliver services each year is the total expenses of the organization. Nonprofits are required to provide this information in their Form 990 filed with the IRS each year. This basic calculation does not exclude overhead expenses. Categorizations of expenses vary greatly between nonprofits and all expenses are relevant to understanding the financial input required for a nonprofit to deliver services.
Number of Beneficiaries Served. While the IRS does not require nonprofits to disclose how many beneficiaries are reached by the organization's services, this data is of paramount importance. Because this data is typically self-reported and unaudited, several factors must be used to assess the reliability of the data. For example, does the organization disclose how the data is collected? Does the nonprofit disclose the figures in published documents each year? Are numbers consistent across annual reports, the nonprofit's website and other documents?
Complexities in Calculating Cost per Beneficiary. Many unique circumstances require additional information and analysis to calculate a meaningful cost per beneficiary number. A few complexities that we have encountered include:
- Nonprofits with Separately Reporting Affiliates. Some larger nonprofits are structured as multiple entities, with a parent organization and affiliate organizations filing separately with the IRS. While there are valid reasons for structuring an organization like this, detailed disclosures are required to understand how the impact of the organization relates to the financial input to the parent vs. affiliates.
- Multiple Programs Provided. Many nonprofits deliver a variety of programs or operate in several different countries. If this is the case, in order to calculate cost per beneficiary, the nonprofit must disclose how much funding is spent on each program and how many beneficiaries each program serves. Also, because the mix of services provided by a nonprofit may change over time, it is important to track cost per beneficiary on a per program basis.
- Program Revenues Generated by Beneficiaries. In some cases, beneficiaries of a nonprofit generate significant income for the organization. For example, Delancey Street Foundation's vocational training program participants are directly responsible for income generated by the nonprofit's social enterprises. This can significantly offset the numerator of the cost per beneficiary calculation.