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How Do Nonprofits Manage Their Largest Expense?

best practices board finances foundation Mar 09, 2023

How do nonprofits manage their largest expense? 

     Well, before we can answer this question, we need to first clarify what is the largest expense? I can assure you, no matter what industry you're in, nonprofit or for-profit, that the single largest expense is the cost of people. Sure, you may call it “payroll” or “salaries and benefits”,  but no matter what you call it, the people are the largest cost. 

     So, today I want to share with you how we  can manage that cost. Isn’t it interesting that the single largest category of your overall expenses can also become the least managed? I've seen this play out over and over with the various churches, ministries, and nonprofits I’ve worked with over the years.  It’s the same predictable slide. As we grow over time, we add programs and people along the way. But, we don't really have a clearly defined strategy. We just pay the next person what they will agree to, or what someone in a similar role is being paid. Since good stewardship requires that we manage financial resources on purpose and with purpose I want to share my 5-step strategy for managing the cost of people.

1. Determine your percentage

     The first step is to look at our budgets and determine what percentage of the budget we can spend. Sometimes, we need to start with, “What percentage should we spend?” The answer will require doing some industry research. Then you’ll need to document your determined percentage and apply it to your own budget. These calculations will provide you with a concrete number indicating   what you'll have available to spend on this important expense. 

2. Document Your Philosophy

     The second step is to document your compensation philosophy. Your philosophy is the “true north” of how you'll handle pay and benefit decisions. For example, are you going to pay on the high end? Maybe you're a nonprofit that says, “In order to attract and retain people in our region, we have to pay what the for-profit industry is paying.”  Well, in that case, that's going to make your cost per employee higher than an average nonprofit. But you still need to make a plan for that. Or perhaps you are saying, “We're going to pay in the midpoint of what the market offers, but we're also going to offer a really flexible schedule and a better benefit package than you can find elsewhere.” Another question to ask in this philosophy step is, “How are we going to hire people?” Where will your new hire start in relation to your pay scale? You should also consider how you will pay your highest performing staff and those with long lengths of service. 

3 Design the Compensation Package

     The next step is to design the compensation package. This “package” includes both an employee’s pay and all the other benefits that are not part of their pay such as paid time off, work schedule, retirement, medical benefits, and the extent to which the employee shares cost for each. 

4. Define Compensation Ranges

      Your fourth step is to look at the compensation ranges. Make a plan that shows a table of data based on the role the person is in, not the person, but the roles in your organization. Your plan should denote the hierarchy of your positions. For each position, you’ll want to have good market research that aligns with your philosophy and establishes the minimum, maximum, and midpoint you’ll pay for each of those positions. This data will provide helpful reference points to inform your philosophy and guide your policy on paying new hires and pay increases. 

5 Implement the Process

      The fifth and final step, is both the hardest and most important. It’s time to implement what you’ve learned. Apply your percentage to your budget. Put your pay philosophy in writing. See if your philosophy is actually driving your compensation packages and pay scales in practice or whether it’s still just a theory on paper. This five step process is what I walk my clients through when managing their large expense. Your people are the most important asset to the organization, to the work you're doing, and to the future you’re building. 

     If you found this helpful, I hope you'll look into going deeper in my Financially Thriving Nonprofit course, which is about to launch.  It's a six week course which I present live and in real time. We’ll also have group coaching time, and time for application exercises, including a deeper dive into today’s topic. Registration is open now, but move fast because it's about to close. Registration is open through Friday, March 10th, 2023. Click here to register or learn more! 

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