The strategic value of a shared understanding of costs

Abstract

Purpose

To make resource‐related decisions in a way that maximizes an organization's effectiveness and promotes its mission, nonprofit leaders need to have a clear picture of the full costs of operating their programs and services.

Design/methodology/approach

The authors studied individual nonprofits and confirmed their findings by interviewing their executives.

Findings

While most nonprofits have a good understanding of the direct costs incurred by their programs, many don't account for indirect costs. Full cost data can provide invaluable input to decisions about how to allocate resources among programs, whether to expand into a new location, and what level of funding is required to sustain the organization's operations.

Research limitations/implications

Larger studies are needed to confirm whether nonprofit executives conclude that investing in more accurate cost accounting provides a substantial payoff.

Practical implications

Resource‐allocation decisions based on accurate cost data present nonprofit executives with their best opportunity to concentrate resources on activities that will effectively achieve their organizations’ goals.

Original/value

Corporate executives who volunteer to help nonprofits need to be aware that the financial data needed for strategic decision making often isn't available. Moreover the culture of the nonprofit sector resists adopting accounting systems that measure true costs.

Citation

Colby, S.J. and Rubin, A. (2005), "The strategic value of a shared understanding of costs", Strategy & Leadership, Vol. 33 No. 2, pp. 27-32. https://doi.org/10.1108/10878570510586829