Magazine article The CPA Journal

Does Your Nonprofit Break Even? How to Come out Even

Magazine article The CPA Journal

Does Your Nonprofit Break Even? How to Come out Even

Article excerpt

By definition, a nonprofit is not profit motivated. Its objective is to render as much suitable service as possible while expending as few dollars as possible with the resources available to it. Ideally, the goal is to break even; revenues should equal costs. If a nonprofit generates too much of a surplus, it may not receive the same funding as last year because contributors feel their support is no longer needed. On the other hand, if it produces a deficit, it may risk survival.

Financial planning becomes a major aspect of what a nonprofit does. Costvolume-revenue (CVR) analysis, together with cost behavior information, helps nonprofit managers prepare useful planning analyses. CVR analysis deals with how revenue and costs vary with a change in service level. It looks at the effects on revenues of changes in certain factors, such as variable costs, fixed costs, prices, service level, and mix of services. By studying the relationships of costs, service volume, and revenue, management is better able to cope with many planning decisions.

Break-even analysis, an integral part of CVR analysis, determines the break-even service level. Break-even point-the financial crossover point when revenues exactly match costs-does not show up in financial reports. Nonprofit financial managers, however, find break-even point a useful measurement. It reveals which programs are self-supporting and which are subsidized.

CVR analysis tries to answer the following questions: What service level or units of service are required to break even?

How do changes in price per unit, variable costs, fixed costs, and service volume affect surplus?

How do changes in program levels and mix affect aggregate surplus or deficit?

What are some of the break-even strategies available?

Revenues for nonprofit entities are typically

grants from governments

grants from private sources

cost reimbursements and sales

membership fees

public contributions received directly or indirectly

legacies and memorials other revenue such as investment income (e.g., interest, and dividends).

For management purposes, each type of revenue is grouped into its fixed and variable parts. Fixed revenues are those that remain unchanged regardless of the level of service, such as gifts, grants, and contracts. For example in colleges, donations, gifts, and grants have no relationship to enrollment.

Variable revenues are the ones that change in proportion to the volume of activity. In colleges, tuition and fees are variable in relation to the number of students. Different nonprofit entities may have different sources of revenue: variable, fixed, or a combination of both.

Analysis of Cost Behavior

For external reporting purposes, costs are classified by function such as payroll, occupancy, and office and by programs and supporting services. But for managerial purposes, such as planning, control, and decision making, further classification of costs is desirable, e.g., by behavior. Depending on how a cost reacts or responds to changes in levels of activity, it may be viewed as variable or fixed.

This classification is made within a specified range of activity, called the "relevant range." The relevant range is the volume zone within which the behavior of variable costs, fixed costs, and prices can be predicted with reasonable accuracy.

Typical activity measures for service levels at various types of nonprofit organizations are shown in Exhibit 1.

As with a typical breakeven analysis, costs must be categorized as either variable or fixed. Simple definitions follow:

Variable Costs. These costs vary in total with changes in volume or level of activity. Examples include supplies, printing and publications, telephone, and postage and shipping.

Fixed Costs. These costs do not change in total, regardless of the volume or level of activity. …

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