Budgets without overheads are an invitation to disaster

Staff should understand the value of the services they use, writes Valerie Morton

Valerie Morton
Valerie Morton

Q. Should overheads be included on all our budgets?

A. Some readers might be turning the page already in reaction to this question because they see the issue of overheads as one that excites only finance directors on a slack day. Others will immediately see it as being all about 'full cost recovery' and will already be thinking of timesheets and cross-charging, or arguing the validity of fixed nominal overhead charges on bids.

Let me see if I can bring the subject to life. Imagine your 21-year-old son has started his first job and wants to live at home again. If you have lots of money and you're not bothered about teaching him the financial facts of life, he is probably getting away without paying rent or making any other contribution to household expenditure. After all, the house is still there, you would be cooking meals anyway and the heating won't be on for any longer, will it?

Incremental costs

An alternative view is that, if your son was not living there, you could buy a smaller house, or if he chooses to live with you he should contribute to the costs. After all, if he was living anywhere else he would be paying rent. Household expenditure goes up with each additional person living there - think of food and electricity. Believe me, I've checked: one long shower a day adds 10 per cent to the water bill.

Finally, consider this: even if the incremental costs of having your dear son back at home were small, you might find he wants one of his friends to stay; then a couple of your nieces and nephews arrive on the doorstep, and then your best friend needs a bolthole for a few months. With all of that going on, you would need to start employing a cleaner or sending the laundry out to be done.

Increase in infrastructure

So back to charities: the answer to the question is yes. It is a pain, but it needs to be done. Staff should understand the value of the services they use. If you didn't have an HR department, you would need external advice and it would cost money. There would be nobody to process invoices without the finance department and nobody to create the strategy without the chief executive. The extra support cost of one new member of staff might not seem like much, but if every department added 10 per cent to its headcount, the infrastructure would have to increase and then someone would have to pay for that.

Most importantly, when charities are looking at the business case for a new area of fundraising, or when they are tendering for a contract, a lack of understanding of the true costs involved can lead to financial disaster.

So bite the bullet, insist on the inclusion of overheads and bask in the warm glow of having taught your staff one of life's hard lessons.

Valerie Morton is a trainer, fundraiser and consultant

Send your questions to Valerie.Morton@haymarket.com

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