Program Expense Ratio
Program Expense Ratio is the tool to measure Non-profit organization spending on program activities verse the supporting service. This ratio can be calculated by dividing the expense of program service by its absolute costs. It measures the amount of cash that an organization spends on the key mission instead of managerial expenses.
Program Expenses are the expense related to the main mission of the entities or project. Non-Profit Organizations usually make a project with a specific objective such as training, support a group of people, help children or any minority group of people, and so on. All expenses to support such kind of activities are considered as program expenses.
The general expenses such as rental, management salary, utilities are classified as general expenses. These expenses are part of the total expense and will be included in the ratio calculation.
It is almost impossible for the entities to focus purely on the program expense, as they need to spend on other expenses in order to ensure the entities can survive.
Program Expense Ratio Formula
Program Expense Ratio = Total Program Expense /Total Expense
Program Expense Example
ABC is a non-profit organization, during the year 202X, they operate one project to support a group of minority people in the rural areas. Based on report, there are expenses as following:
|– Per Diem||10,000|
|– Training Cost||80,000|
|– Consultant Fee||35,000|
|– Other activities||50,000|
|Total Project Expense||190,000|
|Head Office Expense:|
|– Other Expenses||20,000|
|Total Head office Expense||140,000|
|Total ABC Expenses||330,000|
Program Expense Ratio = 190,000/330,000 = 57.5%
It means that 57.5% of the organization’s expenses are paid for the project’s objective.
Important of Program Expense Ratio
- Measure how effective the organization uses donors’ fund. This ratio will show that how the entities use the fund, donors want to see the impact of the fund on the program’s objective rather than using it to support the organization.
- The key feature to ask for more funds: management can show this ratio to donors during fundraising events. A good ratio will help to get more funds from donors.
- To alert the management to focus on activities: management needs to keep an eye on this ratio. They need to be creative to bring results to society rather than enjoy donor’s money.
- To gain trust from donors: It is very important to gain trust from donors otherwise they will not support entities in the future. And it will impact to entities’ going concern due to lack of fund to operate.