A Program's True Cost

By: Andrew S. Lang, FASAE

The Society of Nuclear Medicine's improved cost analysis makes for an improved bottom line.

Recently, while teaching a course on additional revenue generation to a room of CPAs, I asked my favorite question: "Has anyone come up with a new or improved method of earning additional net income?" Vincent A. Pistilli, chief financial officer of the Society of Nuclear Medicine, raised his hand.

SNM has about 18,000 members and 43 staff. With a budget of $11 million, it is what I would call a midsized nonprofit. Pistilli's story begins a few years ago, when an unhappy board member was questioning whether that $11 million was being well spent.

The question came up as the board was going through the strategic planning process. The board member wanted to know what each of the elements of the strategic plan was actually costing SNM. The association's CEO, Virginia Pappas, CAE, asked Pistilli to develop a document that would link the organization's programs directly to the strategic plan.

Pistilli set out to find each program's "fully loaded cost"—direct program costs, direct labor, and overhead. His investigation revealed that financial reports for SNM programs, both large and small, had reflected only those costs that could be traced directly to the program.

To get true cost figures, Pistilli first developed accurate, all-inclusive overhead cost pools and a sound method for distributing these costs. He also developed a logical and accurate method for distributing direct labor costs. By combining these with direct program costs, he created a much more accurate expense picture for each program.

Pistilli's final report included a description of each program, the department responsible for it, its total revenue, and its fully loaded cost. The document provided a much different view of where SNM was and was not netting income.

Previously, Pistilli says, many of SNM's major programs were thought to be making money. Once fully loaded costs were applied, it was clear that they were losing money. Even programs as significant as the major journal were running at a loss. This knowledge prompted Pappas to begin discussions about which programs could be merged, which could be cut or scaled differently, whether opportunities for revenue were available, and whether a program's costs could be reduced without blunting its effectiveness.

One place where savings could be made involved SNM's management of a group of smaller associations. Based on the new analysis, it became clear that these organizations were paying only about 23 percent of the cost of services provided to them. This area of business quickly emerged as one the association needed to change as soon as possible.

For programs that were losing money but that SNM wanted to continue, the association began doing more to assess market pricing. It increased prices in areas where SNM was lagging behind the market. Where it could not increase prices, SNM decided to either accept the loss or reduce program costs without diminishing effectiveness.

Ending programs inevitably means cutting staff, and SNM initially found it needed to take the hard step of letting nine people go. (Happily, after refocusing its efforts, it brought on three new people, reducing the net loss to six.) The bottom line: SNM went from annual losses that had been averaging $360,000 to surpluses averaging $831,000.

This improvement in cost analysis and reporting has had an ancillary benefit, Pistilli says.

"With this new insight, finance has been put on page one of the board's conversations," he says. "It is not as high up as the mission or the members, but now the leaders are asking, 'What's this going to cost us, and can we achieve a return on investment?'"

Board members and senior staff looking deeply into the financial implications of each potential significant new investment or direction—this is undoubtedly something every association can financially benefit from.

Andrew S. Lang, CPA, FASAE, is with LangCPA in Potomac, Maryland. Email: [email protected]

Andrew S. Lang, FASAE