The One Number Most Nonprofit Leaders Cannot Answer
Authored by Thaddaeus Hubbard, founder of BSEG Advisory, LLC in Baltimore, Maryland, and the author of Bridging the SE Gap: Master Earned Income, End Grant Dependence, and Achieve Sustainable Social Impact for Nonprofits.
Ask an executive director what it costs to serve one client. Most answer in four seconds. Then ask how they got the number. The answer is almost always the same. They took the program budget and divided it by the number of people served.
That number is wrong. In my experience, it is usually wrong by 30 to 50 percent.
Here is what the simple division leaves out. The executive director’s own time on the program. The finance staff who process the invoices. Compliance and grant reporting. Rent, insurance, and technology. The cost of raising the grant that pays for the program. The unpaid hours a program manager works because the model assumes heroics.
That is not sloppiness. It is what happens when a sector is trained to report a low cost per client and treat overhead as a moral failing.
The gap is structural, not seasonal
The Nonprofit Finance Fund surveyed 2,206 organizations in early 2025. Seventy percent said they could only charge an indirect cost rate of 10 percent or less, a rate federal guidance itself acknowledges is insufficient to run a healthy organization.
Now compare that to what health requires. The MacArthur Foundation commissioned a study of IRS Form 990 data from more than 130,000 US nonprofits and found the minimum indirect cost rate associated with financially healthy organizations was 29 percent.
Ten percent allowed. Twenty-nine percent required. That is not a bad year. That is a business model with a hole in it.
I call the hole the SE (Social Enterprise) Gap. It is the difference between the fully loaded cost to serve one client and what that client can actually pay. Grants do not close it. They rent it one year at a time.
Three things I have learned from measuring it
The true number is always higher than leadership expects, and that is good news. In a composite of workforce programs I have reviewed, an organization reported roughly $1,200 per participant. Once we allocated executive time, compliance reporting, facilities, and the fundraising cost of the contract itself, the figure landed closer to $1,800. The board’s first reaction was defensive. Their second reaction was useful. For the first time, they could evaluate a new site before signing it. A number you dislike is still a number you can manage. A number you do not have manages you.
Not everyone you serve is broke. Most organizations price as if every client has zero ability to pay. That is rarely true. Segment by ability to pay, and you usually find a group that would pay market rate for a version of what you already deliver. Employers, insurers, and adjacent institutions often sit inside your existing service footprint. Surplus from those relationships can fund the subsidy for everyone else.
Stop leading with need. Funders and agencies respond differently when you present unit costs, subsidy logic, and cash flow timing instead of a need narrative. The National Council of Nonprofits has documented how widely governments underpay the real cost of contracted services. You cannot negotiate that down if you cannot say what the real cost is.
What to do in the next 30 days
Pick one program, not the whole organization. Define the unit precisely enough that two people would count it the same way. Allocate everything, including executive time, finance, compliance, facilities, and the cost of raising the money. Estimates are fine. An honest estimate beats an elegant omission.
Divide by units delivered. Subtract what clients actually pay. Multiply by volume. That is the annual subsidy your organization is carrying.
Then ask the only question that matters. Where is that subsidy coming from, and how long can it last?
Most leaders find the answer is one grant, one contract, or one relationship. That is not sustainability. That is a countdown.
Thaddaeus Hubbard is the founder of BSEG Advisory, LLC in Baltimore, Maryland, and the author of Bridging the SE Gap: Master Earned Income, End Grant Dependence, and Achieve Sustainable Social Impact for Nonprofits. He serves as an Executive Mentor at Innovation Works and advises nonprofit and social enterprise leaders on unit economics and earned income strategy. bridgingthesegap.com