Have you ever had a donor question why your nonprofit spends so much on salaries? Or have you ever had to report on fundraising and administrative costs, keeping them below that magical 20% mark?
Nonprofits are all too familiar with the issue of donors and funders raising an eyebrow when we ask for funds for indirect costs or, as it’s more commonly called, overhead. Overhead expenses can include finance staff, fundraising, technology, office space, and human resources.
It’s undeniable that nonprofits- much like any other business- need these overhead expenses in order to operate. These are not extraneous, but rather a core part of running a functioning business.
And yet, the more nonprofits invest in the very infrastructure needed to operate, the less funding organizations receive. Donors and funders are averse to organizations with high overhead, defined as more than 20% of the operating budget.
This has been a frustrating challenge for many of us in the sector, but what can we do about it?
Here’s what you can expect to take away from this episode…
⦿ How donors came to believe overhead is a measure of nonprofit efficiency
⦿ How is overhead related to organizational outcomes
⦿ How to determine the optimal overhead percentage for your nonprofit
SNEAK PEEK AT THE EPISODE…
⦿ [3:20] With the growth of our sector came the need for donors and the general public to determine which organizations were effective and which weren’t.
⦿ [5:14] Unfortunately, this logic has some crucial errors because, as it turns out, if nonprofits do not invest in overhead, the infrastructure of the nonprofit falls apart, and the organization’s programs suffer consequently.
⦿ [7:53] The reliance on the strategies of low pay, make do, and do without have resulted in what we now call the nonprofit starvation cycle.
⦿ [10:20] Based on years of data both empirical and anecdotal, it’s clear that this 20% or even 25% ceiling on overhead is hurting nonprofits. So, the next question becomes, is more overhead always better?
⦿ [11:36] So this means too little and too much overhead results in negative outcomes for the nonprofit and the community.
⦿ [14:57] For these arts and cultural nonprofits in this study, they found that the optimal level was much higher than the recommended 20-25%.
⦿ [18:08] Rather than starting with an overhead percentage in mind, and using that value to guide our decision making, these studies point to a different way of approaching this problem.
⦿ [20:18] With this in mind, we can start talking to donors and funders about what our needs really are and how they can help the organization increase its capacity so that together, we can have a greater impact.
⦿ [21:50] On the next episode, we are going to talk about some of the studies that investigate how nonprofits can communicate overhead spending such that donors and funders become less reluctant to fund such costs.
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LINKS MENTIONED IN THIS EPISODE:
⦿ Article: Anatomy of the Nonprofit Starvation Cycle: An Analysis of Falling Overhead Ratios in the Nonprofit Sector
⦿ Article: The Nonprofit Starvation Cycle: Does Overhead Spending Really Impact Program Outcomes?
⦿ Article: The Demise of the Overhead Myth: Administrative Capacity and Financial Sustainability in Nonprofit Nursing Homes
⦿ Episode 17: The impact of financial management on nonprofit survivability with Dr. Young Joo Park
