How Can Nonprofits Make the Most of Overhead Funds?
It is no secret that nonprofits struggle to make ends meet when it comes to costs that cannot be directly attributed to a specific program. These costs, referred to as “indirect” expenses, “general and administrative (G&A)” costs or “overhead,” include such outlays as salaries and employer related expenses, utilities, rent, computers, and information technology (IT). Many funders, including individual donors, are averse to funding these indirect costs, preferring to support direct program expenses: food for hungry people, medical care for the sick, and childcare for working parents. However, these services could not be delivered if it were not for the trucks that move the food, the computers used for patient records, and the electricity that powers lights and heating at the daycare center.
A study cited by Nobel (2015) showed that individual donors are averse to funding organizations with high overhead rates. “The higher the level of overhead associated with a donation to charity…the lower the percentage of participants who chose to donate to it.” Grantor agencies also eschew funding these necessary expenses. As reported by Knowlton (2016), “…only 7 percent of nonprofits report that foundations always cover the full cost of projects they fund.”
Building the infrastructure needed to properly support an organization as a whole is vital to the entity’s sustainability. In their 2007 Action Guide, Grantmakers for Effective Organizations (GEO) writes, “Inadequate infrastructure leads to inadequate organizational performance. As Sharon King, president of the F.B. Heron Foundation, put it, ‘In the long run, you can’t have strong programs in weak organizations.’” It is therefore imperative for an organization’s survival that all costs be measured and considered in accepting grants or funding contracts. When slim funding for overhead costs creates tight G & A budgets, how can nonprofits make the most of these scarce dollars?
There are myriad options available to nonprofits that can help them to make the most of tight G&A budgets, and so it is important to find the best fit for their needs, culture, and environment. Nonprofits may need to consider a blended approach to maximize their overhead funding by choosing the right mix from among these options. Any combination of approaches needs to consider both external and internal ways of achieving success. Nonprofits must consider not only external avenues of increasing unrestricted funding, but also internal solutions that can help make the most of resources already on hand. Four methods to address the challenges of slim administrative budgets are:
1. Change the unrealistic expectations of contributors.
This action alone “…could be the best way to slow or even stop the cycle [of nonprofit starvation]” (Goggins-Gregory & Howard, 2009). Organizations need to properly report actual costs and then use this data to make the case to funders to support those full costs.
2. Secure separate funding for overhead costs.
Although the amount of grant funds currently available for general operating expenditures is still somewhat limited, more and more foundations are offering grants that include full costs, and some are even awarding separate grants specifically for overhead expenses. GEO quotes a 2004 evaluation that “found that grantees that received general operating support were more likely than those that received project support to report that their funding had a ‘great’ impact on building the sustainability of their organizations.”
3. Increase board engagement
An educated and engaged board of directors can be the key for a nonprofit to find new funding and maximize currently available resources. In early 2012, The Nonprofit Research Collaborative collected data from almost 1,800 nonprofit organizations on board engagement and reported: “Survey results show organizations that have engaged board members are more likely to meet fundraising goals.” Contributions from board members need not be limited to personal financial support or time spent on board activities and fundraising efforts, but can also include donations of specialized expertise otherwise unavailable to the nonprofit.
4. Engage in internal innovation
Organizations should investigate ways to develop low-cost systems internally to wring more out of current processes to increase efficiencies. Since nonprofits must cope with slim overhead budgets, it is important to cut out inefficiency and waste at every opportunity. Andruszka (2014) explains the analysis that goes into cost containment methods: “It forces us to think concretely about what expenses are truly necessary for achieving our mission and what can be eliminated.”
A mix of these four approaches could do much for a cash-strapped organization to make best use of limited G&A funding. One approach alone won’t usually offset the number of holes that exist in nonprofit funding. Sewing up the tears here and there instead with numerous approaches can offer nonprofits more of the flexibility and scalability needed to close funding gaps. Each nonprofit’s unique mission, needs, culture and environment will dictate the best mix to enact to make the most out of G&A resources and ensure long-term sustainability for the organization to deliver its mission for years to come.
Andruszka, R. (2014). Want to increase your bottom line? Think like a nonprofit. The Muse – Advice. Retrieved from https://www.themuse.com/advice/want-to-increase-your-bottom-line-think-like-a-nonprofit
Goggins-Gregory, A., & Howard, D. (2009). The nonprofit starvation cycle. Stanford Social Innovation Review – Stanford Nonprofit Management Institute, 1-2.
Grant Makers for Effective Organizations (2007). GEO Action Guide – General Operating Support, 11, 14, 21.
Knowlton, C. (2016). Why funding overhead costs is not the real issue: the case to cover full costs. Nonprofit Quarterly, 2.
Nobel, C. (2015). Donors are turned off by overhead costs. Here’s what charities can do. Harvard Business School: Working Knowledge, 2.
Nonprofit Research Collaborative (2012). Special report: engaging board members in fundraising. Retrieved from http://www.npresearch.org/pdf/earlier-reports/NRC-Board-Engagement-Report-Sept-2012.pdf
Anna is the Comptroller at Critical Path Institute, a nonprofit organization in Tucson, Arizona. She received her undergraduate degree, a Bachelor’s of Science in Business Administration, at the University of Arizona, graduating Magna Cum Laude. She has been a CPA since 1996, and recently received her Masters of Nonprofit Leadership and Management from Arizona State University, graduating Suma Cum Laude in December of 2016. She makes her home in Tucson.