How much do you spend on overhead?
Nonprofits depend on sustainable revenue sources to ensure their mission is fulfilled. Therefore, when a funder requests administrative costs lower than what is needed, or state they will not fund administrative costs, organizations make it work. The Overhead Project speaks to the difficulties that organizations can face when they do this:
"Community nonprofits typically have overhead that is much too low. They often underspend on essential, basic costs such as rent and insurance. They can't afford adequate accounting staff, good technology, or human resources management. They often try to compensate for under-funding of programs and systems by having too few staff or paying staff poorly. The consequences of under-investing in overhead are financial weakness and inefficiencies at the nonprofit, and as a result, fewer services or lower quality services."
Most in the nonprofit sector have heard the question, “How much of my donation will go toward programs?” This may be a triggering question, but with good reason. There are many implications that this question brings, but when it is asked by major funders it causes a ripple effect within the nonprofit sector.
By adhering to these expectations, nonprofits are supporting false expectations in other donors, potential board members, staff and the public. Goggins-Gregory and Howard in The Nonprofit Starvation Cycle make note, “Not only do funders and donors have unrealistic expectations, but the nonprofit sector itself also promotes unhealthy overhead levels.” Each of these stakeholders then perpetuate the idea that nonprofits use a small fraction of income to run properly.
Nonprofits need funding to carry out their mission, but by conforming to funder expectations, nonprofits may spend less on themselves, which will not help them serve those that need help. One important finding regarding funder expectations includes how they contribute to the nonprofit starvation cycle; a pattern of continuous actions that include unrealistic donor expectations, pressure to be successful and misleading reporting of expenses. These factors lead to nonprofits neglecting overhead needs.
What can be done to put an end to the overhead expectation?
The good news is that every stakeholder in the nonprofit sector can play a part in breaking the low overhead expectation. The moment that leaders in the sector let go of “standard practice,” the opportunity to make improvements to the funding process becomes possible.
- Encourage honest discussion with grantees and come to an agreed upon definition of overhead.
- Support organizations that have general operating funds and commit to paying more for administrative and fundraising expenses.
- Instead of focusing on income and expense ratios, donors should ask about the scale of the organization’s goal, how they are measuring their goal progress, and what it would take to reach that goal.
- Communicate results and success through stories and words, do not focus so much on numbers to show success.
- Prioritize infrastructure and overhead needs all throughout the organization so everyone involved understands the needs and understands its role in completing the mission.
- Take opportunities to normalize overhead and be a part of educating the public on the importance of it.
The nonprofit sector has high standards set by funders and the public, including the expectation to keep overhead spending low. Because of this, nonprofits have been stuck in a cycle of starvation that can be a detriment to the growth and success of an organization. It is important for all stakeholders involved to be aware that overhead is a necessary part of a nonprofit’s operation. The first step is for funders and grantees to create a more honest and collaborative relationship with each other.
Shelbee Axsom-Anderson is a graduate of the Master of Nonprofit Leadership and Management program at Arizona State University. Originally from Elkhart, Indiana, she is now a proud Michigander living in Belmont with her husband and two pets and is expecting their first child. Shelbee studied sociology and public and nonprofit management for her undergraduate degree. She has now been a part of the nonprofit sector as a volunteer, board member and employee and has enjoyed every aspect of the experience. She looks forward to continuing her journey as a future leader.