(Photo by Flickr user song zhen, used via a Creative Commons license)
Let’s talk about nonprofit overhead.
I’ve seen a lot of chatter about the topic lately, because there are a lot of well-intentioned folks exploring their options for making an impactful donation in the wake of Hurricane Harvey. I really love that people want to help, but I also hate that overhead is a part of the conversation.
There are a lot of ways to evaluate a nonprofit and overhead should never be at the top of that list.
For those of you who are unfamiliar with overhead, a quick overview: A popular evaluation tool for nonprofits is the percentage of expenses that go towards administrative and fundraising costs (aka costs that aren’t directly related to the service that nonprofit provides). Nonprofits that have overhead costs of 25 percent or more are often considered unworthy of philanthropic support, while those with overhead costs under 10 percent are considered to be incredibly successful.
It’s entirely possible that you’re now thinking, “Well, of course, nonprofits SHOULD limit their overhead costs.” And you’d be partially correct: Nonprofits shouldn’t spend money just to spend money.
For some organizations, any staff time is overhead.
But, on the other hand, nonprofits often hinder their own success because they won’t (or can’t) invest in infrastructure that supports them in achieving their missions. Check out Dan Pallotta’s excellent TED Talk on the topic, “The way we think about charity is dead wrong.”
The organization where I work, Council for Relationships (CFR), provides therapy services. We don’t provide any physical items to our clients: no school supplies for youth going back to school, no housing for folks experiencing homelessness, no food for the hungry. A quick glance at our expense sheet would show that everything could be considered overhead (even though some are direct costs): staff salary and benefits, rent, utilities, printing, technology, postage, advertisements. For some organizations, any staff time is overhead.
From our Partners
Naturally, this creates a challenge for me when it comes to fundraising. Some funders prefer to fund only specific projects or programs and not allow for any overhead. Some will fund staff time, but only 50 percent or less of the overall staff time required for your program. Or, staff time is included but technology, rent, and other tools are NOT covered.
It’s like putting together a giant jigsaw puzzle to find funding for an entire organization. The delightful nonprofit professional and blogger Vu Le provides an excellent example of this here.
As a result, fundraising involves a lot of education. You have to explain to donors not just what your organization or program does, but WHY it is important to fund more than a small piece of the puzzle. For example:
“It’s fantastic that you feel so strongly about supporting housing for homeless LGBTQ youth, and we’re honored that you are considering a donation to our program. If you choose to direct your funds only to rent and utilities, we won’t immediately be able to serve more youth. We will have to find additional funding to cover staff time for an extra counselor who will take on the new caseload, which may take several months. If, however, you would consider providing funding for the project as a whole, we would be able to immediately serve more young people. Here’s a breakdown of the expenses.”
Luckily, CFR has many enlightened funders who provide us with unrestricted support. But what happens when a nonprofit can’t find full funding for overhead? As these organizations grow, their administrative systems don’t grow with them. They stay lean. I’ve seen a lot of this first or second hand over the years:
- A 40-year-old nonprofit with over 400 employees that employs only one human resources staff person. One. For 400 employees.
- Folks with specialized training and a master’s degree earning an entry level salary.
- Nonprofits that are run out of the founder’s kitchen or living room.
- And, finally, my all-time favorite nonprofit conundrum: We can’t expand without more funding. There isn’t space in the budget to hire an extra fundraiser, so we need to raise funds to cover a second salary. But the current fundraiser is already so over extended that they’re unable to raise more funds.
Nonprofits and their staff are constantly on their grind. They hustle. They make do with less. Their staff is frequently burnt out. And, despite the odds, they still achieve their missions: kids go back to school with full backpacks, housing is provided for the homeless and food for the hungry.
Imagine how much more they could achieve if nonprofits could invest in efficiency building infrastructure like their for-profit counterparts do.
There are some truly wonderful funders out there that willingly provide unrestricted gifts to support general operations, and many more are making changes to their processes to be more inclusive of the needs of nonprofits. It’s encouraging to me and my fellow fundraisers — they’re finally getting it! Which brings me back to those well-intentioned folks who are seeking recommendations based on overhead: Please, for the love of all that is good, don’t do it. Don’t base your giving decisions on overhead.
Instead, you should:
- Check out the nonprofit’s annual report or website — Do they have client testimonials that talk about the work they’re doing first hand? Do you know anyone who has benefitted from their services you can talk to?
- See the nonprofit’s work in real time — Sign up to volunteer. Stop in to tour the facility. Sit in on a class or workshop. Get a hands-on feel for what they’re doing day in and day out.
- Take a look at the outcomes — Is the nonprofit doing what they set out to do? Are there still folks that need their services that haven’t been reached yet? Are they upfront about any challenges they’ve faced?
- Look at the board and key staff members for the organization — Do they reflect the population served? For example, does the organization serve female-identifying individuals but employ only males?
- Talk to someone who works there or is on their board — Ask why they do what they do, what drew them to the organization, how they feel about the work they do.
There’s so much great work being done, and so many deserving organizations out there providing needed services. Don’t let overhead stop you from championing the causes and nonprofits that are important to you.