What is overhead and why is it a bad thing, at least in the nonprofit sector?
According to “The Nonprofit Starvation Cycle” in the Stanford Social Innovation Review, the bad rap for overhead stems from funders’ unrealistic expectations about how much it costs to run a nonprofit. Because nonprofit leaders want to meet the expectations of their funders, they either spend too little or under report spending on basic business needs such as rent, utilities, furnishings, computers, and sometimes, even salaries.
This is a vicious cycle. The assumption is that high overhead rates mean your nonprofit is poorly run and not worthy of support. A donor once told me that I should not receive a salary for helping the poor. That my salary should go toward helping more people who are homeless and hungry. That’s an extreme example, but it is a sentiment shared by some donors.
Part of The Overhead Myth is that nonprofit executives are paid exorbitant salaries and benefits. The salaries of nonprofit leadership are, most often, reasonable and are divided among the three expense categories, as defined by the IRS: Administrative, Programs, Fundraising.
Exactly, what are overhead costs for nonprofit organizations? Ask two people and you’ll get three different answers. Here’s the right answer: overhead (or indirect) costs are any expenses not incurred by programming.
Examples of overhead/indirect costs are administrative and fundraising costs. Overhead is necessary to build capacity and expand programs. Without these investments in capacity, many nonprofits fall behind in technology, staff development and the ability to effectively fundraise.
Check out my previous article HERE on How to Calculate Your Overhead Rate.
In an open letter from BBB Wise Giving Alliance, GuideStar and Charity Navigator, The Nonprofit Overhead Cost Study, they outlined their concerns regarding the strict use of overhead costs as a measurement of nonprofit performance.
Their research shows overhead ratio is imprecise and often reported inaccurately.
· 37% of nonprofit organizations with private contributions of $50,000 or more reported no fundraising or special event costs on their Form 990
· Nearly 13 percent of operating public charities reported spending nothing for management and general expenses.
According to the Better Business Bureau, 35% is an acceptable overhead rate. This is a reasonable benchmark. Funders are starting to agree.
Overhead isn’t a bad aspect to nonprofit work; it’s a necessary investment in their work to support the community,
Michelle Crim, CFRE
Dynamic Development Strategies can help. We offer coaching and fundraising services for our nonprofit clients. We specialize in startup and smaller nonprofits because we understand your challenges. Please contact us for more information.