Overhead Costs: What the Numbers Don’t Tell You

Traditionally, nonprofit overhead—expenses for management, general operations, and fundraising—has been viewed negatively by donors. But emerging research and best practices are challenging that assumption and calling for a more nuanced understanding

Debunking the Overhead Myth

Nonprofit professionals have long wrestled with perceptions around overhead. For years, conventional wisdom held that low overhead equaled higher impact. But this oversimplified view ignores the reality that infrastructure, leadership, and long-term planning are essential to delivering on mission.

What Is Overhead Really?

Overhead includes administrative, management, and fundraising costs—essential expenses that support day-to-day operations. While watchdog organizations once emphasized spending ratios, the nonprofit sector now recognizes that focusing solely on overhead percentage can be misleading. The truth is that strong internal systems are not distractions from mission work. They make mission work possible. These are categories represented on section nine of a nonprofit’s 990.

The Harm of the "Low Overhead" Expectation

When donors expect overhead to stay under 15%, nonprofits feel pressure to underinvest in their own capacity. This "nonprofit starvation cycle" leads to overworked staff, outdated systems, and under-resourced programs. Ultimately, it's the community that suffers.

This mindset also discourages organizations from pursuing strategic growth. How can a nonprofit scale impact if it can’t afford to hire development staff or invest in technology? Click HERE for details on the importance of overhead for nonprofits.

Why Overhead Is a Smart Investment

Quality accounting systems, compliance protocols, professional development, and fundraising are not luxuries. They are the foundation of accountability and sustainability. Funders are starting to understand and accept this reality. Many now support capacity-building grants or accept realistic indirect cost rates. Charity evaluators like Charity Navigator are also shifting focus to transparency and outcomes.

Best Practices for Managing and Communicating Overhead

1. Track and allocate costs accurately. Ensure staff time and shared expenses are allocated based on actual use. Transparency builds trust.

2. Share your story. Help donors understand how overhead supports impact. For example, investing in a grant writer might lead to new programs or expanded services.

3. Embrace full-cost budgeting. Include true indirect costs in funding proposals and budgets. Underestimating needs leads to underperformance.

4. Align with the right funders. Seek partners who support long-term sustainability, not just program outputs.

5. Educate your board and stakeholders. Provide data and case studies that show how strategic investments behind the scenes drive better results.

Moving Forward

Donors care about impact. Nonprofits need to communicate how sound management and adequate infrastructure enable that impact. It's time to reframe overhead not as a cost to cut, but as a critical investment in mission delivery.

Cheers,

Michelle Crim, CFRE

Dynamic Development Strategies can help. We offer coaching, grant writing, and fundraising services for our nonprofit clients. We specialize in small to mid-size organizations because we understand your challenges. Please contact us for more information.

https://www.dynamicdevelopmentstrategies.com/

Dynamic Development Strategies helps small to mid-size nonprofits strengthen their operations and fundraising strategies. If you're ready to invest in your organization's capacity, let's talk.

https://www.dynamicdevelopmentstrategies.com