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February 2015:

Industry Perspective: Nonprofit Overhead: The Legend and the Myth

By Kathleen Swanson and Ande Kolp

February 3, 2015

Posted in: Community Service

For years, some funders and nonprofits have held to the belief that an organization with low overhead was an efficiently run, solid organization. This notion seemed to become more widely accepted during the recession years when foundations and other funders were faced with less money to distribute and determined that an organization’s overhead was a good measure of how much “bang for the buck” a funder would get for its contribution.

A statistic provided in “The Overhead Myth: What’s All the Fuss About?” (www.qgiv.com/blog/the-overhead-myth), by Abby Jarvis, noted that nonprofits that allocated more than 25% of their funding toward infrastructure often faced increased scrutiny and even denial of funding when competing for grants against nonprofits with less overhead.

‘Overhead’ Defined

What is “overhead,” anyway? How does it affect nonprofits, and why do people care about it?

Generally speaking, overhead expenses are those budget line items that are spent on mortgage/rent, administrative salaries and related costs, and bills incurred through normal business operations. A nonprofit’s “overhead ratio,” which is an indicator that many funders use in determining their contributions, refers to the amount of money a nonprofit spends to fulfill its mission (a.k.a., direct services) versus the amount of money spent on overhead.

All businesses have overhead expenses, but is less really “better”?

The Consequences of Imbalance

Nonprofits that limit their overhead to the extent that they do not have the resources to conduct effective work run the risk of failing to fulfill their missions and thus failing to meet the needs of those they strive to serve. A lack of overhead can place an organization in a situation where it does not have the funds to sustain operations, but also does not have the person-power to seek and obtain life-sustaining funding sources.

Organizations in this position face a slow, agonizing and steady demise unless they can find the right balance of spending once again.

Conversely, organizations with too much overhead may not be viewed as mission-centric, and may jeopardize their 501(c)(3) status with the Internal Revenue Service (IRS), which has become much more interested in collecting and analyzing nonprofits’ financial compositions in recent years.

A nonprofit organization’s IRS 990 form requires the organization to submit its financial information, as well as anecdotal information pertaining to processes used to determine executive compensation, actual amounts of executives’ compensation packages and the amount of money spent on fundraising efforts, including amounts of actual funds raised.

Only Part of the Equation

According to an article published by Guidestar (“Charities Urged to Crush Overhead Myth and Take Actions Toward an Overhead Solution”), most experts agree that the overhead ratio of an organization is indeed important when used as one indicator of an organization’s health and effectiveness. Equally important, however, are other metrics of an organization such as the number of people served, the success of an organization’s efforts/results of nonprofit efforts, a nonprofit’s leadership, its transparency and its ability to effect a positive change in the community.

An important movement is gaining momentum to finally dispel the myth about nonprofit overhead and educate nonprofits, donors and funders alike on the importance of an organization’s investment in its infrastructure and systems to improve and have the ability to serve.

Professional Assistance

Having healthy overhead is necessary for the sustainability and growth of an organization, but finding and obtaining the funds to create this critical balance is often not easy. Nonprofits often face the dilemma of carving out money in their budgets to promote their mission, vision and the positive impact they have on the community that they serve.

They tend to identify their stakeholders as the people they serve, their families, their board of directors, their employees and sometimes their vendors. They ask the same group over and over for financial support. Donor fatigue sets in for these beleaguered few, and the nonprofit becomes uncomfortable with the “asks” and abandons its efforts.

When this occurs, it may be time to call in the help of a fundraising professional to consult with the organization. Some areas that should be addressed are as follows.

• The clear articulation of mission, vision and services in all printed and online materials

• Strong social media platforms that have frequent updates

• Regular communication to a robust database in the form of an e-mailed newsletter, blasts about successes and stories of need, as well as an annual report

• A web site that is well designed, frequently updated, tells the stories of the nonprofit and identifies donors and the reasons they give to the organization

• A well-planned calendar of events and themes that are friend-raising as well as fundraising

• Frequent asks for time, talent and treasure from stakeholders and from the community in which it serves, including businesses, schools and colleges, government and foundations

• Ease in making contributions through a web site, e-mail or a contact person within the nonprofit

• A well-run process for acknowledging donations and other gifts that help donors feel connected to the organization

While this list is not exhaustive, a fundraising professional may help prioritize the goals in this area and will help create the capacity within the organization to implement the goals.

Having a consultancy relationship allows for a smaller investment than having an employee for this function and allows for getting best-practice information from someone who has many opportunities to learn about current practice from other professionals and clients.

Do not fall into the overhead myth trap. By consistently communicating your mission, vision, successes and needs to your community, you will influence how your nonprofit is perceived, valued and supported.

Kathleen Swanson, J.D., is president of Swanson Consulting Inc., a nonprofit management consulting firm. Ande Kolp is president of the board of the Association of Community Services of Howard County. She is also the executive director of Compass Inc., a nonprofit organization that provides residential and employment supports to individuals with intellectual and developmental disabilities. They can be reached at kathleenk.swanson@gmail.com and akolp@compassmaryland.org, respectively.

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