As an employee of a nonprofit organization, have you ever felt constrained, either by budgets or expectations, on how much you’re allowed to spend on overhead? Do you know someone – a Board member, donor, co-worker, etc. – who consistently seems to be the perpetrator of your constrained feelings? If so, you’re not alone. This feeling is common within nonprofit organizations and part of an Overhead Myth that has become pervasive in the nonprofit industry.

What is “overhead” and the Overhead Myth?
The Overhead Myth, simply put, is the common misconception that the less overhead an Organization has, the better the Organization. So which expenses are considered “overhead”?

Overhead consists of general and administrative expenses – things necessary to run an organization, such as office supplies, postage, telephone and rent. In addition, overhead includes a portion of many employees’ salaries, including the Executive Director’s salary, and likely all of your Finance Director’s salary.

Overhead also consists of fundraising expenses – costs necessary to grow your grants and contributions, which then allows you to expand programs and overall community impact. We typically think of expenses to put on your annual event, but fundraising can be much more, including the Development Director’s salary and other strategic planning and grant writing costs.

Everything else is program expense. Many donors request that their donations go entirely toward programs. Herein lies the “Starvation Cycle”:

  1. Funders have unrealistic expectations about how much it costs to run a nonprofit.
  2. This creates pressure to conform to funders’ unrealistic expectations.
  3. Fork in the road – Nonprofits either 1) spend too little on overhead or 2) underreport expenditures.
  4. Step 3 then perpetuates Step 1.
To make matters worse, this cycle shows itself most in times of economic recession, precisely when nonprofits are meant to step-in and fill the gaps. It can be disguised when things are going great and contributions are rolling in. But when that ends, and there is no infrastructure or reserves in place, what is left to do but start cutting costs?

Moving the Needle on the Overhead Myth
There aren’t any easy overnight answers to address this challenge, but an important first step is to start actively changing the discussion from overhead to something else! Help your funders shift their focus from costs to outcomes. How can you do this?

One option is to add a cover letter to the copy of your financial statements or Form 990 that you post on your website describing what you’re doing, what your plans are for the future, and why overhead costs are important to achieving success. And if someone asks about your ratios, DON’T just jump to answering it. Answering perpetuates the problem! Have a plan in place to refocus their attention to your organization’s outcomes and success stories.

You need to understand your true costs, or desirable true costs, if your organization has been starved for a while.  Educate individuals within your organization and then begin educating your donors. Little by little, your actions will help shift the focus away from stale ratios that tell so little about the work you’re doing and toward the amazing achievements your organization is helping facilitate throughout your community.