Howard Chi, Chief Operating and Financial Officer San Francisco SPCA and Board member Zuckerberg San Francisco General Hospital Foundation.
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The percentage of expenses that a nonprofit spends on administrative and fundraising costs are considered its overhead costs.
If we take a detailed look at what constitutes as an administrative expense, we will discover they are investments made in infrastructure and operations. For example, all the staff in accounting and human resource departments, the information technologies they use in those departments, governing board expenses, management systems and annual report production are all considered administrative expenses.
When it comes to fundraising expenses, these typically include any process of acquiring funds, time or materials from potential donors, including expenses incurred during the process. They also include the time dedicated by the staff for donor development, maintenance of the donor mailing list, direct mail expenses, executing fundraisers, fees when using a fundraising consulting firm, etc.
Both administrative and fundraising expenses are often not incurred in the same proportion and are both essential to the sustainability of a nonprofit organization.
The desirability of having low administrative costs is an unfortunate myth that continues to circulate within the nonprofit industry. This dangerous belief has led numerous nonprofits to under-invest in their administrative processes. This, in turn, affects how well an organization can perform and often compromises its chance for long-term sustainability.
(Mis)Understanding Overhead
While some grantmakers and donors continue to believe in the necessity of maintaining low overhead costs, many are starting to shift their way of thinking.
Changing Views
Gradually but surely, the belief in the negative nature of overhead is changing. One vital reason behind this change is that increasingly more people are realizing that the effectiveness of a nonprofit is directly related to how well its overhead costs are met. With an overhead too low, there is cause for concern. A charity cannot operate cost-free, which is why potential donors should be focusing on how effective it is and the impact it is creating versus its overhead costs.
All Nonprofits Are Not Created Equal
Comparatively, two different nonprofits might have similar missions but could vastly differ in terms of their infrastructure. That includes accounting, human resources, fundraising, physical plant and other elements that help an organization execute its mission and carry out its programs. Having a unique business model would mean the organizations would also have variable operational strengths and weaknesses. Thus, they should have an overhead percentage tailored for them.
With Infrastructure Inadequacy Comes Organizational Ineffectiveness
Deficiencies in the organizational infrastructure will be translated into inefficiencies at the operational level. For instance, imagine a nonprofit that aims to support the livelihood of struggling artists. Implementing a CRM software that catalogs donors would add efficiencies for the nonprofit to cultivate relationships. As a result, the organization may receive increased timely contributions. But to keep overhead low, this nonprofit may choose not to in invest in the CRM and, therefore, would not gain the added benefit.
Staffing Deficiencies
Often, to save on administrative and overhead costs, organizations understaff and don’t hire the positions they need. Poorly staffed organizations may find themselves putting out too many fires and being overworked with a high level of burnout. Due to staffing deficiencies, for example, everyone may be reporting directly to the CEO. Consequently, the CEO would have little time to consider long-term strategic planning, relationship building and growing the business if managing day-to-day activities.
Salary Insufficiency And Unqualified Staff
Insufficient funds dedicated to supporting overhead costs can affect every aspect of a nonprofit organization. For example, they may not be able to pay competitive salaries and thus cannot hire qualified individuals. Consequently, their subsequent hires may lack the expertise and experience necessary to fulfill the organization’s objectives.
A nonprofit may also not have allocated sufficient funds to invest in staff training. As a result, they are harming their value to stakeholders and closing a viable avenue that could help them groom future leaders.
There are several links between program quality and organizational capacity. Too little overhead is inimical to outcomes because it deprives nonprofits of resources critical for their capacity-building need.
Implications
Under-calculation of overhead costs reaffirms the misconceptions most funders and grantmakers have on this subject. Many nonprofits realize that their donors won’t fund operational costs and only programs/services, so they deliberately report a much lower figure for overhead. As nonprofit leaders and advocates, it is our duty to our constituents to dispel this myth. If we do not, we run the risk of undermining progress and may potentially provide lackluster products and services to the very demographics we intend to serve.
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