February 18, 2014

Is Your Overhead Too Low?

man fixing a computer who has no idea what he is doing

Are you sitting in an uncomfortable chair? Dealing with crummy software? Writing with the world’s cheapest pen? Why? In all likelihood, it is to minimize your nonprofit’s overhead.

Appropriate overhead is the funding a nonprofit needs to do its programs well and frugally, with quality prioritized over frugality. Like a well-fitting hiking boot, appropriate overhead protects, supports, and allows you to climb mountains. Inappropriate overhead pinches, blisters and increases the odds of falling. With overhead, the right sizing is critical.

Too Many Nonprofits Spend Too Little

Like ants whose nest has been disturbed, many nonprofits run about being penny-wise and dollar foolish to keep their overhead low. Why? To woo donors and, in competitive situations like government funding, earn income.

The challenge for ethical, value-providing nonprofits, however, is not that overhead is too high. The challenge is that it’s too low. Too little is invested. Excessively low overhead impacts far more nonprofits, donors, and funders than overhead that is too high. Why? It reduces the results all three are trying to achieve. Even as we worry that the emperor is overspending on his wardrobe, we fail to see his nakedness.

Most nonprofits are ethical and seek to provide value. In one nonprofit with an annual budget of $9.9 million, staff can’t participate in long-distance conference calls because their less-expensive telephone service only allows local calls. In a second, the CEO can’t Skype. His computer lacks a camera. Their annual budget is $10.6 million. In a third with annual expenses of $467,290, field staff must drive to the office every evening to file their reports. This involves a 60-mile commute, time that might have been invested working with troubled families.

Both because of restricted budgets and to keep overhead low, nonprofits often choose not to invest in tools, personnel, and resources that make their working lives sane and allow them to achieve more outcomes. The biggest tragedy is the wasted human capital spent dealing with avoidable crises. For instance, how many staff hours have been spent coping with an undersized-but-we-got-it-cheap copier that only fails when it is used for last-minute print jobs?

You can be ethical, value-creating, and well run. To be well run: invest wisely in overhead.

The Few: The Scoundrels

It is true. Some rascals use the nonprofit infrastructure for their own personal gain. Scoundrels do run a small percentage of nonprofits. One valid detection sign of scoundrels is high overhead. In his blog, Ken Berger, President of Charity Navigator, writes, “Show me a nonprofit that uses 70 percent of its funds for overhead, and I predict with a great deal of certainty that it is an organization that is either clueless or focused on lining someone’s pocket rather than effectively serving others.”

Yes, overhead that is 70 percent or higher–-except in very unusual circumstances such as startups or recovery from catastrophes—is probably naive or unprincipled. However, just like in school when Johnny misbehaved and 25 other children lost recess, the good (ethical and value-seeking) are punished with the bad (unethical or well-meaning and clueless.)

Note that Mr. Berger’s 70 percent or higher suggests overhead from 0 percent to 69 percent might be wise and ethical. Since most nonprofits seek to bring their overhead under 20 percent, this leaves open the possibility of a greater investment of your budget in overhead. Might you provide greater value if you invested more in overhead? Would a 1 percent increase in the overhead matter to your nonprofit and your everyday working life? If you invested a bit more in overhead, would you be even more productive?

Find Your Percentage: One Size Does Not Fit All 

Using one measuring stick or percentage is like asking all children to wear the same size shoe. One size overhead does not fit all nonprofits.

Nonprofits that own their own buildings require less for the same reason as people who own homes instead of renting. Such nonprofits no longer have to pay the landlord profit. Likewise, nonprofits with large budgets generally need less since many nonprofit expenses are the same regardless of budget size. Lunch tickets to hear the CEO of your community foundation speak are $30 for all attendees. Likewise, salaries of key positions, while higher in large nonprofits, have less effect on their bottom line.

I recommend that your nonprofit determine the percentage of your budget needed for overhead. Make this percentage equal to the amount you need to run a value-producing, efficient nonprofit. Then, as necessary, defend the heck out of it. This percentage and the defense of it is something I can help you to establish, but many of you will be able to achieve both following these important steps:

1.  Create a chart of the budget line items you count as overhead.

2. Learn how much others spend. Select five to seven other nonprofits in your sector. Prefer those whom you respect and who produce great outcomes. If possible, select nonprofits in communities with similar sizes and budgets.

3. Gather publicly available information about these nonprofits’ overhead. Do not rely on 990s or audits alone. Budget categories never match one organization to the next. Contact the CFO at each organization. Ask enough questions to be sure you compare Granny Smiths and Galas and not apples, grapes, and kiwis.

4. To develop a data-driven and justifiable range for your nonprofit, compare the overhead expenses line-by-line for each other nonprofit with your investment. Evaluate the total invested in overhead by everyone.

5. With your board of directors, discuss your findings, overhead fears, and the logic of investing more to create better outcomes. Be prepared to give examples of how your current overhead hinders your work. Boards composed of successful community leaders will see the logic. They will help you to set a defensible overhead range for your nonprofit.

6. Be preemptive and lead. Defend your goal and reasoning on your website, Guidestar, and other listings.

7. Develop high-quality outcomes within your overhead range.

8. Encourage your national or international associations to develop an association-wide range, publicize, and defend it.

9. Call out scoundrels.

Make this Yesterday’s Challenge

You deserve credit for working in a low overhead environment. To save money, you’ve done things the hard way. You’ve been amazing and tolerant. It’s time to change. Get out your shovel and bury the concept of low-overhead-equals-good nonprofit in the rotten wood casket it deserves.  Invest in what you need. Buy services, skills, and products that make logical, common sense.  Keep your overhead low, but not so low that it harms your work. The race will go to the nonprofits that have the most capacity to run well. This takes investment in overhead.  Changing lives requires resources, and these are expensive. Determine how much you need to invest in it and defend it.

Karen Eber Davis

Karen Eber Davis provides customized advising and coaching around nonprofit strategy and board development. People leaders hire her to bring clarity to sticky situations, break through barriers that seem insurmountable, and align people for better futures. She is the author of 7 Nonprofit Income Streams and Let's Raise Nonprofit Millions Together.


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