CalNonprofits Articles

changes-ahead-exit-sign-1024x662Nonprofit overhead is an issue that plays itself out in several dimensions: proposed legislation limiting nonprofit overhead, the influence of the online charity raters, the reluctance of foundations to fund "overhead," and the failure of so many government contracts to pay for the full costs of the programs they fund. CalNonprofits is developing a plan of action on all these fronts. Here we are pleased to bring an article from CalNonprofits board member Kim Klein, nationally known for her biting insight and wit about all things nonprofit:

Rethinking “Overhead” Costs: Talking to Donors About the Real Cost of Meeting Your Mission*
by Kim Klein, Klein and Roth Consulting

More than two-thirds of the adult population of the United States gives away money, and probably all of us, from time to time, wonder if the organizations we give to are spending our money wisely.  Unfortunately, we have been taught that one way to find this out is to ask, “What do you spend on overhead?”   But of course, we have no idea what the right answer is.  The “experts” will say anything from 5-20% is normal, but that is a huge range and doesn't take into account the size or age of an organization.  It often comes as a surprise to donors to know that overhead costs give you almost no clue about the effectiveness of the organization.  We who work with and in nonprofits need to stop giving this question any credibility and instead focus on questions whose answers would be meaningful and useful for us all. Here are three things you can start doing to help change the way your group thinks and talks about overhead:

First, stop using the word “overhead.” Lee Draper, founder of Draper Consulting Group, suggests these alternatives, “infrastructure expenses” or “core agency support”, which are more descriptive and accurate.  I am a fan of “administrative costs” since I take part in an ongoing battle to help people realize that administrative staff are doing equally important and mission fulfilling work as organizers, program staff or advocates.  Administration comes from the Latin word ministrare (to serve).  Administration is a service, a way of getting the work done.  All programming has an element of administration (such as taking notes, creating plans, evaluating work) in order to be effective.

Second, help donors to see that administrative costs are honesty costs. I mean, do you really want to run your agency without a bookkeeper, for example? When people say they don’t want any of their donation used for “overhead,” we should respond, “Then how do you propose I deposit your check?” Just the process of calculating administrative costs requires accounting and possibly an audit—both are administrative expenses.

Third, help donors ask the questions that will give them the information they deserve.  If you are a social service agency, talk about how many clients you see in a day, what you talk to them about, how long it takes to resolve their problems, what you have to do to help them.  Create a “day in the life of a social worker” column for your newsletter.  When you bring a busload of low-income seniors to a city council meeting, talk about exactly what goes into doing that:  your administrator calls several bus services, decides on one, arranges a time to pick everybody up, pays the bus operator, and tracks all these expenses in your financial records so that they can report them accurately to your funders and donors.   You could save money by renting a bus that is not wheelchair accessible, but you decide not to because three seniors who use a wheelchair want to be present. And so on.  The fact is that our donors don’t know the range of important details that goes into our work.  Letting them know about these details  as well as the costs associated with them will reassure donors that their gifts are being used well.

Someday, when we have matured as a sector, our donors will ask questions not to try and find out if we are spending too much on infrastructure, but that we are spending enough on these crucial services to ensure that our organization is doing its work in the best way possible.  It is up to us to hurry that day along.

*Note: This piece was taken from a longer article, which was first published in the Grassroots Fundraising Journal in December 2003, entitled “’Outing’ Overhead.” You can find the original article at http://www.grassrootsfundraising.org/2014/03/outing-overhead/

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