If you work in the nonprofit sector, chances are you’re familiar with the overhead myth. For those unfamiliar with the term, the overhead myth refers to the common but misguided idea that high overhead costs (e.g. rent, administrative costs, salaries, bills, etc.) are a negative indicator of a nonprofit’s performance or even a sign of fraud or poor financial management.
Despite the work that many have done to debunk this myth, some still use the overhead ratio as a measurement of success, dedication to mission, and performance. In fact, the reality is that many nonprofits might need to actually spend more on overhead as these important investments can improve efficiency and increase their impact.
Here are some ways you can combat the overhead myth and communicate why overhead costs don’t necessarily reveal whether or not your organization is achieving its mission.
Communicate Your Unique Worth
Demonstrating the impact of your organization is one of the first steps in helping donors become more comfortable with the idea of higher overhead. In order to commit funds to your organization, donors will want to understand what makes you different from other organizations doing similar work. Does your organization have any existing achievements it can highlight? What is your unique strategy for achieving your mission? Make sure that you understand what sets your organization apart and can easily recite a pitch to potential funders.
Stress the Necessity of Overhead Costs for Achieving Success
Just like for-profit organizations, nonprofits need to pay for staff, office space, computers, office supplies, and more to help them more effectively work toward their goals. Of course, there is such a thing as too much overhead, but a closer look at the actual overhead costs of many nonprofits will show that they include necessary expenses such as rent, utilities, and salary—not excess spending.
The key here is looking at the breakdown of costs. If your organization is spending most of its money on a building and settling for inexperienced staff members, the overhead costs may need to be re-evaluated and redistributed. However, if you’re spending a significant amount of money to hire experienced staff, you still need a building to house your organization, efficient software, an adequate training program, and more. Every nonprofit is different: Asses these costs internally and decide where overhead needs to be shifted so that your organization can be most successful in the long-term.
Educate Board Members & Donors on the Actual Cost of Results
In order to move beyond the overhead myth, funders and board members need to understand what your organization actually needs to function well. Speak openly about how much it actually costs to run a nonprofit and why. Once you’ve had an internal discussion about your costs, help your board understand the importance of overhead by giving them past examples of what happened when your organization didn’t invest in overhead, as well as examples of the positive results that your organization or other organizations have seen when they did.
For example, if your organization is interested in purchasing an application management software like Submittable, you might provide your funders and board members with statistics on how much money and time other organizations have saved by incorporating a submission management software into their workflow. For example, the Montana Department of Commerce ICED gained close to three weeks of staff time and saved $4,300 per grant cycle when it switched to Submittable, which quickly covered and then surpassed the cost of the platform.
Demonstrate Your Commitment to Ethical Practices
Many donors and board members are concerned with the overhead ratio because they want to ensure that nonprofits are handling their donations properly. Demonstrate your commitment to handling donations ethically by focusing on transparency when it comes to where your money goes. To make it easier for those interested in your organization’s spending to view financial information, consider creating a page on your website that houses documents such as your annual information returns, strategic plan, and more.
Nonprofits are required to provide certain financial information to the public on request, but you can go beyond that to fully exemplify your commitment to ethics. For example, you could craft a code of ethics, communicate honestly about how a specific donation will be used, adopt a compensation policy, and more. If you’re interested in exploring all of the options, the National Council of Nonprofits has a thorough list of tools and resources focused on helping organizations work toward true transparency and accountability.
Share Concrete Data About Your Progress Toward the Mission
If you want to move away from overhead metrics, it’s important to give board members and funders something else to consider when it comes to measuring the success of your organization. Instead of showcasing your low overhead, move toward language and metrics that accurately capture your progress. Share data about your strategies, impact, performance, and results. Show what you have accomplished and how you plan on moving forward. If you are achieving your goals as an organization, the need to focus on overhead will diminish.