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Addressing Overhead with a Comprehensive Budget


“Overhead” is considered a dirty word in too many nonprofit circles. Organizations are walking on eggshells talking about overhead with a donor or grantmaker...

...explaining why some money has to go to pay the electric bill rather than to a directly mission-related program. There are many misinformed perceptions on overhead that have persisted over time. Most nonprofits are just working within the current system, instead of changing the narrative about general operating costs.

Nonprofit overhead is a challenging thing to discuss since there is no agreed upon definition of what overhead truly entails. According to the Nonprofit Overhead Project, an initiative of the California Association of Nonprofits, “In everyday conversation, nonprofit overhead is a fuzzy term meaning administrative costs such as accounting, insurance, and the salaries of administrators.” If you ask most nonprofits, 100% of the funding goes to help the cause – which at times just means paying the phone bill to have a place for clients to call, an office building for clients to go, etc.

A lot of these negative perceptions have to do with the detrimental narratives about overhead. Here are a couple of the most pervasive underlying myths: 1. Nonprofits with low overhead are more effective and spend more on programs/services; 2. Nonprofit organizations should never spend more than X% of their budget on overhead costs; and 3. Grantmakers should be able to choose where their funding goes (e.g.,if they only want to fund mission-related programming). These myths force nonprofits to be restricted in their creativity to solve complex community issues and also reinforce power differentials between grantmakers and grantees.

There are so many factors to consider when deciding how much to allocate for general operating expenses. Geographic location, size of the organization, scope of work, and the lifecycle stage of the organization all affect how much is necessary to spend on overhead. Preventing an increase in overhead can actually impede an organization's process.

It is clear that overhead is still the go-to question for many philanthropists and funders when it comes to asking about an organization's overall effectiveness. The fact of the matter is nonprofits are always going to have overhead since organizations need to have people, places, and products to provide programs and services.

What it comes down to is that all nonprofits are different. Different missions, different programs, and different structures. So, putting organizations under a rigid constraint to only spend so much on overhead is harmful, especially to nonprofits that do not fit under the traditional structure. Education programs are going to have costs of consumables for afterschool activities, domestic violence shelters will have utilities cost to keep the lights and heat of the shelter on, and mental health organizations will continue to have a high cost of salaries to pay for licensed therapists to provide necessary treatments.

If organizations are going to be able to achieve their missions, overhead will be a required part of program delivery and impact. It is time to take control of the word "overhead" and embrace and normalize operating costs. Nothing will change unless nonprofits start speaking up about the need for general operating funds and the crippling nature of restricted funding. In addition, foundations and other grantmakers, in particular, have the power to change the narrative by beginning to fund operating expenses. Funders have the capacity to change the game by providing what nonprofits need to be effective.

So, stepping off the soapbox now – What is a nonprofit to do? When building a grant budget, consider including necessary expenses of the program(s) you are applying for at the beginning. In my professional opinion, almost everything a nonprofit does is tied to some type of program (or you would not be spending the money). Some grants allow indirect costs and some do not, so it is important to review the guidelines before applying. While grant money is usually a blessing, sometimes accepting it can be a curse due to the limitations it sets. Here are few tips for building a comprehensive budget that accounts for overhead costs from the start.

Fixed Costs vs. Variable Costs

Building your budget with fixed costs and variable costs can help you determine how many people you can serve with a budget. Doing this prevents an unrealistic expectation of the program staff and the reporting party within the organization. Within government grants, organizations often have to track data on low to moderate income clients, so figuring out how many can be served with the funding helps determine how many people you have to gather extensive data on if you are strapped for time and money. This way, you may be able to supplement other clients in a government supported program with philanthropic contributions without the reporting hassle. If you receive enough money for 100 clients then spend it and report it out on 100 clients. Calculating variable costs can help set realistic program expectations and they add up faster than you think.

Charge Yourself for Your Services

Nonprofit organizations occupy spaces that the government and businesses usually do not; however, it is important to not lose sight of the value a nonprofit brings to the community. One model I suggest if you do have some “competition” is to determine what others are charging in the for-profit world and blend your model after that model. For example, if it costs $100 to see the doctor at a local for-profit healthcare provider and it costs a nonprofit clinic $45 per visit, it may be better to consider charging yourself (or the grant essential) $60 per visit. The $45 can cover the costs and the remaining $15 could go in a fund for future equipment purchases or a rainy-day fund. Just because it costs a certain amount it does not mean you need to break even.

If They Want It, They Need to Fund It

Lastly, if a funder is asking you to collect specific information, have them pay for that specific information. If they want an evaluation, incorporate funding in the budget. If they want you to track client data, incorporate the costs of labor into the budget. As a simple rule of thumb, evaluation should be about 10-15% of the overall grant budget to allow you to pay for staff time, data tracking software, or an external evaluator.

How do you communicate about your nonprofit's overhead in your budgets?

Colton C. Strawser is the President of Colton Strawser Consulting and the co-founder of the Nonprofit Leadership Toolbox – a monthly subscription service for nonprofit professionals. He can be found online at www.coltonstrawser.com or on Twitter at @Colton_Strawser.
 
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