‘Overhead’. ‘Management and general’. ‘Administrative costs’. ‘Operating expenses’. Whatever you call it, this is what it takes to keep your doors open, your lights on, and the toner cartridge full. No matter how hard you try to keep these costs low, there’s no avoiding them altogether. And, while light bulbs and printer ink aren’t nearly as shiny and attractive to most funders as your programs, finding funding to cover them is just as critical. You can’t fulfill your mission if you can’t pay the rent to keep your doors open.
But too often funding comes with restrictions that might allow spending on printer ink, but not light bulbs. Also, potential donors will factor how much your organization spends on these administrative costs into an ‘overhead ratio’ that shows that number to how much is spent on programming. The bottom line is, even if this ratio has been proven time and time again to be a poor indicator of an organization’s health or impact, if they see that you’re spending more than 15 or 20 percent on operating costs, they may be scared off. In fact, the practice of restricted funding and overhead ratio calculation has been called out as problematic by leaders in the nonprofit sector in recent years. In 2013, for example, Charity Navigator, GuideStar and the BBB Wise Giving Alliance wrote two open letters, calling for both philanthropists and nonprofit organizations to cease practices that contribute to the overhead myth, which is defined as “the false conception that financial ratios are the sole indicator of nonprofit performance.”
While this shift in the conversation about nonprofit overhead, and the real cost of operating a nonprofit organization, is a positive step toward ensuring organizations can run effective programs and buy printer ink, you might still be scratching your head wondering how exactly to get more funding for your organization’s overhead expenses, especially if you’re the director of a small organization.
Ways to Cover Overhead Expenses
Here are a few tips to help you get started.
- Look for capacity building grants. Many foundations offer a bucket of funding specifically for capacity building. Capacity building grants are used for strengthening an organization’s infrastructure, management and governance. Examples of how a capacity building grant might be used include professional development for Board or staff, creating accounting systems (for example, if a small, young nonprofit organization has experienced growth and needs to hire an accounting firm to help manage their books, a capacity building grant might fund the first year of that service) or technology upgrades.It’s important to keep in mind that when applying for a capacity building grant, the funder will most likely ask for the name and contact information of any consultant or other outside service provider you intend to work with, a scope of work from that consultant and your plans for sustaining the systems or services beyond the life of the grant.
So, continuing the example of the accounting firm, the funder will want to know how you plan to continue to pay for that service once the capacity building grant’s funds run out.
A good place to start when looking for a capacity building grant is your local community foundation and/or a foundation with which your organization already has a strong relationship.
- Ask your closest supporters for help. Past and present Board members and long-time major donors know and love your organization. Chances are that means they’re also aware of any challenges you have in covering overhead expenses (and of how hard you work to stretch every dollar you receive to ensure your programs achieve their maximum impact).If they contribute regularly to certain programs, ask these supporters to make their yearly contribution unrestricted if they aren’t doing so already. Or, ask them to commit a specific amount each year (or month or quarter, depending on the situation) to a management and general fund, which will help guarantee X amount of your overhead expenses are covered on a regular basis.Establishing a fund like this, or even just being able to show you have steady, reliable income to support overhead expenses, can also help when applying for a capacity building grant when it comes time to show how you’ll sustain the systems or services beyond the life of the grant.
Remember, your closest supporters (hopefully) understand that a contribution to cover overhead expenses supports your programs and your mission as much as a contribution restricted to programming expenses does. They also trust your judgement to spend their money responsibly and effectively.
- Establish an organizational standard per-project overhead percentage. Work with your accountant to determine what percentage of any funding request should be for overhead and set that as an organizational standard. Of course, some funders stipulate that overhead expenses can account for no more than X percentage of your project budget and, in those cases, you’ll have to follow their directions. But having an established standard percentage will ensure that you are regularly taking into account your overhead expenses in your proposals. Some grant proposals are specifically for programming only, in which case you will want to build any expenses that you currently consider ‘overhead’ into the program, if appropriate. For example, if a staff member spends 50% of their time on a program, you can potentially count 50% of their salary as ‘program expenses’ rather than ‘overhead expenses’. This can get a little tricky, so feel free to contact us if you have questions about how to do this effectively and accurately.
- Be honest about what it takes to run your organization and, ultimately, fulfill your mission. Despite progress made from conversations throughout the sector about the overhead myth and the true cost of running a nonprofit organization, most organizations still feel pressure to show the percentage breakdown of what they spend on programs, fundraising and management and general expenses. This calculation still shows up in annual reports and is often a question on grant applications. And while it may be an outdated evaluation tool, it’s important to be honest about your percentages. For example, it might look really attractive to some funders to see that 80 percent of your spending is on programs. However, chances are good that even if you are currently spending 80% of your income on programs, it may not be sustainable in the long-run.If you must report on these percentages, then be honest about the break-down and simultaneously be just as loud about reporting on your results and the impact of your programs on the community you serve. Engage your Board members and your other close supporters to do the same when drumming up new support for your organization.By doing so, you’ll help contribute to shifting the way the philanthropy world sees and invests in the nonprofit sector, which will ultimately create a stronger, more effective sector that is better equipped to make critical and positive changes within our society.