A recent article on NPEngage tackled the issue of overhead – specifically, how important do nonprofit staff consider overhead concerns, and how prepared are they if a major shift in financial policy takes place. As part of a dissertation, this piece works within a framework of hypotheticals – how would nonprofits respond to the dual pressure of assessing needs with expectations from donors.
This thesis makes a major assumption – that donors will continue to expect and request due diligence in maintaining or lessening the impact of overhead costs. But why is that so? How did overhead become the defacto scale of assessing nonprofit efficacy?
I would argue that it’s not just that donors think that overhead is bad – it is that they have been given no compelling narrative for them to think otherwise. How do we move the narrative away from this concept of spending less being the ideal?
The story behind the money
As Dan Pallotta puts it – we have dehumanized overhead and now we need to humanize it. When people hear overhead, they think wasteful spending. They worry about the people in need not receiving help or funds because it is being used to salaries and infrastructure.
But salaries are people. Better infrastructure means the ability to reach more members of your community – to scale your services to be even more effective. Marketing costs contribute to reaching new potential donors or funders; office space allows for constituents and clients to meet in a safe, warm environment.
These costs are part of your impact on people and can tell just as engaging a story about your work than your direct services.
What would happen without these expenses?
Alternatively known as the “Doomsday Scenario.” Who couldn’t you reach if you didn’t have these funds available? What direct services would you need to halt in order to cover for these necessary costs? People often assume that donations of time, services, and money can make up the difference – but what if they can’t? How can you justify cutting back on overhead when it is vital for keeping your services afloat and effective?
Better definition of allocated costs
Specifically joint allocated costs. While some donors, in researching nonprofits, look to see the total percentage of income spent on overhead, others like to see specific information on what it costs to provide services to one person. But much of what people consider to be “overhead” is actually a joint cost (meaning it is attributed to expenses that go beyond a single service) that allows your nonprofit to provide services to many constituents.
Putting it another way – you wouldn’t calculate a staff members salary down to .79% of their job helped a single constituent – beyond being impractical, it doesn’t fully tell the story of how many people are being reached by employing this staff person. In purposefully and strategically investing in overhead expenses, you are creating more value. And more value should be what drives donation and contribution decisions, not arbitrary austerity metrics.
What constitutes abuse?
While nonprofit fraud and waste are a concern, the idea that many nonprofits take advantage of donors is largely overblown. Embezzlement and fraud are huge breaches of trust with donors – but also have little to do with the concept of cutting back on overhead.
Nonprofit abuse and mismanaged overhead are two very different concepts, that unfortunately draw similar ire from donors and community members. And by conflating these two together, nonprofit efficacy if being harmed. When your donors and supporters worry about wasted spending, bring it back to the points above – the people, the effect, and the financial impact. In doing so, and by adding transparency, fears of abuse should be alleviated.
Nonprofit finances are not easily understood, which is why simple narratives of waste and abuse have become so popular. By redefining what overhead means, and by showing how these capital resources are helping your community, you can help shield future organizations from tackling the hypothetical situation of operating with even less.
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