Cosmic

How Your Nonprofit Can Escape the Overhead Trap Once and for All

Nonprofits, you must control your funding, escape the overhead trap, and break free of the starvation cycle. Learn how to change your revenue forever.

Eric Ressler
September 1, 2021
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There is a myth that dominates the nonprofit sector: The less you spend on overhead, the more effective your nonprofit. This misconception dictates the priorities of budgets and rules, much to the detriment of nonprofits — and in turn, their causes. You might even believe it, too, wearing your leanness as a badge of honor.

But when it comes to creating systems-level change, there’s no way around it: Nonprofits need sufficient overhead in order to make it all happen. In the same way that it costs money to make money, it costs money to ignite change.

It takes overhead to hire talented staff and secure suitable resources to get the job done. Without overhead, how can you expect your marketing efforts to reach the supporters and donors who will push your cause forward?

The need for adequate overhead is nothing to hide — not from funders, not from the public, and not from charity organizations that have (mis)guided you into messaging á la 100% of proceeds go directly to programming.

It’s time to stop believing the myth and start pushing back. Your cause depends on it.

Why is Overhead a Dirty Word in the Nonprofit Sector?

To dismantle the negative narrative around overhead, it’s important to know how it got to be downgraded in the first place. The truth is, everyone is to blame. From the IRS to the nonprofits themselves.

Indeed, nonprofits like yours may have accidentally perpetuated the notion that overhead is not part and parcel of sparking long-term change. Before we get there, however, let’s look into a few other instigators.

1. Tax structures and the IRS

You can thank the IRS for setting a precedent that resulted in overhead getting the budgetary scraps. You see, financial reports require nonprofits to clearly define their categories of spending, which means spelling out how much your nonprofit spends in overhead. This puts a magnifying glass on a nonprofit that lends its budget to scrutiny — even though numbers don’t tell the whole story.

Furthermore, nonprofit tax structures require a majority of their income to be spent on furthering the organization’s mission. As in, not overhead.

This combination of a rigid tax structure and detailed reporting sends a strong message that nonprofit organizations can and should get by with less. Less talented staff and less adequate resources with which to do the work.

2. Charity watchdog organizations

This vicious cycle of underfunded, understaffed, and under-resourced organizational operations has become the norm. And it’s inadvertently upheld by organizations like Charity Navigator and Charity Watch.

These watchdog organizations exist so supporters can get a better look at a nonprofit before they decide to donate. Part of that evaluation includes a look at the financial health of an organization. And since overhead is reported and publicly available, it influences a supporter’s decision.

The thing is, many people want to feel their donation is going toward the change itself. And when they see a nonprofit spending more than 10% to 35% on overhead (depending on the nonprofit), they’re less likely to trust that their dollars would make an impact. It’s a catch 22: If your organization spends more on overhead costs — and it makes potential supporters balk — you’re more likely to be skipped when it comes down to decision time.

3. Foundations and major donors

Unrestricted funding is on the rise, thanks to philanthropists like Makenzie Scott. But until giving with no strings attached catches on, most foundations and other major donors have parameters around what organizations can do with their gifts. Usually, their donation stipulates that the money should go toward specific program work.

But even if funders and large dollar donors don’t have strict spending rules, they do look at how much of their donation will go to program work. In turn, organizations put as much money as they can into categories that fall under impact. And the necessary resources and funding to support that impact get short-changed — again.

4. Individual donors

The need to contribute to an organization’s overhead isn’t much of a thought to individual donors. As we said before, they’re more likely to give if they think their money is going to be 100% used on the program work.

The reason for this is simple: Humans want to feel connected to positive change through their dollars. They would rather feel good about giving money that feeds a family of four than running the administration of an organization.

Ultimately, it’s up to your nonprofit to connect the dots for supporters. They must understand that overhead costs are an integral part of ensuring your mission moves forward. And you must convince them.

5. Nonprofits’ messaging

Your nonprofit’s messaging can be keeping you in the overhead trap. By soliciting donations through messages that say something like ”100% of proceeds go to program work,” guess where that money has to go? Yes, program work. Overhead gets neglected.

Similarly, if your organization has ever tried to boost donations by telling a supporter that their American dollars will go further in a foreign country, none of that supporter’s donation can go to overhead. Nonprofits have to admit where their messaging is hurting their own efforts.

In the end, you must believe that your nonprofit’s value isn’t tied to how low your overhead is. And instead, look at your overall impact.

Measuring Nonprofits’ Impact by Looking Beyond the Budget

Measuring impact isn’t possible solely by judging a nonprofit’s budget. And luckily many in the nonprofit ecosystem are adopting this belief. Part of the tide turning is thanks to more nonprofits telling stories around their statistics and sharing their proof of impact in creative ways.

Perceptions of value are shifting as more people learn what change looks like — and what it takes to get there.

By trending away from focusing only on the numbers, charity watchdog organizations are slowly starting to change their assessment methods. These watchdogs are generally eager to assess a nonprofit's actual impact beyond where the money goes. This means nonprofits can establish and track metrics to show they are moving the needle for their cause, regardless of what their overhead looks like. It’s another great opportunity for nonprofits to showcase real, human stories from the lives they’ve impacted. As we know, stories about our communities – not us – win more hearts and minds.

While gathering and analyzing statistics may pose a challenge for some nonprofits depending on the work they do, this pivot in evaluating is a step in the right direction. It’s becoming acceptable to believe that no matter how much you spend on overhead, it’s the actual impact of an organization that matters.

Change Your Nonprofit’s Overhead Lens by Shifting Your Focus

If you want to increase overhead so your organization (read: your staff and marketing efforts) can drive more impact, you have to start by shifting your focus.

Indeed, honing your expenses is part of running an effective organization. But if all of your strategic decisions are based on keeping your overhead low, how will you attract and retain good talent? And how do you make sure that you're not losing sight of the actual impact? (Because you shouldn’t be focused on running a 10% overhead organization.)

As your organization starts to look at overhead differently, don’t focus on how you can keep your overhead low. Instead, focus on diversifying and growing your revenue so you have more flexibility for overhead costs. Think about how you can bring in more resources to fund the work you and your team are responsible for.

Shifting your focus from a scarcity mindset to one of opportunity is one vital way to escape the trap.

Messaging Matters if You Want to Escape the Overhead Trap

Another way to break free from chronically insufficient overhead is to retool how you ask for funding — not only from your funders but from your everyday supporters, too. This starts with your messaging.

Charity Water’s method is a good example of how to go about messaging with different funding needs in mind. They separate their organization’s giving into two sections: 100% program donations and 100% administrative donations. Each section has a clear story, leaving no room for ambiguity about where a donor’s money will go.

While you may sacrifice unrestricted funding with this method, it’s an easier “ask.” Plus, the transparency in your budgeting makes your nonprofit all the more credible.

Your Website Isn’t Overhead — It’s Part of the Work

A well-built digital platform is part of your program work, and therefore its budget shouldn’t fall under overhead. After all, your website is more than a place for people to get your contact information and read about your next volunteer opportunity.

With a robust digital presence your organization can:

  • Provide ongoing outreach that influences the conversation about your cause, thereby pushing the needle on policy and societal change.

  • Educate your supporters, policymakers, change makers, and the public with the information they need to get involved.

  • Inspire real world action, such as signed petitions, advocacy work, and other necessary boots-on-the-ground work.

Though you may have to change your own mind first, you have the power and obligation to push back on the myth that overhead equates to your organization’s value. It’s up to nonprofits everywhere to shift their focus, educate and inspire their supporters to give freely, and change the conversation about what “overhead” means in the social impact space.

There’s so much more to measuring impact than how much it costs to make it all happen at an administrative level. Will your organization lead the way?


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