Nonprofit Overhead Costs: Myths vs. Facts

“Overhead” is considered a dirty word in most nonprofit circles. We 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. And most nonprofits are just working within the current system, instead of changing the narrative about general operating costs.

A basic definition of overhead is “the costs related to operating a business (or nonprofit) that are not directly linked or attributed to a specific program, service, or product.” Overhead includes accounting/legal expenses, insurance, rent/mortgage/property taxes, salaries, insurance, utilities, etc. All of these are very necessary to running an effective nonprofit- so why are they so taboo?

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:
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Myth #1: Nonprofits with low overhead are more effective and spend more on programs/services.

The Truth: Low overhead does not necessarily mean that resources are being spent in more effective ways. In fact, it is usually the opposite. Low overhead costs can actually be a sign of an unhealthy organization that is not building a good foundation for long-term sustainability.

Nonprofits that do not spend adequate amounts of money on competitive salaries and decent working environments do not attract the right people to their organization. For example, spending more on salaries to hire skilled executives, fundraising professionals, and/or grant writers can lead to better funding for the organization over time.

What it boils down to is Investments into “overhead” costs like salaries, utilities, etc. can actually produce better results than just pouring the money directly into programs. Effectively funding overhead can lead to better staff retention, more skilled employees, and more sustainable programs/services. Another great article about that can be found here.

Myth #2: Nonprofit organizations should never spend more than X% of their budget on overhead costs.

The Truth: A survey in 2012 called, “Where’d My Money Go?,” found that most Americans believe that nonprofits should not spend more than 23% of their annual budget on overhead. In fact, 27% of the people polled said that charities shouldn’t spend more than 10–19 cents of every dollar on overhead and operating expenses. For most of us in the sector, only having from 10% to 19% of a budget to cover everything from salary to utilities to rent seems a more than a little unreasonable. And yet, something is getting lost in translation between what nonprofits actually need to operate and what donors think should be enough.
You can find more information about the survey here.

There are so many factors to take into account when deciding how much to allocate for general operating expenses. Geographic location, size of the organization, scope of work, lifecycle stage of the organization all affect how much is necessary to spend on overhead.

What is comes down to is this: all nonprofits are different. Different missions, different programs, different structure. So putting organizations under a rigid constraint to only spend so much on overhead is harmful, especially to the nonprofits that do not fit under the traditional structure.

Myth #3: Grantmakers should be able to choose where their funding goes (e.g.,if they only want to fund mission-related programming).

The Truth: Many foundations do not provide any general operating expense funds to organizations. Most foundations and other funders are still focused on providing resources as it directly relates to a program or service. However, operating funds are usually what nonprofits are most in need of, and these funds can help develop the effectiveness and sustainability of an organization more than any other funding. As Vu Le wrote in his blog (which everyone should read), “General operating funds allow us nonprofits to be most effective at helping people, including saving lives. By restricting funds you are impeding our work…”

There has been a shift recently to focus on providing more unrestricted funding to nonprofit organizations, like through the Full Cost Project. This collaboration is trying to change the nature of grantmaking, including funding every aspect of a nonprofit instead of just picking and choosing what to support.

It is time to take control of the word “overhead.” Now is the time to 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.

And 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 really need to be effective.