A Message to Nonprofits: Stop Worrying So Much About Overhead Costs!

Guest blog By Elise Saltzberg, CFRE, Saltzberg Consulting 

The past decade has seen a significant shift in the way funders and nonprofits relate to each other. More and more funders – whether they are government agencies, private foundations, or individual donors – are demanding measurable outcomes and demonstrated impact. At the same time, funders are continuing to require

that organizations
maintain low administrative costs – the dreaded overhead. And many nonprofits are scrambling to meet these oftentimes unrealistic demands.

It’s time for nonprofits to focus on serving their constituents effectively, and stop worrying so much about administrative costs.

What Caused the Funding Model to Change

To understand the current funding model, it’s important to look at how it developed. The change is based on a number of factors, including:

– Competition: The rate of growth in the nonprofit sector has greatly outpaced giving. In recent years the number of organizations has increased by 70%, while giving has grown by only 30%.

– Changing Donor Sentiment: The prevailing sentiment for generations has been one of “giving back.” This is still the case for many older donors. However younger philanthropists are more likely to see

their
giving as an “investment in the future.” They have a more business-oriented

focus,
and want to see results for their investment in social change.

The Role of Overhead

This new emphasis on measurable results has not replaced the older funding model, which required nonprofit organizations to keep their administrative expenses low, thereby demonstrating that gifts were being used appropriately – to provide directly for programs and services.

In the for-profit world, 40-45% overhead is considered acceptable. As long as the bottom line is healthy, business owners and investors are happy. Yet in the nonprofit sector, administrative overhead is expected to stay in the 10-15% range.

But to reach desired outcomes, organizations need capital to invest in staff capacity, equipment, and

systems,
and the flexibility to change course quickly if necessary, to meet the needs of those they serve. Compliance-driven decision making, constrained by rigid funding requirements, is at odds with this kind of flexibility.

Additionally, the ability to measure outcomes can be very expensive. Both nonprofits and funders need to understand the true costs associated with developing and testing programs and reporting outcomes. Funders must be willing to bear additional costs — such as third party evaluators — if they expect nonprofits to deliver measurable impact.

How Nonprofits Can Help Shift the Paradigm

Of course
funders want to invest their money carefully. And there are highly-publicized examples of nonprofits spending exorbitantly on staff salaries and luxury travel. The scandal earlier this year involving the Wounded Warriors Project is just the most recent egregious example.

Nonetheless, the emphasis on overhead is overblown, with the result that many nonprofits can’t serve as effectively as they could if their infrastructure were stronger. Some funders already accept that focusing on administrative costs can be an impediment to success. And more are headed in this direction.

Nonprofits can proactively help to shift this paradigm by doing everything they can to fulfill their missions, and not waste precious time and energy agitating over their administrative costs. After all, the most important numbers are the ones that demonstrate positive impacts on their communities.

Funders and nonprofits share a common goal — to strengthen and support communities. The challenge is to find the most effective funding model to achieve this desired outcome.