The Issue with Nonprofit Overhead and How to Change the Conversation

July 14, 2017 Andrew Urban

The common question I’ve heard over the years is this:

“How do I get donors to realize the importance of paying for what are considered overhead costs?”

I even had one nonprofit professional tell me about a time a donor said to her, “You and your job are overhead, and I don’t want to donate just to pay for your salary.”

Ouch.

It’s important that we determine what is and isn’t an overhead cost for nonprofit organizations that are trying to be good stewards of donated or granted money.

  • Is an accountant overhead?
  • Is a fund accounting software subscription overhead, even if it’s needed to accurately track and report back to funders of the organization?

To answer these questions, I think it’s important to first understand the landscape and pressures around nonprofit overhead

We are all familiar with the ‘Shiny New Toy Syndrome.’ People love donating to the new program, the new building, or the new project because it’s fun to be a part of new initiatives. It’s part of our nature to want to leave a mark and be involved in something that’s going to have impact.

But this creates issues for nonprofits.

The reliance, and accompanying reporting requirements, on restricted program funds often leaves nonprofit organizations in a bind. Since nonprofits must legally live by the donor’s intent of a gift or grant, there’s no wiggle room to use those dollars to pay for things like the light bill, staff needed to manage the new initiative, or building maintenance. And, as you know, the costs associated with delivering the new programs pile up long after the ribbon-cutting ceremony is over

Nonprofit Overhead vs. Mission Costs

I remember an article from a while back in the Chronicle of Philanthropy titled ‘Overhead Costs Pose Dilemma for Charities’. It highlighted the issue of nonprofit overhead costs vs programmatic or mission costs. My thought, after reading the article, was that nonprofit organizations are missing a key metric to accurately define what is and what is not an overhead cost.

The typical percent distribution of program costs to overhead costs paints a false picture for donors to view a charity’s work—and can force some organizations to manage to the metric (much like teaching to the test). It’s not a good way to live or to work.

I challenge the industry to adopt a new metric. I call it Return on Mission® (ROM), a more accurate means to state a standard Return on Investment (ROI) for nonprofit organizations.

Why Return on Mission is a More Accurate Measurement

How do you calculate necessary items—such as staff, technology, office space, etc.—in terms of impact to the mission? How does staff turnover affect program or mission delivery? Could implementation of a better technology solution improve grant funding performance and reporting? Will providing an inviting workplace inspire employees to work even harder and in more collaborative ways for the mission?

For-profit companies are encouraged to make investments that foster happiness and productivity in the workplace, because productive employees help the company’s bottom line. And a healthy bottom line is needed to reinvest and develop the best solutions for clients. Why do we expect nonprofits to operate differently? Why is it considered taboo to ask for money to help those that deliver on the mission?  

The concept of Return on Mission is that the real measure of a charity’s success is not in how well the return is on an ‘investment’ (e.g. a grant, major gift, etc.) but rather how much that investment impacts the mission itself. That, then, is the bridge that connects overhead and mission costs.

It creates the test by which to determine whether a cost is pure overhead or if it is connected to the delivery of the mission. If a large purchase, a salary, an ongoing project, or a proposed project is not tied to the performance of the mission, then the donor or grantor should certainly reconsider that gift or grant. However, if the investment supports the delivery of the mission, whether it’s a shiny new toy or not, it deserves support.

Do you agree? Disagree? I’d love to hear your thoughts on overhead versus mission costs and the concept of ROM.

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