THE MYTH OF OVERHEAD

KEEPING IT REAL

Michele MayStephanie DodsonApril 22, 2014

I say ‘Overhead’ and you say…

The Overhead Debate:How much pie?

The Myth of Overhead

Low overhead is a sign of an effective and well-run nonprofit.

It is morally wrong for people who are helping people to be paid well.

$ spent on fundraising and marketing = fewer people being helped.

The Reality of Overhead

IMPACT is the measure of whether money is being well spent…

And, high impact requires an investment in capacity and infrastructure.

Overhead ratios do not communicate effectiveness.

And yet…..

Overhead costs provides important information to funders….

And, taken in context, are a useful evaluation tool

Unrealistic funder

expectations

Pressure on nonprofits to

conform

Misleading reporting

What Drives the Overhead Myth?

…leads to under-investing in infrastructure…and ultimately to serving fewer people less well

The Nuts and Bolts of Overhead• Program Services

– Activities that result in good and services being distributed to beneficiaries, customers or members that fulfill the purposes or mission for which the NFP exits

• Overhead– Administrative expenses - Expenses for overall

operations and management, e.g. general legal services, accounting, insurance, office management, HR, costs of BOD meetings

– Fundraising/Development

What is the Industry Norm?

Inherently subjective: No IRS spending rules, just disclosure

20 percent norm perpetuated by both funders and organizations

Practice of misreporting overhead is tacitly supported

Better ratings from online charity advisors for lower overhead ratios

What is the industry norm?2004 Indiana University study:• · When researchers examined the tax forms from 220,000

nonprofit organizations to determine the accuracy of financial reporting, they found “widespread reporting that defies plausibility.”

• Over a third of the organizations reported any fundraising costs whatsoever, while one in eight reported that they had no management and general expenses.

• 75 to 85 percent of these organizations were incorrectly reporting the costs associated with foundation or government grants.

Allocation Issues

ONLY RULE: Must be reasonable and consistently applied

EXAMPLES OF ISSUES:• What percentage of the ED’s salary is

overhead?• What portion of depreciation is related to

program?• How to allocate website costs?• How to allocate IT costs?

What do the Funders think?

• Traditional foundations– Allowances are typically 10-15% of each grant allocation

• Individual donors– 2001 BBB survey found that over half of adult

Americans felt that nonprofit organizations should have overhead rates of 20% or less

• Government: – contracts limit the amount of overhead that can be

used to between 0 and 15%

What are funders really looking for?

• Is the organization making an impact?

• Are they careful about transparency, governance, leadership, results?

• How does the impact versus cost of this organization stack up versus other organizations I might fund?

Our Own Funding Experience

Two Examples• Rosie’s Place• Artists for Humanity

Strategic Grant Partners and a Venture Philanthropy approach

What do you do with all of this?• Educate your board about your infrastructure

needs and how they will impact the effectiveness of your programs

• Make sure you understand and manage your program costs –good internal systems required

• Look at Financial SCAN for comparative info

• Consider growing non-grant funding (i.e. direct mail, events) for stable source of admin expenses