There are plenty of nonprofits that don’t have these problems. It’s not because they’re lucky or because they have the most generous donors. It’s because the leadership has structured it that way.
It’s appropriate that nonprofits have an expense structure that is heavily weighted toward mission-related spending. However, the degree of this weighting often becomes extreme to the point that it squeezes out necessary spending on infrastructure -- that is, the parts of the organization that support the mission-related parts. Finance and accounting, development, human resources, and physical facilities are often afterthoughts.
How do we know there’s an imbalance? The signs of an organization in distress are everywhere. Our best staff members are leaving. Our building is falling down around us. Our books are a mess. We need more money.
Bringing in more money, now that’s a challenge. Additional sources of revenue are a challenge for any organization, nonprofit or for-profit. More likely, the answer to the imbalance problem lies in simply reallocating expenditures to support more overhead. Yes, that means spending less on mission-related activities. It’s the most dependable way to secure your organization’s future.
Let’s face it, we tend to underestimate the additional resources we’ll need to support the next project that comes along. While we may think of it as “marginal revenue,” each new endeavor taxes the organization in ways in which it is already deficient.
If your standard for allocating overhead is 10% of revenues, it’s probably too low. If it’s 15%, and you still see signs of organizational distress, it might need to be 18 or 20%. Converted to dollars, that $10,000 funding for a new project may only allow for $8,000 of direct program expense. If you think you’ll have $10,000 to spend, you’re in trouble from the start.
Certainly, there are funding opportunities that will attempt to limit your “overhead” to less-than-acceptable levels. Even so, there’s still hope. First, there’s no universal definition of overhead. That means there’s usually a way to legitimately pass on some of what you consider to be overhead costs as direct program expenses. Second, be willing to say no.
It takes discipline and strong leadership to make this cultural shift. For laudable reasons, nonprofit staff will be naturally driven to spend more rather than less on the mission. Often to their own personal detriment -- including the potential for a well-deserved raise -- staff may resist any effort to divert resources from the mission.
Even so, this shift is worthwhile, because a starving organization can’t do as much good as a healthy one.
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