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Stop Giving Nonprofit Overhead a Bad Rap

written by: •edited by: Carly Stockwell•updated: 4/21/2015

Nonprofits can't change the world unless they take care of themselves first, which means having enough overhead to properly pay their employees and take care of other essential needs. Here's why nonprofit overhead is important and necessary.

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    Stop Giving Nonprofit Overhead a Bad Rap If you’ve ever set foot on a plane, you probably remember the flight attendant going through the emergency checklist. She showed you how to undo a seatbelt, use the provided life raft and, of course, secure your own oxygen mask before assisting others.

    Similarly, a nonprofit can’t change the world if it doesn’t take care of itself first — whether that’s updating its technology or paying its staff appropriately. Yet not everyone recognizes this concept. As a potential benefactor, you most likely look at various elements to determine where to donate, but it’s easy to have an especially judicious eye when it comes to a nonprofit’s overhead costs.

    And who can blame you? After all, you want your funds to go directly toward the cause. The problem is that gauging a nonprofit’s worthiness based on a single metric that has no direct connection to its success will actually have an adverse effect on its purpose.

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    Don't Judge a Nonprofit by its Overhead

    At their core, nonprofits are businesses, too. The differences are that their profits are measured in lives changed, and their donors and investors require results instead of dividends. Just like any business, nonprofits need a strong infrastructure to survive and thrive in the competitive marketplace.

    When you choose to withhold your donation because of a nonprofit’s overhead costs, you’re essentially telling it that you won’t pay for salaries, modern technology or building maintenance. But how can you hold a nonprofit to a higher standard without giving it the resources to reach that benchmark?

    In short, you can’t — and you shouldn’t. After all, nonprofit watchdog groups consistently rank nonprofits with more overhead as more effective1, and these organizations also report less employee stress and burnout. Rather than ask whether a nonprofit’s overhead is low enough, I challenge you to inquire whether its overhead is high enough.

    For instance, one agency I’m familiar with operates a playground that serves close to 700 children a year. The playground equipment, however, has been in tatters for the last year. Wooden swing sets that have aged and splintered have been removed because of their high risk of injury. A four-square court, originally constructed from cost-effective and efficient asphalt, has deteriorated with weatherization and constant use. Its crumbling surface has sharp fragments that prohibit children from playing on it. And while the children may find playing in mud fun, the playground’s drainage issue leaves standing water and mud, a breeding ground for insects and disease.

    It’s unacceptable for an agency that serves children to offer unsafe and faulty equipment to its patrons, but most don’t have other options. The 2014 State of the Nonprofit Sector Survey2 found that 92 percent of Missouri nonprofits expected an increase in demand, yet 65 percent of them would be unable to meet it. Only 49 percent would break even. A business couldn’t meet increased demand with last year’s operating budget, and it wouldn’t even try — it would seek a line of credit, new investors or more sales.

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    Overhead Stigma Creates a Vicious Cycle

    That’s not to say that abuse and bad decisions have never occurred in the nonprofit sector. Your desire to monitor overhead stems from a sensible need to ensure that funds aren’t being misallocated and that your contributions are being spent wisely. But these factors shouldn’t be your only considerations when you’re gauging an agency’s health and effectiveness.

    The burden of maintaining unrealistic overhead negatively impacts an agency’s ability to carry out its core mission. As a result, agencies are forced to underfund their administrations, which already lack modern technology and sufficiently trained staff. On top of that, in fear of losing support, nonprofits often underreport overhead expenditures. This is called “the nonprofit starvation cycle."3

    The “Nonprofit Overhead Cost Study"4 researched this vicious cycle by surveying 1,500 nonprofits and examining more than 250,000 charities’ IRS Form 990s. The study found nonfunctioning computers, ill-equipped staff members and beaten-down furniture that even professional movers refused to transport.

    Likewise, my agency’s anonymous partner agency survey found that the better an agency can complete its evaluative processes, the better positioned it is to acquire additional resources. However, our donors indicated that underpaid, overworked and less skilled staff members meant that the agencies worked so hard on their year-end reporting that their programs likely suffered. With limited funds, they make tough decisions between administrative tasks and direct services.

    As a funder, you have to ask yourself whether this is really what you want in a nonprofit that you’re going to invest in.

    Charities can’t change the world when they’re working under conditions like these. Every type of business — including nonprofits — requires solid IT systems, a qualified staff, sufficient skills training and quality control systems.

    To successfully run an agency and help others, nonprofit employers must have the resources to offer competitive salaries and benefits. Working for a nonprofit demands passion and heart for taking meaningful action. Nonprofit work is more than just a job; it’s a calling, and it deserves appropriate training and a fair income.

    Nonprofits touch a deep need in the world, but without proper funding and the ability to develop a strong infrastructure, they won’t be able to fulfill their purpose. The next time you’re considering donating, don’t base your decision on overhead alone. Instead, understand that your money helps nonprofits help themselves so they can be the change in the world.

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    About the Author: Cathy Atkins is the director of resource development at the Heart of Missouri United Way in Columbia, Missouri. After a fulfilling career as a business owner in sales management, she shifted gears to devote herself to nonprofit work after United Way’s mission caught her heart. Cathy is an active member of the Rotary Club of Columbia NW, the Columbia Chamber of Commerce and Voices CoMo.

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