Overhead? What is it?

What compels you to donate to an organization? Many people have a family tradition of donating to one cause or one organization that is close to their heart. Others have felt the burden of financial issues, homelessness, or health problems and were supporting during these crises by a specific organization- thus their loyalty and support. One issue that can greatly impact someone’s willingness to donate is the issue of “overhead” of an organization. However, looking at overhead divorced from factors that go into calculating overhead can give a false picture of where your money is truly going.

Nonprofits have a tax-exempt status because their work benefits the public good, but in order to comply with the IRS code, they need to file a Form 990 every year that details program costs, operational costs, and fundraising costs. To calculate overhead, management and operational costs are added to fundraising costs and divided by total cost of operating. In order to appeal to potential donors that want nonprofits with low overhead, many nonprofits underfund administrative and operational costs. This can have a devastating impact on the work that nonprofit can do. Why?

First, nonprofits need to be able to share the results of their hard work with their donors and the public. Without staff hours to write newsletters and fliers, and without printers, ink and paper to print these materials, we cannot share our impact. We also would not be able to leverage the money thais donated without spending on fundraising.

Second, without appropriate funding, nonprofits won’t have adequate facilities available for the public to provide them goods and services. Funds spent on buildings and upkeep make sure that those who need resources- often the most vulnerable in the community- have safe and secure facilities to access that help. Nonprofits need to be able to offer their full range of services that the public need, which they may not be able to do with less staffing or infrastructure.

Finally, there is less accountability when there is a lack of funding. Monies spent to keep correct bookkeeping, HR policies and enforcement, and accounting ensure that there are no oversights or mismanagement. Also, nonprofits need staff that are the best and the brightest to tackle the community’s toughest problems. Adequate compensation for staff ensures less burnout and turnover by providing training and professional development.

While overhead is one factor that is important to take into consideration, donors should instead look to the larger picture of their transparency, leadership, and results. When a nonprofit has the funding to properly secure their core infrastructure, they can truly innovate and increase program success.