Nonprofit Myths: #4 - Overhead

Starting and running a 501(c)(3) tax exempt nonprofit is a lot of work and not everyone is cut out for it. Some go into the venture with false assumptions and myths and only later find out they didn’t understand what they were getting themselves into. Let’s examine some of those myths.

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Myth: If we’re running our nonprofit efficiently, our overhead and administrative costs should be small.

Truth: Low costs to run an organization might be desirable, but there are different kinds of costs and how much you spend on each depends on what your organization does.

First, what’s meant by “overhead?” Generally, it means all those costs that are not directly related to delivering your program. So overhead might include personnel in accounting, human resources, management; it might include fundraising and development costs, including salaries; IT and related services are in this category; and all the supplies you need to support those functions are also in the overhead basket.

Program costs—those expenses related directly to the work you do—are something else, and usually clearly distinguished from overhead or administration. Program costs will differ dramatically from nonprofit to nonprofit.

If you're running a tutoring program for at-risk kids you might get volunteers willing to do the work, so your program cost might be relatively low (at least when it comes to salaries for tutors).

But if you’re delivering mental health services for veterans with PTSD, you’ll likely need to pay trained therapists and credentialed counselors. Counselors, therapists, teachers and other employees need to buy their groceries and pay their rent just like other people. Skilled professionals can’t afford to work for free. They need to earn reasonable wages for the skills they bring to your nonprofit.

It’s possible that your highest cost category might be salaries and benefits. That doesn’t mean you’re “inefficient,” it means that as long as the wages are comparable to other similar nonprofits, and the work is getting done, get the funding and pay the people!

Moral of this myth: Understand and present the difference between administration and program delivery. Then budget for what is appropriate to provide the best services you can to fulfill your mission. Hire and manage the best people you can, and treat them well, so your clients get the best services possible and your employees want to stay and grow with the organization.

 

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"Nonprofit Myths" is a 12-part series by Dr. Kitty Bickford, founder of Pasture Valley Children Missions. As a nonprofit consultant, Dr. Bickford has provided guidance to thousands of nonprofit leaders in best practices for setting-up and effectively running their organizations. We're also proud to claim Dr. Bickford as an alumna of The Grantsmanship Center. 

© Copyright 2020 Kitty Bickford, DBS, CPC     Used  with permission

 

For further delight and edification, here's a short series on board development:

Who's On Your Board?     Where Can You Find Board Members?     What Does a Board Do?

 

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