There are plenty of watchdog companies out there that use nonprofits’ annual Form 990s and other public documentation to determine how “efficient” that nonprofit organization is. This public financial information is required of all 501(C)(3) organizations and therefore makes it possible for these companies to form their calculations and opinions.
Unfortunately, many of these companies don’t have the full financial story and only share the ratio of funding that’s allocated toward overhead expenses. Then, donors and prospects are encouraged to make snap judgments based on this simple calculation.
In reality, there’s a lot more that goes into the financial management of your nonprofit overhead than simply calculating the ratio.
But what is nonprofit overhead? And how concerned should your nonprofit be about it? That’s what we’ll cover in this guide. We’ll also walk through four tips that your nonprofit can use to better manage your organization’s overhead expenses. Let’s get started!
What Is Overhead?
Nonprofit overhead essentially describes the administrative costs associated with running your nonprofit. It takes money to staff employees, raise money, and market your cause. These expenses help manage your organization which indirectly supports your cause. This indirect benefit led to these expenses also being dubbed “indirect costs.”
Is Overhead Bad?
Overhead inherently gets a bad rap because many individuals believe that the money nonprofits invest in overhead takes away from what they can give to the mission. But it’s often the opposite! Nonprofits invest in themselves so they can better serve their missions.
That said, overhead is a good thing to keep an eye on because it can help you eliminate truly unnecessary expenses. But don’t focus so hard on overhead that you eliminate something that will truly help your organization! When nonprofits put too much emphasis on decreasing overhead without looking at the whole financial story, they may miss opportunities to expand the organization and do more good in the community.
Instead, expand your focus and examine your overhead expenses alongside other key financial ratios. Jitasa’s nonprofit financial ratio calculators provide some examples of ratios that could help you identify the true inefficiencies of your organization. For instance, you might use a fundraising efficiency ratio to see if your organization could improve your fundraising strategy and increase your ROI.
By looking specifically at the efficiency of specific programs, projects, and initiatives, you will better understand where true inefficiencies occur and how you can improve your overall ROI for various organizational initiatives.
Tips to Manage Your Nonprofit’s Overhead Expenses
Of course, if you’re reading this article, you’re probably looking for some actionable ways that you can better manage your nonprofit’s overhead expenses. Maybe you’re just looking for opportunities to cut costs or perhaps you just want to make sure you’re taking the right actions when it comes to finances.
Either way, we’ve got you covered! Here are our five tips to better manage your nonprofit’s overhead expenses.
1. Closely monitor overhead expenses.
If your organization is trying to better manage your overhead expenses, the first step you need to take is to review and monitor them more closely. Peter Drucker is famously quoted as saying, “If you can’t measure it, you can’t improve it.” In this case, it rings true! You can’t manage and improve on your overhead without accurately measuring and tracking those measurements over a period of time.
You might decide to track these expenses in a couple of different ways. You can track:
- The total amount you’re spending on overhead expenses from month to month
- The amount you spend on specific aspects of your strategy (personnel, office administrative activities, etc.)
- The percentage of your spending that’s used for overhead expenses on a monthly basis.
Review your chosen metrics on a regular basis and provide context for the expenses as necessary. For example, you don’t want to cut back on salaries and benefits if you found that you’re offering a competitive compensation package during the research process to develop your compensation policy.
Help tell the story of your expenses while you monitor them. This will help you find the truly unnecessary expenses or confirm that your onboarding expenses are necessary for the organization’s overall financial health.
2. Invest in your volunteer program.
Volunteers are an incredible resource for organizations looking to make the most of their current overhead expenses. Investing in your volunteer program means you can ask your volunteers to take on some of the administrative, simpler, or short-term tasks at your organization, freeing up your staff members’ time to focus on other elements of your mission.
You can also recruit volunteers to help with specific projects at your organization rather than hiring a new employee. For example, you might ask a graphic designer to volunteer their time to design flyers and marketing materials for your organization rather than hiring a new staff member.
Investing in your volunteer program up-front can result in long-term value for your organization and a higher return on investment for your overhead expenses, allowing your team to get more work done in even less time.
When it comes to investing in your volunteer program, here are the areas you should consider:
- Invest in recruitment. Especially if you need skilled volunteers, focus on recruiting volunteers who will serve the specific needs of your organization. Develop volunteer job descriptions and use targeted marketing strategies to find the best candidates.
- Steward existing supporters. It’s much easier to retain existing volunteers than to acquire new ones. Develop a stewardship program emphasizing appreciation, just as you would for your organization’s donors.
- Develop excellent training materials. To have effective volunteers, you need to train them properly. Investing in training materials will make them more effective, efficient, and engaged in your organization’s mission.
Not only can investing in volunteers help your organization accomplish more, but it can actually help you increase your revenue as well! People who volunteer have been shown to be 10 times more likely to donate to charity than those who don’t contribute their time. Therefore, by recruiting volunteers, you may also be sourcing new donors for your cause.
3. Ask about nonprofit discounts.
When the COVID-19 pandemic first emerged, you likely remember all of the discounts and aid provided by organizations, governing entities, and companies to help out individuals and nonprofits. Lots of discounts and nonprofit aid can actually be found outside of the pandemic support! Your organization may be eligible for various discounts on vendors and materials.
For example, some of the well-known discounts and free services offered to nonprofits include:
- Canva. This graphic design tool offers free use of its Pro features for registered nonprofit organizations, allowing nonprofits to save hundreds of dollars on design software.
- Google ads. Google offers Google ad grants for nonprofits, providing up to $10,000 in advertising dollars for ads on the search results page. Your organization would need to sign up and choose the keywords you want to show up for!
- Microsoft Office 365. Microsoft provides their well-known productivity apps for a discounted price for nonprofit organizations. They offer business basic and premium features for around half the price!
When your organization looks for new vendors and resources that you need to serve your mission, ask if the provider offers nonprofit discounts. You might get to save some money on something that would otherwise unnecessarily inflate your overhead expenses. Plus, the worst the vendor could say is “no,” so it’s always worth asking!
4. Look for easy opportunities to increase revenue.
One of the simplest methods to help manage your overhead expenses is to find additional ways to earn revenue that you can allocate to mission-specific activities. Rather than cutting back on overhead, this helps you offset the indirect expenses so they take up a smaller portion of your organization’s total spending.
Luckily, there are some easy and underutilized ways that nonprofits can easily increase the amount of revenue they bring in for their organization. Double the Donation’s CSR guide explains a couple of ways you can find additional revenue through corporate support of the contributions you already receive:
- Matching gifts. Matching gifts are contributions that companies make in support of the donations their employees make to eligible nonprofits. Companies may match the gift at a 1:1, 2:1, and sometimes even a 3:1 ratio!
- Volunteer grants. Corporate social responsibility programs also often feature volunteer grants, in which companies make a monetary contribution in support of the hours their employees spend volunteering with nonprofits. If you invest in expanding your volunteer program, you can earn even more of these grants as well!
The only problem is that many people eligible for these programs are unaware of their existence. By marketing these opportunities to supporters and encouraging them to look up their eligibility, your nonprofit’s donors can double the impact of the contributions, all without digging deeper into their wallets.
5. Tell your nonprofit’s full financial story.
As mentioned, lots of nonprofit watchdog companies review your nonprofit’s public Form 990 to draw financial insights and assumptions about your organization. However, there is usually additional context, especially behind your overhead expenses.
For example, organizations need to spend some time planning and investing in growth for the future. It’s one of the biggest mistakes nonprofits can make to neglect planning for future opportunities. While this growth isn’t immediate and requires some upfront investment, the result, in the long run, is a future where you can make an even greater impact on your mission.
Explain the context behind your organization’s various overhead expenses in your annual report or on your nonprofit’s website. This provides a story and explanation behind the numbers, showing supporters the long-term benefit of overhead investments now.
Overhead expenses get a bad reputation for nonprofit organizations because supporters generally want every cent they contribute to organizations to be used for the mission itself. However, this perspective on overhead is changing. Nonprofits need to spend some funding on overhead to grow their team and make a greater long-term impact on the mission.
Using the tips in this guide, you’ll be better able to analyze your own organization’s overhead expenses to find opportunities to cut back on truly unnecessary expenses as well as find new ways to offset your overhead. The best thing you can do is communicate effectively with your supporters, explaining your vision for the organization and how your expenses will help you get there.
About the Author
Jon Osterburg, Chief Operating Officer, Jitasa
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not-for-profit organizations.