Tag: Operational Funds

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The Importance of Overhead for Nonprofits

Overhead costs are important for nonprofits because they directly affect an organization’s ability to fulfill its mission. Overhead refers to the administrative, operational, and fundraising costs that are necessary parts of running a nonprofit organization yet not directly tied to program delivery. Instead of thinking of overhead as wasteful and something nonprofits should work to keep below an arbitrary percentage, instead consider:

Capacity Building: Overhead expenses are essential for building the capacity of a nonprofit. This includes investing in infrastructure, technology, staff training, and development, all of which contribute to the organization’s long-term effectiveness and sustainability.

Program Implementation: Nonprofits require administrative support to manage their programs successfully. Overhead costs cover essential functions such as financial management, human resources, compliance, legal support, and IT infrastructure. These functions ensure that programs can be planned, monitored, evaluated, and delivered effectively.

Fundraising and Outreach: Generating financial support is crucial for nonprofits to sustain their operations and deepen their impact. These types of overhead costs include fundraising activities and outreach efforts that engage donors, build partnerships, and raise awareness about the organization’s mission.

Accountability and Compliance: Nonprofits have legal and regulatory obligations, including financial reporting, audits, and compliance with applicable laws and regulations. Overhead costs cover the expenses associated with ensuring transparency, accountability, and adherence to legal requirements- all important factors in building trust with donors, stakeholders, and the people or cause they serve.

Innovation and Adaptability: Overhead expenses provide nonprofits with the flexibility to innovate and adapt. This includes investing in research, exploring new program strategies, and embracing emerging technologies. These types of investments can lead to improved outcomes and better solutions.

Let’s work to create a better understanding of the need for overhead expenses for nonprofits. They’re not extras, they’re integral.

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An Ode to Funding Operating Costs

Strictly speaking, it’s not a true ode as its neither a poem nor set to music. But, I’m on a mission to raise awareness of the importance of operating funds for nonprofits so ode more closely matched my passion.

In September of this year, five large foundations ( Ford, Hewlett, MacArthur, Open Society, and Packard) announced their decision to fund operating costs- like salaries, technology, and rent. I was so excited I talked about it for weeks. I’m still going on about it, as evidenced here. I’m a massive fan of people who choose to use their resources to make a difference in our world. But, the lack of awareness around the importance of operational funds to program impact is discouraging.

In the Chronicle of Philanthropy article, Julia Stasch, who was the head of the John D. and Catherine T. MacArthur Foundation at the time, outlined the group’s thinking around changing the perception of overhead expenses. “By setting an example — and getting others to join — they would destigmatize overhead expenses and make sure everybody understands that they are an essential cost not only of doing business but of growing a business and making investments in infrastructure and increasing impact.”

Spot on. I’m energized by this focus on impact. So, fair warning, you’ll be hearing from me often as I advocate for operational funding.

People outside of the nonprofit world are surprised to find out that the majority of grant funding is only for costs tied directly to a particular program or project. That means no operating costs like rent, technology, or salaries of leadership. How do you create a culture of excellence in an organization, take a risk on new and innovative ideas, and focus on creating exceptional outcomes if you are slowing starving your organization of resources? Infrastructure investments are important. Having financial reserves means long-term sustainability for an organization.

If you are evaluating nonprofits to support, I’m pitching for a focus on their impact, not on their administrative expenses. And nonprofits, help people better understand why your work is important. Let’s move away from touting outrageously low administrative costs as a selling point. Instead, celebrate your impact, changed lives, and changed communities.