Whether you are running a non-profit or receive communications from one, you’ve seen it before. “95 percent of our proceeds go to fight world hunger! 85 percent of your donation is used to support local communities in need!” So where does that other percentage go? If you’re running ANY type of business, you know the answer.
Overhead, also called indirect expenses, is essentially the cost of running a business. Without some overhead expenditure, businesses would not be able to function; yet overhead does not contribute directly to the generation of profits. The materials used to bring in money—such as products or brochures to increase donations to your non-profit—are direct expenses. Overhead, on the other hand, includes, for example, the cost of the rental space your company uses to do business. The desk you sit it while you work. Your utility bills and travel expenses.
In a for-profit business, overhead can be a serious problem. If a retail store selling clothing pays a great deal for a premium location, it must charge high prices for its stock. Customers may not be inclined to pay those prices since they see no reason for the products to be so expensive. In this situation, the store may be forced to slash prices, which could mean that it barely meets its operating expenses. Carefully determining what the overhead will be is a crucial step in setting up a for-profit venture.
In non-profit organizations, however, overhead can become even more complicated. CEO of Do Something Nancy Lublin, in her article “Good vs. Evil” discusses how “overhead is seen as the devil of the not-for-profit world” and why this can be a misconception. Of course, your benefactors want to know that the funds they donate to your organization are going directly to the causes you support; not to pay your electric bills. And yet your non-profit needs some of that money to function, right?
In an article advising us about charitable giving, Five Tips on How to Stretch Your Charitable Dollars published by the AP and picked up by the New York Times and other newspapers, overhead is emphasized:
