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:
“Tip #2: EXAMINE CHARITIES CLOSELY. Do the same due diligence on your donations that you would your investments or your business. Pay especially close attention to the overhead. Anything above 9 to 14 percent is out of line and signifies that too much money goes to staff or office space and not enough to the beneficiaries, according to Stephanie Risa Stein, managing director of New York-based Philanthropic Capital Advisors LLC.”
Do we place too much emphasis on that percentage number? Are non-profits that donate 95 percent necessarily making more of a difference than those that donate 85% or less? Lublin says no: “Low overhead doesn’t necessarily mean an organization is awesome at fighting poverty, or that its turnover is low and its people productive. And it certainly doesn’t guarantee that the group is spending wisely.”
Instead, donors should be encouraged to look at how successful an organization is at accomplishing their mission. Yes, you should still let all investors and benefactors know what percentage of their donation goes directly to your cause. But rather than stress over whether you can function on 10 percent of your proceeds, think about how to let your audience know who you’ve helped and how. Spend time (and money) creating a resilient foundation and reputation for your organization and that little number will fade into the background.
Lublin uses a case study from her own organization:
“Last year, we spent nearly $200,000 overhauling our website, from the content management system to the architecture to the design. No one likes such expenses on the books: they smell like overhead. But our site no longer crashes, traffic has doubled and we even won a Webby award.”
The old adage “You have to spend money to make money” (or in this case “raise money’) applies. You want your non-profit to be viewed by potential donors and volunteers as a trustworthy, established and professional organization. To create that reputation, you need a stable base and continuous maintenance. Don’t live in fear of overhead. Any organization that spends unreasonably can’t demonstrate real results anyway. Behind every great non-profit, there are rental fees and bills to pay. So stop obsessing about indirect expenses. Keep changing the world—one electric bill at a time.
By Shea Bergesen of 10 Percent Solution
