Overhead expenses are unavoidable when running any kind of organization, including those in the nonprofit sector. Overhead line items tend to be highly scrutinized in the nonprofit world, where charities and other organizations are judged by how they allocate their funds to anything outside of the scope of mission-driven programmatic spending.
In this article we are going to look at overheard specifically as it relates to nonprofits, defining what overhead is and identifying overhead expenses that work for, or against, a nonprofit.
Overhead Expenses in Nonprofit Organizations
Nonprofit overhead expenses refer to the administrative spending by nonprofits to support overall programmatic operations and infrastructure. They are not tied directly to the nonprofit’s mission and programs, but they are necessary to keep the organization running smoothly and sustainably.
We touched on this topic in a recent article about when and why nonprofits should consider turning down some grants that come their way. In it, we explained that every well meaning nonprofit seeks to minimize its overhead costs while maximizing money spent on their mission. But, the reality is, overhead is an unavoidable component of providing well run and delivered solutions.
Common categories of overhead expense incurred by a nonprofit organization include:
- Administrative expenses such as salaries for leadership and support staff, rent, utilities, office equipment and supplies, and support services in the areas of accounting, legal, and administrative.
- Fundraising expenses like salaries and fees for fundraising professionals, costs associated with organizing and hosting fundraising events, and marketing materials.
- Human resources staff and training.
- Program support expenses, including training and development costs for staff and volunteers, and technology investments to improve program efficiency.
The “Overhead Myth” Limits Nonprofit Reach and Impact
Despite overhead being an essential spend category for all nonprofits, a pervasive “overhead myth” exists. This idea is rooted in a donor-driven belief that they should keep their nonprofit overhead expenses to a minimum, equating to no more than 15-20% of the organization’s total expenditures. This challenges nonprofits’ ability to grow, scale, and thus, impact more of those who benefit from their programs. It also charges them with the responsibility of educating their donor base about how overhead expenses are furthering their cause, by allowing the organization to grow and expand, rather than limiting their reach and impact.
One recent example comes to mind. One of our clients had a difficult time fundraising during the pandemic and simultaneously lost their fundraising staff. They had to hire a fundraising consultant to refocus their fundraising strategy and hire new fundraising staff to carry out said strategy. In the meantime, they started incurring operating losses and eating into reserves. Their fundraising expenses were much higher than normal during that year and the results of the new fundraising strategy and new staff took many months. However, it was a necessary additional expense to help them get back on track with bringing in funds required for the continuation of programmatic expenses at pre-pandemic levels.
Understanding that overhead is necessary to the function, sustainability and growth of a nonprofit is key, but that doesn’t mean that all overhead costs are good for an organization. Next, we will explain which types of overhead expenses work for, or against, a nonprofit.
Overhead Expenses that are Good for Nonprofits
Accountants that provide strategic solutions and guidance to nonprofits are a valuable asset to the organizations they serve and, indeed, the work they provide. And, they are overhead.
Nonprofits don’t deliver their programs in a vacuum. It requires tracking the work provided, paying the people that deliver the programs, operational expenses such as office space and distribution, and more.
A nonprofit needs a competent, highly skilled partner to manage the financial side of delivering their important programs. Strategic CPAs, like the nonprofit sector accountants at Lumix CPA, help make the money work for the nonprofit and are thus an imperative and “good” overhead expense.
Other nonprofit overhead expenses that contribute to expanding the reach and impact of a nonprofit include:
- Investment in staff training and development to enhance performance and impact.
- Technology infrastructure that improves efficiency and data management.
- Capacity-building initiatives that help the nonprofit deliver on its mission on a grander scale.
Overhead Expenses that are Bad for Nonprofits
“Bad” overhead expenses are a major contributing factor to the “overhead myth” mentioned earlier. The acts of minority bad actors and their nefarious spending have led to a larger lack of trust between the public and the nonprofit sector in general. Knowing what would be considered a “bad” overhead expense can help a nonprofit avoid unnecessary skepticism and negative consequences in terms of fundraising and mission reach.
Any expense allocated to overhead that does further the cause of anything or anyone other than the nonprofit mission and programs would be considered “bad” overhead. This includes things like:
- Excessive executive compensation
- Misallocated funds and financial mismanagement
- Unnecessary or lavish expenses
Employing a strategic CPA is a nonprofit’s best line of defense against making these financial missteps and suffering the blowback and reduced impact that come along with them. Even more importantly, having the right accounting firm in your corner can help your organization grow, scale, and maximize its impact. If your nonprofit is ready to have an accounting partner that knows the specific challenges and dynamics of the nonprofit sector, contact Lumix CPA today. We have expertise and experience in the nonprofit industry that will get your organization the best strategic outcomes possible.