As a nonprofit professional, you’re likely all too familiar with overhead costs. Many organizations struggle with how to cover these expenses, how much to allocate to overhead, and how to explain to stakeholders that not all donations will go directly toward their mission.
However, when you understand overhead costs and how to manage them, you can be more confident in your spending decisions and be more transparent with stakeholders. To begin, let’s break down exactly what overhead costs are.
What are nonprofit overhead costs?
Nonprofit overhead costs are expenses supporting an organization’s operations and infrastructure. Also called administrative or indirect costs, they’re typically not tied to specific programs or activities—meaning they indirectly support your mission.
There are three main categories of overhead costs:
- Management and general expenses
- Fundraising expenses
- Membership development expenses
Common examples of overhead costs include salaries and wages for administrative staff, office rent or lease payments, and website development costs. These expenses keep your organization running smoothly so your team can execute your mission.
Overhead costs are included as supporting activity expenses within your Statement of Activities or Statement of Functional Expenses. These financial statements allow you to understand how you have previously allocated resources, make better strategic decisions, and increase stakeholder transparency. Additionally, reporting expenses based on their nature and function is required on your Form 990.
6 Tips for Managing Overhead Costs
There’s no magic number or percentage your organization must hit regarding overhead costs. Many nonprofit professionals call this the overhead myth, which is the concept that every nonprofit must fall within a certain overhead range (typically estimated to be anywhere from 15 to 35% of total costs). Many of the ideas listed below won’t change your organization’s overhead ratio; however, they are ideas to help reduce overhead costs and generate revenue to help cover those costs.
As YPTC’s nonprofit financial management guide explains, “Every nonprofit has a different ideal amount they should allocate to overhead costs based on their organization’s age, size, geographic location, and specific needs.” With that in mind, let’s explore how to approach overhead responsibly.
1. Track overhead.
Create a system to track and categorize overhead expenses so you understand where you’re spending overhead dollars and identify opportunities to cut costs. Use accounting software to create a chart of accounts that separates overhead and program expenses. Then, break down overhead costs into categories to better track your overhead spending on areas like administrative salaries and rent.
Some costs, like utilities or maintenance, may have some line items considered overhead, while others are program expenses. Sort out these shared costs to allocate the correct amount to overhead. Then, regularly review your expenses to ensure you adhere to your budget and understand how much you typically spend on overhead.
2. Negotiate with vendors.
Reduce recurring office supply, software, and maintenance expenses by negotiating with vendors. You may be able to lower prices by:
- Looking for bulk discounts on items you purchase in large quantities.
- Comparing providers to find the most affordable options.
- Seeking nonprofit pricing to get the resources you need at a lower rate.
- Using a single vendor for several different products or services.
Even if you’ve been using the same vendors for a while, inquiring about bulk discounts or informing them that competitors have lower prices can help you push negotiations forward.
3. Leverage volunteers.
Volunteers can help with more than just program delivery. They can also perform administrative tasks, allowing you to limit spending on salaries and wages.
Help volunteers become part of the team by training them in advance. If you’re moving administrative tasks off a current staff member’s plate, have them lead the training.
Whenever possible, match volunteers with responsibilities that reflect their skills. Consider surveying volunteers to gauge their interests and relevant skills. For example, you may discover a volunteer recently retired from her full-time job as a human resources specialist, making her a great candidate to lead your recruiting and hiring processes.
While you won’t be compensating volunteers monetarily, find other ways to motivate them and thank them for their time. For instance, you may start a volunteer of the month program or provide opportunities for them to earn certificates related to their work.
4. Secure corporate sponsorships.
As part of their corporate philanthropy programs, many businesses may be willing to sponsor your organization in exchange for public recognition. You can use these sponsorships to cover overhead costs so you can allocate more funds directly toward your mission.
Sponsors may support your nonprofit by:
- Funding events and auctions to cover venue, catering, technology, marketing, and staffing costs.
- Contributing in-kind donations like office supplies or pro-bono professional services like legal or web design services.
- Providing corporate volunteers to help offset staffing costs.
- Offering promotional support to lower marketing costs.
For the best results, reach out to companies whose values align with your organization’s. For instance, an animal shelter may partner with a local groomer or pet store.
5. Partner with major donors.
Small donors, in particular, are often hesitant to support overhead expenses, especially if they feel their hard-earned dollars won’t impact your nonprofit’s programs. While you should try to explain the necessity of overhead funds and how they make your mission possible, consider offering overhead-free opportunities by partnering with major donors to cover overhead costs.
If small donors understand that major donors cover a significant amount of your organization’s overhead costs, they may be more comfortable contributing, knowing that most of their contributed dollars will go toward program services.
A study about overhead aversion by behavioral economist Uri Gneezy recommends this approach, claiming that “Incentivizing potential donors by informing them that overhead costs would be covered by an initial donation significantly increased the number of people deciding to donate and the total donation amount compared with the seed and matching incentive approaches.” The study also points to charity:water as an example of an organization that practices this finding, collecting donations to overhead from a private group of major donors called “The Well.”
6. Enlist professional help.
While you can manage overhead costs on your own, you may not have the time to add this project to your never-ending to-do list. Fortunately, there are financial experts willing to assist nonprofit organizations with their financial management.
More specifically, hiring a fractional CFO can help you manage overhead expenses through proper:
- Budgeting
- Forecasting
- Financial planning
- Accounting system implementation
They can also support other areas, including scenario planning, cash flow forecasting, data visualization, grant management, financial policy development, and risk management.
Look for a fractional CFO who specializes in nonprofit financial management. That way, they’ll understand your desire to strategically limit overhead and know how to minimize your expenses without compromising operational quality based on their work with similar organizations.
While maximizing the resources you allocate toward your mission is important, overhead costs are also necessary to keep your organization functional. Reframe how you think about overhead as a stepping stone to mission accomplishment, and take steps to develop an overhead strategy that works for your nonprofit.
