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The Overhead Myth

The Overhead Myth

  • By Darin Preis

An executive director’s perspective on how to measure a nonprofit’s success outside of the numbers.

After I earned a bachelor’s in English, I had to make a tough choice. Should I live on an island and write poetry, take the offer to be an assistant manager at the pizza place where I had worked through college, or try to get paid for writing things. When I took a job writing grants for a Head Start program, I was pleased to find that I could make a difference in the world and have enough money to pay the rent. Thus began my life in the world of nonprofits and eventually my role as executive director of Central Missouri Community Action, or CMCA.

CMCA’s mission is to empower individuals and families to achieve self-reliance. We provide work support for families, help decrease expenses, and increase income. You have likely heard of our programs like Head Start, Housing Choice Voucher (the Section 8 program), Weatherization, utility assistance, and the Foster Grandparent Program. You may not realize, though, that we also run the Missouri Women’s Business Center, build single-family homes for first-time homebuyers, and we own five apartment complexes. CMCA has 230 employees, serves 13 counties, and has a 2019-2020 budget just shy of $20,000,000.

Nonprofit employees number in the tens of thousands here in Mid-Missouri with an almost immeasurable economic impact. Nationally, there are nearly 1.5 million nonprofits that employ more than 12 million people. According to the National Council of Nonprofits, that represents “more than 10% of the total private workforce in the U.S., with payrolls exceeding construction, transportation, and finance, and nearly $2 trillion in annual expenditures.” 

The largest of these nonprofit employers are related to health care and higher education. Still, human service nonprofits make up the third largest of the nonprofit sectors. Despite this massive impact on our economy, 88% of nonprofits spend less than $500,000 annually.  

Like for-profit companies, nonprofits have to track income and expenses. Unlike for-profits though, our success is not measured by whether or not the number at the end of the year is red or black. Instead, we gauge our progress by a measure related to our mission. Have we improved the quality of life in our community? Are our participants doing better because of our intervention? 

Regardless of the outcomes for which we strive, nonprofits also have to consider how to attract and retain the best employees, account for the increasing cost of goods, reduce waste, pay for our facilities, and keep the lights on. All of these familiar variables require that we make every effort to maximize our revenue through grants, contracts, fundraising, and events.

But here’s the rub – some donors and funders think that the percentage of overhead costs is as important a metric as the outcomes themselves. The “myth of overhead” is the one where Joe Funder or Jane Foundation says, “We want our donation to go into direct services, and you can’t use more than 5% of the money for administration.” Administration is often associated with all of the costs it takes to run a business, like a facility, utilities, HR, IT, accounting functions, workers, etc.

It is a noble sentiment indeed. We make donations because we want to contribute to identifiable interventions, not to pay for an agency’s rent. For many years, nonprofits bought into this myth and tried to do everything on the cheap. Nonprofits are challenged to seek talented workers who can work quickly, with compassion, navigate multiple funding requirements, and sometimes get torn down by the very people we serve . . . for less than what they’d make working nearly anywhere else.

My favorite blog, Nonprofit AF, frequently ruminates on the myth of overhead. They do a great job of putting this challenge into its proper context. For example, “The Overhead Myth is one of the dumbest and most damaging concepts ever inflicted on nonprofits and the communities we serve. Imagine if we go on Yelp to find help deciding which restaurants to frequent, and all the reviews are like this: ‘We were disgusted that the Happy Chicken spends over 30% of their revenue on rent, water, insurance, and accounting software. Go a block down the street and eat at the Flying Lemur instead; the owner assures me she only spends 10% on things like electricity.'”

Fortunately, this dynamic is slowly changing. Smart nonprofits are trying to pay competitive wages and provide workplaces that support their employees’ well-being and satisfaction. We are not settling for grants that don’t acknowledge this challenge, and we are telling our stories in ways that focus on the difference we make, not the cost of the widgets. Nonprofit work is important to our economy and can be incredibly fulfilling. I have never regretted my 25 years working for nonprofits and am still excited about the opportunities we have to make the world a better place.

As you consider your personal or corporate support for local nonprofits, I hope you will remove “administrative cost” from your calculus. Consider helping your favorite causes hire and retain the most qualified people, have facilities that give dignity to our clients, and the resources necessary to create real impact in their focus area. Challenge us to achieve our goals, to be sure, but don’t handcuff us to outdated measures of success.

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