Being honest and transparent about overhead costs (i.e., Management & General, Fundraising, etc.) is vital in educating stakeholders on the cost of delivering services. Many people think of overhead as a negative part of doing business, thinking it is something to be minimized in order to maximize something (such as profits or other measurables). However, proper spending on overhead is key to an organization’s long-term sustainability and overall health.
With the implementation of FASB ASU 2016-14, nonprofits are now required to present a statement of functional expenses. Furthermore, nonprofits are required to disclose how costs are allocated between the functional categories (program, management & general, and fundraising). The method of allocation is up to management, but it is generally based on estimates. Everyone agrees this information is essential, but the structure behind an organization’s mission is more important than the percentage of expenses that are presented as “program.” None of a nonprofit’s programs could function without funding (fundraising) or proper management (management and general).
The portion of expenses that are allocated to overhead can vary depending on the mission of the organization. For example, a nonprofit may exist solely to administer certain programs that are specifically funded by government grants. They may not have much overhead in this instance, and their ratio of program expenses to total expenses would likely be greater than 90%. On the other hand, many other nonprofits competing for donor dollars must pay for reasonable and necessary costs of doing business such as:
- Buildings and equipment
- Fundraising costs
- Software implementations (often industry-specific and costly)
- Training for staff
- Salaries and benefits for management and administrative staff (such as billers, accountants, supervisors, etc.)
While many donors have concentrated on costs, management, and development, personnel can work on changing the focus of donors from costs to outcomes and impact such as:
- Statistics on outcomes of clients served
- Numbers of clients served
- Volunteer hours (Overhead is essential to coordinate all those volunteers!)
- Information on how donors can help facilitate the expansion of services or speed of providing the services
- Other performance measures
In the current environment, most nonprofits (and for-profit businesses) are looking to cut costs. Evaluating ways to cut costs and streamline operations is a worthwhile exercise, but it is important to make sure the supporting structure of your organization is not compromised. Overhead is essential to doing business. High percentages of costs allocated to programs (right or wrong) are not necessarily what we should boast about; instead, furthering the mission and creating positive outcomes are the most important to the health of the organization.
Ross Van Laar, CPA, and Manager at TDT, discusses misconceptions on overhead in nonprofits and what can be done to change perceptions. With eight years of experience, Ross specializes in audits of nonprofits, small businesses, and employee benefit plans.