Overhead Expenses: Is there an optimum amount?Sep 27, 2022
At a recent meeting of a philanthropic leadership group (we were offering grants to support the social sector), one member suggested that we should know the percentage overhead costs for each applicant. Another asked why, surely it was irrelevant, and we should “trust.” Yet another suggested quite strongly that it costs time, money, people, and infrastructure to deliver services and programs… We could not determine what is appropriate for each agency.
And yet government and donors do just that – set an arbitrary goal or limit for overhead expenses.
But how do you assess how much overhead is too much?
And now, according to recent studies, how do you assess how much is too little?
Are you being held back from reaching your potential due to the government and donors' outdated “rules of thumb”? How much is too much and how much is too little – and does one size fit all?
Indeed, spending too little on overhead may deprive you of the competitive salaries, staff training, equipment and other resources you need for long-term success. And successful not-for-profits cannot be run any longer on a charitable mindset. No one takes a vow of poverty to work for a not-for-profit. Investments in infrastructure are critical.
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Scholars have been warning for some time about the dangers of pressure from donors to keep overhead spending low, paying low and non-competitive salaries, replacing paid staff with volunteers, and using outdated facilities and equipment.
We are often asked to emulate business, to use successful business models. It is challenging to imagine successful enterprises that set out to pay their people less, provide dated tools with which capable people might work and provide substandard facilities in which to work – and then find innovation, retention and growth as a result.
There is evidence supporting donors’ fears that spending too much on overhead is unwise. This tends to be those who spend more than one-third of their budget on these costs. But programs that charge admission may have to spend more on overhead than free programs to attract an audience.
There can be no one guideline for all not-for-profits.
When arts agencies devoted 35% of their budget to overhead, they fared best in terms of attendance.
Attendance declined, by contrast, for organizations that spent extremely low and high amounts of their budget on overhead.
Groups that spent far too little saw their attendance decline by 9%. Attendance for arts groups that spent way too much on overhead fell by 30%.
Overhead is critical to any successful operation. But what is the optimum amount? And how do you determine it?
What are your benchmarks?
What are your measurements?
What does success look like?
What are your main “pain points” in dealing with overhead costs and donors?
What advice would be most helpful to you? And we always assume that you are asking for a friend!
Get in touch. We’ll address your questions and concerns in an upcoming blog post.
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