You're going to be asked. It's just a matter of time. How much of your nonprofit's budget is dedicated to overhead or administrative costs? This question comes up often in foundation and government grant applications. How much of every dollar you have goes to your actual charity work?
Why? Why do grant-makers care how much money your nonprofit spends on administration? Because they want to make sure that the funds they award to your nonprofit are used for philanthropic purposes. As nonprofit professionals, we know and understand that paying staff, keeping the lights on, and buying office supplies are critical components of serving our clients. Without staff, without a building, and without electricity, our nonprofits wouldn't really exist.
But it's important that nothing in our budget outweighs our programs and services. If our annual budget is $100,000 a year and we're paying our Executive Director $75,000 of that budget, are we really committed to our mission?
So what is an acceptable percentage? You'll hear all kinds of different answers to this question, but in general, nonprofits want to keep their administrative/overhead costs below 20%. This includes everything that isn't a direct program cost. Think staff salaries, benefits, rent, utilities, office supplies, taxes, independent contractors, postage, technology equipment, and subscriptions (just some examples).
What if you're not there yet? Sometimes it can take time for a new nonprofit to get in this range for overhead expenses. But working towards this as a target is an important part of being successful in grant writing. Look for ways to streamline or cut back on administrative costs and inject those funds into your programs as your budget grows and develops over time with more fundraising.
What happens if you have a high percentage of overhead expenses? Anything over 20-30% may decrease your chances of securing grant funds when you apply to foundations or government agencies. In some cases, funders may actually state that they do not accept applications with more than 10% of your budget allotted to overhead. This stipulation is usually part of the requirements for government applications. In some cases, we see nonprofits get some negative press when their high overhead percentage is revealed.
While nonprofit budgets and financial data are public knowledge, there can be some misconceptions about how much nonprofit executive staff "should" receive as compensation for their work. Often, large-scale nonprofits with national reach are the ones making headlines. As nonprofit professionals, we know that the work we do is important, and having paid, expert staff to run the organization as well as administer our programs is a valuable part of our ability to serve our clients and carry out our mission. But that investment in human resources must be balanced with the fact that our nonprofits were not set up to make anyone rich.
The takeaway: I've always wanted to fall in the middle of the pack. As an experienced and knowledgeable donor and fundraising professional, I have never really understood how some nonprofits operate with only 1-2% of their budget devoted to overhead. It makes me question if they are fairly compensating their staff and if the staff is happy with the working environment. In my opinion, no one's working life should be miserable because they are devoted to a cause. But I also don't understand the nonprofits that only designate between 20-30% of their budgets to their mission work year after year. Nonprofits are intended to serve a cause. To me, when paying staff or leasing office space or buying expense equipment overshadows that, the priorities may have shifted.
Want to check how your nonprofit measures up? Check out Charity Watch, an independent charity watchdog that helps donors decide how and where to make their donations.
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