The Overhead Myth: The idea that you can reasonably evaluate a nonprofit’s performance and trustworthiness by only looking at how much they spend (or don't spend) on overhead, including operating costs, administrative expenses and technology costs.
No doubt you’ve heard about this, and like many good nonprofit leaders, have done your best to refute it. It’s dubbed a myth for good reason.
Yet most nonprofits feel pressured to do as much as possible with as little as possible when it comes to running their organization. The Overhead Myth still exists, and donors still scrutinize nonprofits, wondering what percentage of their gift actually goes toward the “cause.” As if dollars that support infrastructure don’t also support the mission.
Today, with continually evolving technology and marketing channels, it's crucial to invest in your brand, digital presence, community engagement efforts and fundraising tools. Not just once, but regularly. We may not always want to spend money on overhead costs, but if we didn’t, we’d end up with archaic communication tools and a website that looks like 2005 (which is not okay if you want to appear current and relevant today).
Why do nonprofits struggle with this? Because of the stigma of operating costs. Donors want to believe every dollar they give goes directly to the people who need it—straight to your mission. They forget that helping the cause doesn’t happen if you don’t have a healthy enough organization to deliver.
How can you help your donors and dispel the overhead myth? Be transparent about questions like these:
1. What are typical administrative costs for most nonprofits? Anything necessary to keep the organization running. Without them, we’d have more money to give to our cause, yes. But we wouldn’t have an effective organization to support the cause. Administrative costs include staff salaries, IT setup and maintenance, training, leadership development, strategic planning, marketing, PR and the like.
2. Why has overhead been viewed so negatively in the nonprofit sector? Organizations are required to show on their Form 990 how they allocate administrative, fundraising and program expenses. Donors see that and ask, “How do my dollars actually help save shelter animals or feed the hungry?” They judge an organization by the percentage of administrative costs out of the total expenses the nonprofit has for the year, or the overhead ratio. “Overhead” has become a dirty word.
3. How should donors and nonprofits more appropriately view overhead costs? An example in a popular 2013 TED Talk about the Overhead Myth was this: You can run a bake sale and earn $75 with no overhead. Or you can spend $200 on a radio campaign, reach more people and bring in $500 while increasing your exposure and donor base. Why is it wrong to spend more if you end up better off?
If you don’t pay for a good accountant, you won’t have adequate controls and the possibility of fraud is higher. If your IT system isn’t current, you’ll be limited by outdated technology and waste time doing things you could automate. If you don’t budget for new ways to raise awareness (SEO or SEM, anyone?), you’ll gain fewer new supporters.
The truth is, the attitude of “do more with less” often doesn’t allow you to do much. Of course you want to make wise financial decisions and get the most value for your money. But many administrative costs are not expenses, per se—they’re investments. By allocating money toward the right things, you invest in your brand’s reach, influence, donor base and long-term planning.
So, the “overhead truth” is this: Investing wisely in the right areas allows you to reach more people and create more impact, not waste more money.
This is so important to consider as you plan your budget for the coming year and decide how to best allocate your funds. What will provide you with the best ROI and most effectively move the needle on fundraising? I would suggest starting with these five areas:
1. Your digital presence. Your website is your prime piece of online real estate. You probably have one, but how old is it? Does it look current? Are you able to update content? Is it mobile responsive, which is crucial now that people access the web more on their phones than their PCs? Does it cater to your community and allow them to do things like register for events and make online donations? This is important if you want to remain relevant in 2018 and beyond. Your website is not a “one and done” deal. It should be an evolving marketing tool—your most important one, in fact.
2. Community cultivation marketing efforts. Think email marketing, donor management, social media marketing, direct mail—anything that keeps you in touch with your constituents and fosters better communication and relationships. You can automate and personalize much of these efforts if you have the right tools, saving you precious time, and you’ll reap benefits for years by investing wisely in donor relationships.
3. Fundraising tools. The ability to take online donations is a must-have, but even beyond that, consider your donors’ giving experience: Do you take them to a third-party site in order to make a donation, or can they donate seamlessly right on your site where you have the opportunity to engage with them and draw them further into your organization’s story? Crowdfunding is another valuable fundraising tool your nonprofit may benefit from—have you researched platforms and how this form of fundraising could effectively move the needle? Investing in the right tools can both bring in more dollars and make giving easier for your supporters.
4. SEM/SEO efforts. SEO (search engine optimization) and SEM (search engine marketing) are often confused, but they’re slightly different. SEO is about driving traffic to your website organically through higher search rankings. SEM increases your website’s visibility through organic search engines results and advertising. SEM includes SEO as well as paid search. They both have this in common: They get your website noticed. You can have a brilliant website, but if you don’t invest in visibility and drive traffic to it, it’ll be brilliant alone.
5. Brand updates. This includes your logo, brand colors, website design, marketing materials—anything that conveys your nonprofit’s look and messaging. In order to stay relevant, it’s important to stay current, and that includes the way your brand looks and feels. Investing in your brand is a non-negotiable if you want potential donors to see you as an organization that’s worth supporting.
This is not easy, and I want you to know that I feel your pain. Allocating your funds in a way that provides the best ROI can be a challenge, especially when you’re doing so under the watchful eye of your constituent base. At Firespring, we get you and we’re up for the challenge. We’ve been serving nonprofits for nearly 20 years, and we’ve learned how to help nonprofits make a bigger impact without blowing their budgets.
The best news: As a member of NDANO, you can benefit from Firespring’s services for even less through our preferred partner program. Investing in your organization’s capacity to raise money and engage supporters could be the wisest decision you make this year.
About Jay Wilkinson
Jay Wilkinson has been actively involved in the nonprofit community his entire life. He sits on the board of several nonprofits and is an avid supporter of programs that provide leadership and enrichment programs for America’s youth. As a philanthropist, Jay has raised millions of dollars for nonprofit organizations. As an educator, he has trained thousands of fundraisers, marketers and nonprofit executives and has appeared on CNN and other national news outlets discussing the important role nonprofits play in the U.S. economy.
Jay is the founder and CEO of Firespring—a company that provides beautiful websites and essential tools to nonprofit organizations. Firespring helps nonprofits raise money, manage donors, organize volunteers and conduct events while presenting a powerful and professional online presence. Firespring is proud to be the first B-Corporation in Nebraska and is on a quest to transform the business landscape by encouraging all companies to leverage their people and profit as a force for good.