A strong nonprofit organization needs a strong infrastructure. Yet many foundations, corporations, and individual donors that support nonprofits only want to fund specific programs and not the glue that holds these programs together. The double standard that haunts the leadership of nonprofit organizations and hurts the quality of the programs they provide is that funders expect the nonprofits they fund to be well-managed, but these same funders are often reluctant to pay for an organization’s operating costs. There is an underlying suspicion among many donors, caused by media attention to the high salaries that executives of some large nonprofits receive, regarding the legitimacy of a nonprofit’s operating costs.
Operating costs represent the fixed costs of keeping a nonprofit organization’s doors open. In the 2007 study, Paying for Overhead, conducted by the Indiana University Center on Philanthropy, researchers discovered that two-thirds of the educational and human services nonprofits they surveyed reported having inadequate overhead funds. The nonprofits placed the blame on foundations that only wanted to support programs, not administrative expenses, and on external pressures to keep administrative expenses low. The same study showed that over 90 percent of the organizations reporting inadequate infrastructures were small, like most of Sonoma Valley’s nonprofits, with revenues of less than $500,000.
So, how can small nonprofit organizations raise the operating capital they need to run quality programs to benefit the needs of the communities they serve? According to Christine Dohrmann, owner of the Sonoma-based nonprofit consulting firm Dohrmann & Associates, “To successfully raise funds for operating costs, one has to have a larger story—a strategic plan—to tell. Operating costs can and should be woven into the costs of each and every program. Nonprofits should then share both with their donors and prospects and tell the story of what it costs to do the work they do. The best way for donors and prospects to understand the cost of doing the work is for staff and board members to share the information—the real story—with them personally. Nothing takes the place of a personal conversation.”
The Paying for Overhead study revealed that while 18.5 percent of the philanthropic foundations they surveyed would not fund any operating costs, 12.5 percent would fund some types and 69 percent would fund all types of overhead funding. The foundations most likely to fund overhead expenses were foundations that give away more than $6.5 million per year are younger than ten years old, are independent (as opposed to community foundations), are local (as opposed to nationwide), that fund human service organizations, and are West Coast-based.
Nonprofit boards of directors have the ultimate responsibility of insuring that the organizations they lead are accountable to the public and have the necessary infrastructure to execute their missions. According to the 2003 Nonprofit Overhead Cost Study of the National Center on Charitable Statistics and the Indiana University Center on Philanthropy, nonprofit boards should consider merging with another nonprofit with a similar mission to reduce infrastructure expenses or simply outsourcing some of their infrastructure.
In a 2006 study of nonprofit executive directors published by the San Francisco-based nonprofit consulting firm, CompassPoint, researchers discovered that the number one way that funders could be helpful to nonprofit leaders was to offer general operating/unrestricted grants and multi-year support. It might be helpful for funders to stop thinking of overhead costs as an unfortunate consequence of doing business and, instead, view these costs as a way to create robust, effective community-based organizations.
Dr. B.J. Bischoff is the owner of Bischoff Performance Improvement Consulting, a Sonoma firm specializing in building the capacity of nonprofit organizations and government agencies to better serve their stakeholders. She is a member of the Impact100 Sonoma Board of Directors.
