What is a good overhead ratio for nonprofits?
There are more than a few realities unique to the world of nonprofits (just spend a few minutes on Shit Nonprofits Say if you don’t believe me), but one of the biggest and most challenging is how much a nonprofit should spend on overhead. A quick google search suggests that a for-profit business should spend no more than 35% on overhead expenses, but, apparently the average overhead percentage for nonprofits is around 10%.1 Where this number comes from is a bit of a mystery and is based on some pretty outdated thinking—you’ve heard of the non profit overhead myth, right? So, instead, we’re going to talk about all the good things investing in overhead can help you accomplish.
Overhead costs for nonprofits.
Let’s get one thing clear, the average overhead for nonprofits is going to include the same costs as any other business. The only real difference is that the average nonprofit overhead ratio will be scrutinized, questioned, and judged on how little you spend—not on how much you accomplish.2
Your nonprofit’s overhead expenses will depend on a few variables: your size, your cause or purpose, where your funds come from, the views of your board, your donors’ understanding of overhead—the list goes on. To keep things simpler, we prefer the “if you can explain why, it’s worth investing in” approach. And no, that doesn’t mean not investing in overhead.
A nonprofit overhead definition.
Before we go any further, let’s agree on a nonprofit overhead definition. For our purposes, overhead are any costs that aren’t directly invested in your cause or purpose. For example:
- Office space and supplies
- Fundraising software—Yes, this one will turn into a shameless plug or three for Zeffy and our free fundraising platform that covers all the fees (including transaction fees) for nonprofits.
Ways to reduce overhead costs: the nonprofit overhead myth.
Finding savings within your overhead costs can be complicated, but, off the top of our heads, one simple way to save would be using a fundraising software that doesn’t charge you the industry standard of around 3-10% per transaction. Sound too good to be true? Well, we can think of one: Zeffy. Okay, okay, shameless plug number one complete.
There are a couple other slightly more complicated solutions: you could transition to remote work, try and pay your employees as little as possible, spend next to nothing on marketing, cut back on events, etc. But, as you probably know, cutting back on any of these will have consequences. Yes, you’ll be able to claim that more or even 100% of the money you raise goes directly to your cause or purpose, but will you raise as much money? Will you have the same impact? Will you accomplish what you set out to do?
We know—because studies like “Avoiding overhead aversion in charity” have proven it—that your donors would really rather not have any percentage of their donation go towards overhead.3 Why do they feel that way? For years, a measure of a nonprofit’s success has been how much it spends on its cause and not how successful it has been at change.4 Some studies have found that 60% of donors were concerned that charities overspent on administrative expenses. So, if investing in overhead can be detrimental to you, what’s a charity to do? Well, slowly the times are changing and there are a couple long-term actions you can take to educate donors on the importance of nonprofit overhead expenses and steadily disprove the nonprofit overhead myth.
The first one: be transparent. And also patient. Changing the way people think takes time. And when it comes to transparency, we find a little education goes a long way.
How much do nonprofit employees make?
“How does a nonprofit pay employees?” and “How do nonprofits pay employees?” and their many, many variations are popular google searches. But, do you know what has almost no google searches? “Do nonprofits pay employees well?” and all it’s variations. These search results are pretty telling. Assuming is never great, but these results are definitely hinting at a two things: people assume nonprofits are mostly run by volunteers and, if you are an employee of a nonprofit, you’re not supposed to be paid as well as your for-profit equals.
This is a problem for two reasons. First, the nonprofit industry represents 9.0% of Canada’s GDP, which adds up to around $185.8 billion and 5.6%, or around 1.5 trillion, in the United States (US).5,6 There’s just no way that it could be run entirely by volunteers. But, just to be sure, we checked.
In 2019, […] non-profit institutions accounted for 2.2 million full-time jobs and over two hundred thousand part-time jobs in Canada. When excluding government non-profits, the sector employed approximately 630,000 full-time employees and 238,000 part-time employees.5
And in the US nonprofit jobs account for 14% of all private sector employment or 12.4 million jobs.7 People who work for nonprofits are among the most educated, dedicated and passionate employees out there—the vast majority have university or college degrees. However, they tend to justify and accept the lower salaries nonprofit jobs come with because they do actually care about the work they’re doing. It has become a common knowledge that nonprofit jobs pay less than their for-profit equivalents. Nonprofit jobs have been under-compensated for so long that they are no longer attracting the same quantity of talent.5 The nonprofit sector needs to attract new employees, while also holding on to the ones they have. Currently, the most best way to do that is through compensation.8
What do we mean? Well, paying wages above the market rate motivates employees because it’s harder to find an equivalent salary at another company. And, when a company (or nonprofit) gives an unexpected pay raise, workers tend to work harder.8
All this may seem like a no-brainer for any other industry, but the nonprofit industry isn’t like other industries. So, it’s worth reminding donors that a nonprofit’s overhead does indeed include compensation for employees, that low wages will attract fewer talented people and, if you do happen to get lucky and hire the perfect person, chances are they won’t last long if you aren’t paying them well. And with 170,000 nonprofits in Canada and 1.5 million in the US, competition is fierce.9,10
Ways to reduce overhead costs: a remote workplace? Maybe, but it’s not for everyone.
Allowing your employees to work remotely comes with a lot of benefits: less people commuting is good for the planet, everyone’s mental health improves, your employees save money and, you, them employer, save money too. A lot of money. Up to $11,000 per employee. 11 (Yes, we think this is high for the nonprofit sector, but still worth thinking about.)
But remote work from home is not for everyone. Not all nonprofits can transition to remote work. You may need to house animals, provide temporary lodgings for women, maintain a presence in an underserved community—the list goes on. And informing your donors about the realities of effectively and successfully running your nonprofit and why your overhead costs are what they are will help them better understand that nonprofit overhead expenses do exist and they often play an important role in the work you’re doing.
It costs money to raise money.
This isn’t news to you, but to your donors it might be. Fundraising takes money (and time). And we’re not just talking about the cost of advertising, building and maintaining a website, event planning and ticketing, staying in touch with your community, etc. We’re talking about the expensive fees charged by fundraising platforms for nonprofits. With most nonprofit fundraising platforms charging anywhere from 3% to 10%, the cost of raising money can add up quickly and represent a hefty chunk of your overhead that could be invested into your cause or purpose.
Okay, another shameless plug: Zeffy can help you out by charging exactly 0% in fees. No nonprofit fundraising platform fees. No transaction fees. Nothing. Imagine suddenly finding 3-10% more dollars per year. If it sounds too good to be true, it isn’t and we invite you to read all about why and how Zeffy is 100% free.
Enough about Zeffy and our 100% free fundraising platform that covers all of the fees (including transaction fees) for nonprofits like yours. Let’s chat about why more nonprofits could benefit from advertising. By now we’ve probably all seen Dan Pallotta’s TED Talk: The way we think about charity is dead wrong. (If you haven’t seen it, it’s 18 minutes and 38 seconds of greatness.) In it, he talks about the “double standard that drives our broken relationship to charities” and a big part of that double standard is related to advertising.2
Advertising works. Building demand for something, creating a desire to give, changes how much and how many people will give to your cause.
A disaster like Katrina received tens of millions of dollars of media equivalents in the form of 24/7 news coverage for weeks on end. Billions in donations poured in. How much would have come in if the story were never reported?12
Most of us have a finite amount of money. And with the for-profit industry outspending the nonprofit industry 384 to 1 when it comes to advertising, it’s no wonder that we decide to give so little of our hard earned money to charity.12 Yes, donors will have a hard time understanding why a part of their money is being invested in advertising. But, we think charitable giving is worth the long-term investment in overhead to make it a larger more present part of our everyday lives.
Stop using the word “spend” when talking about overhead.
What? Why? Well, “spend” has a lot of negative connotations to it. Especially with the over 55’s. And, honestly, you’re not spending the money, you’re investing the money. Language really does matter. If you can educate your donors on why investing in your employees makes sense and will provide an excellent return on investment, well, that's a good thing.
Better yet, if you can explain why investing in marketing actually helps you raise more money by creating awareness for your cause, well, now you’re talking. As an example: on average, nonprofits that invested in digital advertising raised $1 for every $0.12 invested.13 And who wouldn’t understand investing in your employees—especially when the numbers speak for themselves.
Encouraging, and paying for, training keeps your employees curious and engaged. Employees that are happier produce better work and more of it. Oh, and happy employees talk just as much as unhappy employees, which means investing in your employees will help you attract more employees.
So go ahead, invest in overhead.
Be transparent about your overhead investments.
Finding the right ratio of overhead for your nonprofit is going to mean a whole lot of trial and error. And, like any good business model out there, keeping your overhead as low as possible by, let’s say reducing what you invest in fundraising software to 0% with Zeffy, is a good idea.
We know and understand that the success of a nonprofit is based on outdated and unfair criteria, like how much you spend invest in overhead. But, people are increasingly interested in actual accomplishments and want to understand why you invest their hard earned money the way you do.
Be transparent. Share as much about the way your nonprofit works as you can, as often as you can. It will keep you honest and help your donors understand the importance of investing in what you and they believe in.
How to get your donors on board?
This is the hard part. But there are solutions out there.
The trust-base philanthropy project suggests that nonprofits should have a clear set of values to guide everything they do. These values will not only ensure your nonprofit’s culture, structures, leadership and practices are all working together, they will ultimately reassure donors that every dollar invested—even the dollars invested in overhead—ultimately helps your cause.
But, the bigger challenge is education. We’ve all been brainwashed into thinking that, for some reason, nonprofits shouldn’t invest in overhead. That, although the good nonprofits do is a noble calling, they pay less because they can’t afford to pay more. That advertising is evil and a waste of donors hard earned money, even if it would raise awareness and ultimately result in more donations. The list goes on.
The good news is, people are starting to realize this and are ultimately curious. They want to know why. They want to trust you. And, in most cases, earning and keeping this trust will be pretty easy because nonprofits are used to being transparent and used to performing miracles with next to no resources. Let people know how much you’ve accomplished, how you did it and what you need to keep doing it.
Start sharing why and how you do what you do and slowly but surly, we’ll all stop talking about nonprofit overhead expenses.
Keep learning (our sources):
1. Find the Right Overhead Ratio for Your Nonprofit
2. The way we think about charity is dead wrong featuring Dan Pallotta
3. Donors Are Turned Off by Overhead Costs. Here’s What Charities Can Do by Carmen Nobel
4. One of the most frequently used criteria for judging a charity is also one of the worst by Kelsey Piper
5. An overview of the Non-Profit Sector in Canada, 2010 to 2020
6. Health of the U.S. Nonprofit Sector Quarterly Review
7. Nonprofit Hiring Trends and The National Nonprofit Employment Market
8. The Impact of Wages on Employee Productivity by Dr. Sterling Carter
9. Canada’s Charities and Nonprofits
10. 26 Incredible Nonprofit Statistics by Sky Ariella
11. Here’s How Much Companies Can Save With Work From Home by Michael Tedder
12. Why Nonprofits Should Invest More in Advertising by Dan Pallotta
13. Computing the ROI of Digital Marketing for Nonprofits
(Mis)Understanding Overhead by the National Council of Nonprofits