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This article will never provide a clear definition of overhead. Unfortunately, we can’t. While overhead is most commonly thought of as the expenses presented as management and general and fundraising functions on Form 990s or audited financial statements, the accounting guidance to determine which expenses belong to which function is so vague that reasonable people make wildly different determinations about how to allocate expenses across functions. What ends up classified as overhead is so open to interpretation, even manipulation, that we cannot provide a useful or consistent definition.

McGroarty Arts Center, where I was executive director from 2005 to 2013, provides an excellent example of just how difficult it is to determine which costs are overhead and which are program. Ceramics students at the small Los Angeles center wanted to raise money for new studio equipment. They created the Annual Ceramics Exhibition and Benefit—a volunteer-driven fundraiser that exhibits curated work of emerging ceramic artists. Is the event a fundraising expense? In some years, the Annual Ceramics Exhibition and Benefit barely breaks even—but the event is so highly mission-aligned and impactful that the center was committed to the event whether or not it made money. So is it a program expense? As the event grew in popularity and artistic reputation, the staff devised ways to capitalize on its momentum. Guided gallery tours are arranged for local schools and senior centers, and private receptions are held in the evening for the organization’s most important donors. Fundraising expense?

The accounting guidance does not tell us how to allocate the Annual Ceramics Exhibition and Benefit expenses across functions. The art center struggled to present the event expenses accurately, treating it as a fundraising expense in some years, a program expense in others. Some years, the art center came up with complicated rationales for allocating a portion of expenses across functions. Each year, the center consulted with tax accountants and auditors. Each year, it was told that its allocation was reasonable. The center would have been better served to allocate the entire event to programs and use its limited staff time on something beneficial to the organization. But the center’s leaders desperately wanted to be truthful and abide by the rules.

Nonprofits spend far too many resources attempting to report their functional expenses honestly. Costly time studies and complicated time sheets are used to determine how many hours each staff member spends on programs. Organizations build and maintain complicated accounting structures so every expense can be reported by function. A simple phone bill is recorded in the books as a lengthy journal entry of functional allocations, with back-up detail for the auditor to test at the end of the year. To what end?

The reporting of functional expenses exacerbates the myth that, somehow, nonprofits should be able to operate programs without an administrative structure to manage, measure, and execute. It implies that, by some as-yet-unknown magic, nonprofits should be able to achieve their mission without dedicated and systematic fundraising efforts to pay for it. The attempt to segregate interwoven and complementary expenses according to the function they serve is an exercise in futility. The truth is, all resources spent by a nonprofit are spent in order to successfully deliver on programs (with obvious exceptions made in cases of fraud). Certainly, not all spending in a nonprofit is efficient; but functional expenses tell us nothing about efficiency.

By abandoning overhead, we free up limited nonprofit capacity to focus on more important measures. With the coming sector-wide shift toward outcomes-based measurement, this capacity is needed now more than ever.

**Now more than ever, as the call to achieve high standards of outcomes-based measurement grows, we must hold ourselves to an equally high standard of understanding nonprofits’ full costs. This article is meant to encourage nonprofit executives and boards to know and advocate for their full costs, and to urge the philanthropic sector to structure funding with greater consideration for the full context in which its grantees are operating. We look forward to the day when nonprofits and funders have embraced the concept of full costs, which include far more than direct program expenses and so-called “overhead.”

Overhead as a Parental Control

Many foundation leaders now understand that overhead is part of the real, necessary costs of delivering quality programs. Funders large and small have shifted grant strategies to fund overhead. In 2013, Charity Navigator, GuideStar, and the BBB Wise Giving Alliance spoke out against the myth that overhead spending is a meaningful way to evaluate nonprofit performance.¹ Even the federal government, at the end of 2014, began requiring federal grants to cover nonprofit overhead costs.

Yet, it seems practice is lagging behind public discourse: In Nonprofit Finance Fund’s Annual State of the Nonprofit Sector Survey 2015, only 7 percent of nonprofits report that foundations always cover the full cost of the projects they fund; while decrying the overhead ratio as a “poor measure of a charity’s performance,” Charity Navigator still includes the overhead ratio as the very first financial performance metric in its evaluation; and the federal government set a pitifully low default overhead reimbursement rate of 10 percent. In other words, funders and watchdogs (and probably even nonprofits themselves) are not “there” yet in recasting overhead as an essential cost of providing services—and we have farther to go than you might think.

Imagine if your personal paycheck were like a restricted grant. Instead of representing your value and level of responsibility in the company, your paycheck is based on a predetermined line-item budget that details exactly how you can spend your earnings. A portion of your paycheck can be used for rent, some for utilities, but most is earmarked for business attire, transportation to work, and coffee to keep you productive throughout the day. The thinking here is that by tying your paycheck to the expenses that contribute to your work, the company is making sure that you will show up on time, appropriately caffeinated, and properly dressed. It’s as if every penny of your paycheck is spent before you cash it.

To some extent, you had a say in your paycheck budget. In fact, you had to present a proposed paycheck budget when you applied for the job. Your friends on the inside said no one who spends more than 20 percent of his or her paycheck on rent has ever been hired. To get the job, you cut your rent line item. That means making do with an efficiency unit above an all-night bowling alley, but it’s better than not having a job at all. Some line items were nonnegotiable from the start: As a policy, your company won’t pay for haircuts; but that’s okay—you can let your hair grow long.

At the end of the year, the company assesses your job performance by comparing your actual spending to the line-item budget. Your spending is carefully scrutinized for fluctuations of 10 percent or more, and your job is in jeopardy if it fluctuates too much. You know this measuring of line-item expenses doesn’t say much about the value you created for the company. You are pretty certain you would be more productive if you could just get a good night’s sleep, but that would mean moving away from the bowling alley, and that would put you over budget and in danger of being fired.

The company doesn’t feel great about measuring your line-item expenses either. They know it’s not a great proxy for your productivity, and the truth is they actually want to pay you based on a true measure of value. Unfortunately, they just aren’t sure how valuable you are. They’ve asked you for the data, but you don’t have a system to track it—not to mention, you tend to show up to work a little worse for the wear. You always seem tired and your hair looks rather unkempt. (Don’t you know someone who will cut your hair for free? The other employees do.)

If we start to fully fund nonprofits for their day-to-day program and overhead expenses, and abandon overhead measurements as a proxy for mission fulfillment and efficiency, it’s the equivalent of giving nonprofits control over their paycheck. With the flexibility to manage their own funds they can make better spending decisions—like moving away from the bowling alley, not spending so much on business attire, and finally getting a haircut. Despite the fact that they are spending less on items that “directly support the work” (business attire, coffee) and more on “overhead” (rent, haircuts), the nonprofits can make smarter spending decisions that actually let them produce more value. Without a doubt, this arrangement would be a huge improvement over the status quo.

**Excerpt from Nonprofit Quarterly’s winter 2015 edition, “When the Show Must Go On: Nonprofits & Adversity.” It was first published online on January 25, 2016.  Check out next quarter’s Overhead Bin for more from this important article

So, how would you currently define the atmosphere and human relationships in your organization? These are the life blood and connective tissue that create an impression every day. Yes, mission is critical, but the atmosphere in your office and how people relate to one another sets the stage for how work gets done and how those outside your organization see you – your board, donors, volunteers and the larger community. As the leader, what are you doing to foster a strong organizational culture?  How often do you remind people how important they are to the organization?

An important strategy is to remind everyone in your organization — board and staff — that they have an important role in your philanthropic success. Parker shared her observation that most people define fundraising in a narrow box. Haven’t we all heard someone say “I hate begging for money!”  She prefers the term philanthropy over fundraising. Philanthropy is much broader; it is defined as “the desire to promote the welfare of others, expressed especially by the generous donation of money to good causes.” While donations are part of it, time, energy, good will, resources and stewardship are key to success.

For an organization to flourish, you want everyone – staff, board and volunteers – to participate. However, if you have a one size fits all approach to philanthropy and force them into areas they are not ready for or comfortable with your organizational culture will suffer.

• Staff: Does every staff member know how he/she impacts philanthropy? For example, how well does your front line staff represent the best of your organization? Do staff, board members, volunteers and members of the public (all prospective contributors to your bottom line) feel welcome at your organization from the minute they enter the door? If not, what can you do about it?
• Board: Does your board have regular educational agenda items to grow their own expertise and foster a culture of philanthropy? Education should be a regular feature of your board meetings. Bring someone in periodically to address the group. Make sure the agenda includes regular items about philanthropy several times a year. Ask yourselves: How do other people see us? What can we do to enhance our effectiveness as a board?
• Philanthropy Committee: Even if you don’t have a development director, a philanthropy committee is important. Their role should be to define the strategies and identify the most cost-effective resources for your organization as a whole to raise money. They should also work with the board to ensure those strategies are carried out. Ask yourselves: Are our philanthropic activities worth it, or do we hold them because we always have, regardless of the rate of return on dollars spent to fund the activity?

Use strategies that are best suited to your organization, not just because another nonprofit uses the strategy. Think about your base of support. For some organizations, direct mail may be a great approach, but for others, not so much. Events are expensive and labor intensive. If all you are doing is putting on an event, it is likely not be the best use of resources.

Think long term: encourage planned giving and legacy gifts. Does your organization want support from millennials? Research shows they are most interested in making gifts for specific projects. Doing the research and leg work on what works for your organization will save money for you and is most likely to generate loyal donors.

• Think about various roles for people in your philanthropic organization: Kay Sprinkel Grace, who was here last fall, defines three roles. By allowing people to participate in a role that is comfortable to them, you will find your philanthropic wings stretch farther and as they become more confident they may move into another role for your organization.
  • Ambassadors are voices for your organization and are enthusiastic about your mission; these people tend to be naturally gracious talkers and should have an “elevator speech” at the ready to share your organization’s mission and why they love what you do in 100 words or less.
  • Advocates are people who are trained to talk about your organization and its mission. They are not always the Executive Director. Sometimes they are board members, other staff, donors, and volunteers. Regardless of role, they can help potential donors understand how their time and resources can do something that is important to them in the organization.
  • Askers spend time on what matters — connecting donors to a particular project, around which they feel joy in the mission of the organization. Donors who are asked for resources shouldn’t be surprised by the “ask” but have, instead, been cultivated and have expressed their interest in the organization, and projects they might want to support. These donors are good sources for thinking long term about investments in the organizational infrastructure and future. What can we do now, to increase the likelihood of our success in the next five years, ten years, beyond ten years?

In sum:  A healthy work culture provides advantages to all.  In addition, to creating organizational strength, building camaraderie and team spirit promotes loyalty and motivation, inspiring all to give their absolute best!

Along your way toward determining and creating a vibrant organizational culture which can bring about a strong culture of philanthropy, check out these items for some guidance and ideas.

1. Start at the beginning:  “Why Defining Your Nonprofit’s Culture Will Be the Most Important Thing You Do This Year”  – A blog post from Classy.org
2. Defining Philanthropy & a Culture of Philanthropy: Nonprofit Quarterly article by philanthropy guru, Simone Joyaux
3.  Doing the work – check out these ideas: The 5 Pillars to Build a Culture of Philanthropy, from Community Funded
4. Brief Stories from the Trenches:  These nonprofit leaders share what has worked for them in this article from Forbes Nonprofit Council

If you are looking for a deeper dive into these important ideas and how to embark upon them for your organization, check out these books:

• Daniel Coyle – “The Culture Code”
• John Maxwell – “Leadershift”
• Adrian Gostick and Chester Elter – “All In”
• Kay Sprinkel Grace – “The AAA Way to Fundraising Success” 

It’s not about making your team stronger, it’s about using your team’s strengths to develop and grow your organization and its capacity.  Whether it’s the staff team, board team, volunteer team or all of them— Strengths Coaching’s goal is to identify individual strengths and how to best utilize them to maximize organizational impact.

CNL has seen that being a “Strengths-Based” organization forms more compatible, efficient, and engaged teams, which will positively impact of the organization’s mission and services.  So what does it mean to be a Strengths-Based organization and how do you begin? Did you know that only 31% of American workers are engaged at work? (Gallup, 2017). The Gallup organization has studied workplace engagement for over 30 years and their Clifton StrengthsFinder assessment is an incredible and useful tool in building workplace engagement and productivity! This is the first step in creating a strength-based organization, one in which team members are encouraged to build upon their talents that are naturally recurring patterns of thought, feeling, or behavior that can be productively applied.

The StrengthsFinder assessment identifies a person’s top five talents and together with a coach, you and your team can learn how to invest in those talents, eventually developing them into strengths over time. People who work in their “strengthzone” are over 6 times happier and more engaged and over 8 times more productive at work. Did you know that some of the habits of great managers include investing in strengths, surrounding themselves with the right people and maximizing their team, and understanding what their team members need to be successful and productive (Gallup, 2017)? How well do you know your staff team and your board team? Do you know what motivates them and gets them excited and working for your mission? Is everyone working at their potential? StrengthsFinder and the accompanying coaching is a tool for self-awareness, team building and professional development. If you are interested in learning how you can use StrengthsFinder at your organization, please give us a call or send an email to our C&C Network  Coordinators (consulting@cnlsierra.org).

Relationships are key and this is especially true when we ask people and organizations for time and money. Like almost everything else in life, forward thinking and creating an action plan are critical for a successful outcome. Nowhere is this more important than in nonprofit fundraising.

One big mistake that many nonprofits make is failing to analyze their return on investment (ROI) from a fundraising strategy. So, before starting to plan a BIG EVENT or do a direct mail solicitation, it’s important to create a plan based on your current and future donor pool; think about strategies and for each strategy, figure out “What’s my cost to raise a dollar?” or my ROI? In short, is this strategy “fundraising” or “friend-raising” – both of which are important in non-profit fund development – but based on how much it costs to raise a dollar, your favorite strategy might just be more “friend-raising” than “fundraising”!!

Chapter 6 of Starting and Building a Nonprofit, a Practical Guide as well as, Effective Fundraising for Nonprofits  (publications of NOLO, a producer of do-it-yourself legal books and software that reduce the need for people to hire lawyers) emphasize five over-riding strategies for successful fundraising.

1. Ongoing relationships, the stewardship of donors, is central for organizational capacity building. “The fundamental goal is always the same, to nurture a strong positive relationship with supporters so they find it a pleasure to support your nonprofit”, both financially, and as organizational ambassadors. (See page 105 in Starting and Building a Nonprofit.)
2. Target the best possible donors – thinking about what is most likely to appeal to those closest to your organization and how you can reach out to new donors.
3. Build a Compelling and Detailed Case.  Convey more than your overall mission to possible donors; be specific and business savvy.
4. Put Your Board of Directors to Work. Board members’ relationship to the community is a central part of their role and if some are uncomfortable asking others for money, there are roles for them behind the scenes.
5. Focus on the Big Picture: This is a balance of staying focused on your nonprofit’s core mission while conveying a pressing, specific need for support to contribute to that mission.

A fundraising plan should focus on fund development around your core mission. As described in Starting and Building a Nonprofit, the outcome of the planning process is a prioritized list of tasks you need to accomplish to successfully fund your organization’s activities.  However, before deciding how to raise funds, consider the following issues.

• What are your organization’s needs and how much are you willing and able to spend on fundraising?  Starting with your current budget, identify your current and projected sources of revenue ( i.e., grants, dues, special events) and the strategies which have been most successful with your current donor pool.  Based on this needs analysis, create some fundraising targets, dedicated to your core mission and then to lesser priorities in your work plan.
• Who is your donor pool? And, how can it be expanded? A word of caution here:  Be sensitive to our community. In a small community, many of our philanthropic donors are approached by multiple organizations, so be sensitive to both other nonprofits as well as your targeted donor pool. A detailed list of prospective donors should begin with those “closest to home”, perhaps those who helped you get started in the first place. Relationships are key: talk with your CNL Liaison about how they cultivate long-time donors by giving them a role in the organization while being mindful of their other priorities (kids in college, another NPO in town with a similar mission) and to avoid “Kickstarter” fatigue. Thinking about your overall mission, what other individuals, businesses, foundations, and government agencies might you reach out to for funding?
• Define your overall campaign. An analysis of your organization’s needs and projected budget, (including how much you can afford to spend on fundraising) combined with an analysis of your current donor pool and a detailed list of prospects should help define how you will raise money on an annual basis. This will likely include an array of strategies – membership drives, grant applications, local fundraising events and issue-oriented special appeals. An end of year fundraising campaign is frequently a key part of an NPO’s overall funding strategy.
• Choose fundraising tactics carefully, remembering to cost out each approach (your ROI), before committing to its implementation. Based upon your organization’s mission and community appeal, direct mail may be more appropriate than crowdfunding and use of social media. On the other hand, it may not. Special events, combined with in-person appeals and Facebook posts may work better for your population. It’s key to talk with others about choosing the right strategies to make sure that you know what your return on investment will be for any strategy. See the worksheets in Effective Fundraising for Nonprofits: Real-World Strategies that Work.
• Keep careful track of all people and organizations in your donor appeals. Database management, although sometimes tedious, can help you identify who you communicated within the past year or so, who gave (either time or money) during your End of Year campaign last year, and the best approach now to appealing to specific individuals and organizations. As noted in our last newsletter, investing in donor management software is important. A tip from Starting and Building a Nonprofit recommends looking into hosted versions of donor management software, rather than buying your own. Technical support is often available for subscription donor management software, especially for small nonprofits with few or no tech-savvy people. Nonprofits can find some recommendations for fundraising and donor management software  HERE.

Happy New Year!

CNL is hard at work developing and organizing valuable trainings for our member organizations and all those interested in professional development in our Nonprofit Sector.

Please check back in the near future for information on the first in our series of Workshops and Info Sessions for 2016.

If you need assistance immediately, consider our Coaching & Consulting Network where CNL can bring education, training or facilitation directly to you.