NPO Deep Dive Part Three: 3 Ways to Manage Overheads

Indeed – donors and funders are sometimes so focused on the concept of “limiting overhead”, that one of the most commonly used measures of an NPO’s organizational efficiency  is the “percentage of total expense going to program cost” –and adversely stated  — the “percentage going to overhead”.

Is it a reasonable expectation that if strong limits are imposed on overhead expense the result will be an increase in frugality and operational efficiency?

The answer is no — not always. Low overhead does not necessarily ensure that an NPO is operating in the most efficient manner possible – or even that they are successfully accomplishing their mission. And it certainly does not guarantee that funds are being spent “wisely”. Of course any business, NPO’s included, should be fiscally responsible, practice due diligence, and be mindful of overhead expenditures – however these expenditures must be examined hand in hand with an examination of results achieved. One can only assess the reasonableness of an organization’s costs in terms of their effect on achievement of its goals.

Overhead is essentially the cost of running the business –without overhead expenditures, the organization will not be able to offer the programs and services directly related to their goals. Overhead, often referred to as “indirect cost”, encompasses a broad range of expenses that are not specifically used to conduct program activities, such as rent, utilities, administrative costs.

NPO managers are routinely tasked with managing low overhead expectations of donors and funders while optimizing the efficiency of their organization by investing in organizational infrastructure that will maximize the effectiveness and long term feasibility of their organization.

So – how does an organization minimize and “effectively maximize” overhead expense?  Here’s a few ways:

Shared services can be an effective way to decrease costs and maximize scarce resources ie. “do more with less”. Smaller organizations don’t have “economies of scale” that larger organizations rely upon, and are heavily dependent on funding grants that limit overhead funding. The solution could be collaborating with other organizations to share space, technology, legal, financial and human resources.

Tides Canada is an organization that strives to “connect donors and doers” thereby providing fundraising assistance, as well as a wide range of support services to charities and NPO’s (ie. assistance with grant applications, and managing endowments and long term funding. )

In today’s world this generally involves electronic media:  use of social media (Facebook, Twitter, blogs) as well as the development of a strong internet presence with a compelling website.  Increased visibility almost always results in increased funding and volunteerism. One only has to look at our democratic voting system to see this premise at work – voters often vote for a “name that sounds familiar” in the absence of other information. A strong website can be used to draw in potential donors, volunteers, and even potential employees, and can encourage those individuals to examine both the ability of an NPO to deliver its mission and evaluate its successful outcomes. Online visibility notwithstanding, other methods to increase visibility can also be utilized successfully — such as ads, brochures and networking.

Increasing visibility falls within the category of “maximizing overhead effectiveness”.

Again, maximizing overhead effectiveness is crucial to success – plus the old adage “it takes money to make money” is also applicable here—the intent is the same. NPO’s must seriously consider the value of investing in sound and reliable ERP systems,  high quality financial and administrative staff to maintain them, human resource development, strategic planning time and resources, and other administrative functions – all of which are critical to effective  governance, public accountability, and overall achievement of organizational mission.