Mighty Penguin Speaks

Breaking the Overhead Myth: Why Investing in Your Nonprofit is Essential

Mighty Penguin Speaks
Nonprofits are open for inspection by the public and potential donors. Organizations should strive to operate efficiently and ethically, while demonstrating a positive impact through their financials. When applying for grants, nonprofits are often required to keep administrative and overhead costs within a certain threshold, typically 10-20%, for better or for worse. Managing overhead within this range can be tricky—especially when investing in overhead could elevate your nonprofit to the next level. Like businesses, nonprofits often need to spend money to make money. So, how does an executive leader address concerns about investing in the organization when it might raise overhead costs? Learning how to sell funders and your board on supporting capacity-building efforts is a key skill for nonprofit leaders. It's important for these leaders to understand—and convey—the negative impact of underinvestment. How will strategic investment positively move the needle? This article will guide you through breaking the overhead myth and understand why investing in your nonprofit is essential. The Overhead Myth Capacity building is about maturing an organization so it can better advance its mission, vision, and long-term impact. It’s a continuous effort that sets organizations up for success. Unfortunately, the idea that overhead equals underperformance is a myth that puts nonprofits into a box. Overhead can be a good thing—it might mean your nonprofit has a strong, effective team, is using up-to-date technology, or has staff out fundraising to bring in more resources to serve more people. Nonprofits work tirelessly to build community and create change on very limited resources. Wastefulness isn’t a luxury nonprofits can afford. So, how do you break free from this “overhead myth” and encourage your board and donors to support capacity building? Consequences of Underinvesting What happens when you underinvest? As an example, being understaffed doesn't make an organization more efficient. It can lead to lower service quality, high staff turnover, burnout, and stagnation. In another example, lack of investment in technology can hinder productivity, data management, and processes. Staffing and technology are crucial to an organization’s success. Nonprofit boards and donors rely on the executive leadership to highlight when and where it's crucial to invest. Communication Preferences Everyone communicates differently. Some people love hard data, while others connect with storytelling or emotional appeals. Some appreciate directness, others prefer a more delicate approach. When presenting, try to touch on different styles, and when communicating one-on-one, be mindful of the other person’s preferences. Tools like 16Personalities, Clifton Strengths (now referred to as Gallup), or Color Code can help you understand communication and personality styles. Knowing what information helps someone make an informed decision is key when seeking approval for investments. Communicate, Communicate, Communicate Board members aren’t mind readers—they need to be kept in the loop. Sometimes, information needs to be repeated multiple times to ensure all board members receive it. Here are some proactive communication tips: Send a weekly newsletter or memo highlighting wins and struggles throughout the week. Create a Slack channel for sharing knowledge, starting conversations, and keeping board members informed of challenges. Have regular one-on-ones with each board member. Form workgroups and committees, join meetings to offer support. Hold regular board meetings with agendas shared 48 hours in advance. Develop a strategic plan every three years. Encourage meaningful board engagement—volunteering, providing lunch for staff, etc. Some of these tasks can be delegated—board chairs might manage the meeting agenda, secretaries take notes and follow up, and consultants handle strategic planning. Managing a board is a balancing act, but an executive director can foster a proactive communication culture. Change the Messaging How do you sell your board or donors on capacity building? Start by identifying the problem. Maybe share a story about an overworked staff member, a system failure, or a client who the organization was unable to serve? Show the impact. How is this issue hurting the organization? What would the solution look like? Better donor relations? Better services? Use data, tell stories, and show what other organizations are doing. Anticipate pushback and welcome questions. Give the board time to digest the information before following up with a formal vote. Invite them to see the issue firsthand and be part of the solution. No Surprise Culture While a 'no surprise' culture might be ideal, it’s not always realistic. However, there are ways to mitigate surprises, such as asking targeted questions and seeking input from stakeholders before making decisions. Use the proactive communication strategies mentioned earlier. Sometimes, a decision must be made, even if it’s not perfect. Confidence comes from making the best possible decision with the information at hand, always keeping the organization’s 'why' in mind. Legitimate Programmatic Expenses As mentioned, overhead costs usually need to fall into the 10-20% range to appease grantors, donors, and the public. But some overhead can legitimately be classified as programmatic expenses, as long as it supports the mission. Examples include: Salaries, Wages, and Fringe Benefits: Direct program staff salaries, or a portion of administrative salaries if they support program activities. Facilities and Utilities: Space used for program delivery, and even depreciation, can be categorized as program costs. Technology Costs: Website, subscriptions, or software related to delivering programs may be considered programmatic. Training and Development: Program-related training and professional development can be considered a program expense. Marketing and Outreach: If promoting a program or event for your nonprofit, it’s programmatic. Some examples include community dinners, festivals, or workshops. Consultants and Contractors: Hiring consultants or contractors to enhance programs can be a program cost. An example is hiring a consultant to conduct the strategic planning process. Equipment and Supplies: Items like laptops, office supplies, if used for program delivery, are programmatic. Travel Expenses: Travel, including mileage reimbursement, that supports program delivery is a programmatic expense. It's crucial to speak with a lawyer or accountant to manage your books accurately and ensure precise records. Sourcing Funds There are many ways to source funds: individual donors, grants, contracts, special events, sales, sponsorships, investments, and more. Different sources of funds are critical for running an impactful nonprofit. Engage potential donors like you would your board—explain the need, demonstrate the solution, and align it with their interests. Invest in Your Organization Investing in your nonprofit is crucial to making a bigger impact. Whether you’re strategic planning or hiring, recognize that overhead costs can strengthen your foundation. Keep shining a light on this with your board and funders, build relationships, and keep investing in your mission. Need help with strategic planning or hiring the perfect fit? Contact Mighty Penguin. We’ll partner with you to keep moving the needle in positive, achievable ways.

Nonprofits are open for inspection by the public and potential donors. Organizations should strive to operate efficiently and ethically, while demonstrating a positive impact through their financials. When applying for grants, nonprofits are often required to keep administrative and overhead costs within a certain threshold, typically 10-20%, for better or for worse. Managing overhead within this range can be tricky—especially when investing in overhead could elevate your nonprofit to the next level. Like businesses, nonprofits often need to spend money to make money.

So, how does an executive leader address concerns about investing in the organization when it might raise overhead costs?

Learning how to sell funders and your board on supporting capacity-building efforts is a key skill for nonprofit leaders. It's important for these leaders to understand—and convey—the negative impact of underinvestment. How will strategic investment positively move the needle?

This article will guide you through breaking the overhead myth and understand why investing in your nonprofit is essential.

The Overhead Myth

Capacity building is about maturing an organization so it can better advance its mission, vision, and long-term impact. It’s a continuous effort that sets organizations up for success.

Unfortunately, the idea that overhead equals underperformance is a myth that puts nonprofits into a box. Overhead can be a good thing—it might mean your nonprofit has a strong, effective team, is using up-to-date technology, or has staff out fundraising to bring in more resources to serve more people. Nonprofits work tirelessly to build community and create change on very limited resources. Wastefulness isn’t a luxury nonprofits can afford.

So, how do you break free from this “overhead myth” and encourage your board and donors to support capacity building?

Consequences of Underinvesting

What happens when you underinvest? As an example, being understaffed doesn't make an organization more efficient. It can lead to lower service quality, high staff turnover, burnout, and stagnation. In another example, lack of investment in technology can hinder productivity, data management, and processes. Staffing and technology are crucial to an organization’s success. Nonprofit boards and donors rely on the executive leadership to highlight when and where it's crucial to invest.

Communication Preferences

Everyone communicates differently. Some people love hard data, while others connect with storytelling or emotional appeals. Some appreciate directness, others prefer a more delicate approach. When presenting, try to touch on different styles, and when communicating one-on-one, be mindful of the other person’s preferences. Tools like 16Personalities, Clifton Strengths (now referred to as Gallup), or Color Code can help you understand communication and personality styles. Knowing what information helps someone make an informed decision is key when seeking approval for investments.

Communicate, Communicate, Communicate

Board members aren’t mind readers—they need to be kept in the loop. Sometimes, information needs to be repeated multiple times to ensure all board members receive it. Here are some proactive communication tips:

  • Send a weekly newsletter or memo highlighting wins and struggles throughout the week.
  • Create a Slack channel for sharing knowledge, starting conversations, and keeping board members informed of challenges.
  • Have regular one-on-ones with each board member.
  • Form workgroups and committees, join meetings to offer support.
  • Hold regular board meetings with agendas shared 48 hours in advance.
  • Develop a strategic plan every three years.
  • Encourage meaningful board engagement—volunteering, providing lunch for staff, etc.

Some of these tasks can be delegated—board chairs might manage the meeting agenda, secretaries take notes and follow up, and consultants handle strategic planning. Managing a board is a balancing act, but an executive director can foster a proactive communication culture.

Change the Messaging

How do you sell your board or donors on capacity building? Start by identifying the problem. Maybe share a story about an overworked staff member, a system failure, or a client who the organization was unable to serve? Show the impact. How is this issue hurting the organization? What would the solution look like? Better donor relations? Better services? Use data, tell stories, and show what other organizations are doing. Anticipate pushback and welcome questions. Give the board time to digest the information before following up with a formal vote. Invite them to see the issue firsthand and be part of the solution.

No Surprise Culture

While a 'no surprise' culture might be ideal, it’s not always realistic. However, there are ways to mitigate surprises, such as asking targeted questions and seeking input from stakeholders before making decisions. Use the proactive communication strategies mentioned earlier. Sometimes, a decision must be made, even if it’s not perfect. Confidence comes from making the best possible decision with the information at hand, always keeping the organization’s 'why' in mind.

Legitimate Programmatic Expenses

As mentioned, overhead costs usually need to fall into the 10-20% range to appease grantors, donors, and the public. But some overhead can legitimately be classified as programmatic expenses, as long as it supports the mission. Examples include:

  • Salaries, Wages, and Fringe Benefits: Direct program staff salaries, or a portion of administrative salaries if they support program activities.
  • Facilities and Utilities: Space used for program delivery, and even depreciation, can be categorized as program costs. 
  • Technology Costs: Website, subscriptions, or software related to delivering programs may be considered programmatic.
  • Training and Development: Program-related training and professional development can be considered a program expense.
  • Marketing and Outreach: If promoting a program or event for your nonprofit, it’s programmatic. Some examples include community dinners, festivals, or workshops.
  • Consultants and Contractors: Hiring consultants or contractors to enhance programs can be a program cost. An example is hiring a consultant to conduct the strategic planning process.
  • Equipment and Supplies: Items like laptops, office supplies, if used for program delivery, are programmatic.
  • Travel Expenses: Travel, including mileage reimbursement, that supports program delivery is a programmatic expense.

It's crucial to speak with a lawyer or accountant to manage your books accurately and ensure precise records.

Sourcing Funds

There are many ways to source funds: individual donors, grants, contracts, special events, sales, sponsorships, investments, and more. Different sources of funds are critical for running an impactful nonprofit. Engage potential donors like you would your board—explain the need, demonstrate the solution, and align it with their interests. 

Invest in Your Organization

Investing in your nonprofit is crucial to making a bigger impact. Whether you’re strategic planning or hiring, recognize that overhead costs can strengthen your foundation. Keep shining a light on this with your board and funders, build relationships, and keep investing in your mission.

Need help with strategic planning or hiring the perfect fit? Contact Mighty Penguin. We’ll partner with you to keep moving the needle in positive, achievable ways.