Perception Change of Overhead

Overhead has received a bad rap, I think because it’s associated with accounting terminology, and that’s hard to get excited about. Indirect costs are a part of any business or organization, large or small, for-profit or not-for-profit. The 990 classifies overhead as management and general costs, indirect program costs, and fundraising expenses as overhead.

Organizations need overhead to be financially sustainable and indirect costs are not an accurate measurement for an organization’s effectiveness. Rather than measuring overhead and operational costs, we should measure the not-for-profits impact on the community and long-term effectiveness. There are costs associated with doing business, staff need to be paid an equitable rate, the lights must be on, and operational bills must be paid.

How can we change the perception of overhead? Ideas for change:

  • Communicate your costs in relationship to your outcomes to your board, the community and grantors.
  • Define your overhead costs with explanations. It’s hard to judge an organization negatively for paying their electric bills. Being transparent will be help trust with your funders.
  • Engage your board in the development of the operational budget. Most board members work in for-profit companies that understand overhead and the direct impact and importance on the organization.

Read More: Economic Efficiency by The Bridgespan Group