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May 14, 2014

Nonprofit self-sufficiency means funding overhead

One year ago two major events urged the philanthropic community to change its attitude toward nonprofit overhead.  The most provocative was a TED talk by Dan Pallotta exposing what he called the double standard of philanthropy: “Everything the donating public has been taught about giving is dysfunctional.”

At about the same time the nonprofit overseers Better Business Bureau, Charity Navigator, and GuideStar issued their open letter pleading for foundations, governments, and donors to view funding overhead costs as essential.

They were reacting to survey results that showed that 62 percent of Americans had become convinced that the typical charity spends more than it should on overhead.  They rebutted, “many charities should spend more on overhead.  Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems— as well as their efforts to raise money so they can operate their programs.  These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).”

Notwithstanding their welcome efforts, the message has not registered with enough nonprofit supporters.  The 2014 State of the Nonprofit Sector Report noted that fewer than seven percent of survey respondents always receive grants that fund the full cost of a program.  In sharp contrast, for 45 percent of respondents, funders rarely or never cover the full cost.  A similar share reported their contracts with governments at all levels refused to pay more than ten percent toward overhead.

When we call on nonprofits to run themselves like businesses we need to recognize that overhead is a necessary investment in the growth and sustainability of the business.  When I meet with tech start-ups looking for investment by the Ohio TechAngels Fund I want to see expenses for planning, business systems, hiring, training, marketing, and especially for raising funding.  We look for this because a successful business needs to be able to scale so that, if a product or service is well-received, the business can expand to serve a larger market.

As businesses, nonprofits also benefit from scale, expanding their best programs to reach more clients, customers, or patrons.  For us to say our gifts to nonprofits must go 100 percent to programs is to say we don’t want the nonprofits to invest in themselves nor to scale.  Why is the Columbus Zoo and Aquarium so successful?  It is because it receives $18 million per year from a tax levy it can use to scale and invest in itself.  Without that support, it would not be the successful institution it is.  Regardless of one’s views about tax levies, the reality is that funding the zoo’s overhead has allowed it to thrive.  That is true for every nonprofit.

We need to recognize that we are contradicting ourselves when we ask nonprofits to run themselves like businesses and at the same time insist all our support go to paying for programs.  To do so is to advocate nonprofit dysfunction.  In 2014, we are still positioning too many of our nonprofits for failure.  We need to change our approach to giving so our essential nonprofits can invest in change and a brighter future for our community.