Overhead Rates: What Does It Take to Run an Effective and Sustainable Organization?

Half of all nonprofits report overhead rates below 20 percent of revenues in their annual tax filings. These levels have become so familiar that they seem quite reasonable—to boards, to funders, to individual donors. But just how realistic are they? We recently analyzed the financials of four nationally-recognized youth-serving organizations. We found that the reported financials of each organization understated its true overhead costs (see accompanying chart).

Interviews with the organizations’ leaders revealed funder and board member expectations about appropriate overhead levels to be a major driver behind the under-reporting. The interviewees also said that their organizations were still too lean to operate sustainably.

To improve the health of their organizations, some nonprofit leaders—including a few of those profiled here—are beginning to push against unrealistic overhead expectations and increase their infrastructure investments. Their successes on this front have been aided, in part, by their own ability to articulate the need for infrastructure support, and by a growing understanding among their funders and boards that funding programmatic activities to the exclusion of infrastructure creates problems over the long term.

One of the organizations profiled here, for example, has recently invested in systems and senior team, increasing non-program staff 150 percent over three years. That investment has allowed program staff to spend more of their time helping kids, and has helped its leaders refocus the organization on impact, rather than day-to-day operations. Another has invested heavily in IT, reducing system downtime and advancing the organization to a position of national leadership in outcomes tracking. Examples like these may help to encourage more nonprofits to engage in open and data-driven dialogue with funders and board members about their own true overhead costs.

Source: The Bridgespan Group