Six Ways to Fund Admin & Overhead Costs
by Kay Sohl of Kay Sohl Consulting
Part 5, and final, in the Indirect Cost Series
Nonprofits confront a daunting starvation cycle that threatens both effectiveness and sustainability. Funders, charity watchdogs, and unfortunately some nonprofit board members, are trapped in paradoxical thinking. They seek to support nonprofits that achieve the highest standards for accountability, transparency, and diversification of financial support, while simultaneously insisting that the “best” nonprofits are those that spend the least on the management and fund development capacities that are essential to achieve those results.
The folly of the paradox is intensified by utter confusion about the definition of management and fundraising costs among governmental agencies, private funders, and nonprofits themselves that was highlighted in the May, 2010, Government Accountability Office study of nonprofit treatment of management and other indirect costs.
NAO and other nonprofit sector advocates are working to change both the misguided perceptions and the governmental policies that underlie the paradox and confusion. See previous articles in this series:
Clearing the Cost Allocation Fog and Starving Infrastructure Damages Effectiveness & Sustainability.
The sustainability of our organizations depends on finding strategies to support the core capacities needed for effective operation and resiliency. Here are six strategies nonprofits are using successfully to fund administrative and overhead costs.
Negotiate Fully-loaded Cost Agreements
Be sure your proposals for funding include a fair share of your administrative and overhead costs, as well as the direct costs of providing your programs and services. The rationale: achieving the results funders want will require your nonprofit to employ staff, process payroll, keep accurate financial records, have effective board oversight, etc. You’ll want to be sure those staff can work inside with heat and lights. Your budget proposal needs to include the full cost of achieving the desired results.
Pursue Performance-based Contracts
Urge your funders to base payment on the results you achieve rather than the costs you incur. Agree to take the risk that it may cost you more than the funder will pay to serve the agreed upon number of eligible people and provide acceptable services, in return for having the opportunity to retain a financial reward for achieving the required results at lower costs. Before you move in this direction, you’ll need clear information about your fully-loaded costs and effective systems to make sure you achieve your target volume of services.
Make Overhead Costs Disappear
Allocate the shared costs of rent, utilities, phones, and even the costs of management on a transaction by transaction basis—avoid listing any costs as “overhead.” This approach has numerous potential pitfalls, including failure to adjust your allocation formulae when you add or drop programs and reinforcing the erroneous idea that good nonprofits don’t have overhead costs. But it may offer a survival strategy while you work on the other strategies.
Capacity Building Grants
Larger foundations, and funders who have a history with you, are often open to investing in strengthening nonprofit capacity—including upgrading accounting and client tracking systems, developing meaningful evaluation approaches, expanding individual donor development efforts, and improving communication with potential donors and volunteers. Caution: successful proposals require demonstrating that you will be able to sustain the new systems and capacities and achieve better results after the grant funds are exhausted.
Invest in Your Own Capacity Building
If lack of capacity for management or fundraising is resulting in inefficient use of staff resources or missed opportunities to strengthen donor relationships, consider strategic investment of a portion of your reserves. Caution: prepare as compelling an analysis for the use of your own funds as you would for a request for foundation support for capacity building. Identify critical progress indicators and commit to making changes if your strategies are not achieving your targets.
Ask Your Closest Donors to Support Infrastructure
Current and former board members and your largest donors love your organization. It’s quite likely that they already understand how important effective management and productive fund development is to your ability to achieve your mission. Consider asking those who care the most to be part of the solution by making special gifts for specific capacity building projects or to a campaign to establish an endowment to provide ongoing support for infrastructure.
Be Part of the Solution
Join NAO and participate in its efforts to build public understanding of the impact of the nonprofit sector and the need to invest in infrastructure to ensure sustainability. Discuss the starvation cycle and your organization’s strategies to avoid its traps as part of your next strategic planning effort. Encourage your board members to speak up about the reasons they are committed to your organization—and notice how rarely the percentage of expenses devoted to infrastructure makes their top 10—and remind them of the importance of adequate infrastructure.
The Nonprofit Fiscal Managers Association is an excellent resource for training on these and related topics. To receive announcements about the various nonprofit network sessions and related workshops, please update your mailing preferences on our eNews sign-up page.