February 16, 2023
Nonprofit Technology & Fundraising Blog
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“As a result of our collaboration and learning, we are convinced that today we have a problem in the way we fund nonprofits.”
-Presidents and staff of the Ford, Hewlett, MacArthur, Open Society, and Packard Foundations in a letter to peer philanthropists
Many donors, grantmaking organizations, and people who are passionate about the causes that nonprofits champion often scrutinize “indirect costs” and “overhead,” including staff salaries and benefits, vital infrastructure, equipment, professional development, utilities, and other costs that are necessary for nonprofits to function but don’t obviously support their beneficiaries.
In 2019, the presidents of the Ford, Hewlett, MacArthur, Open Society, and Packard Foundations began a collaborative effort to empirically develop best practices to combat the “nonprofit starvation cycle.”
They discovered that while foundations are key partners in supporting costs for programs and specific projects, their grantees face an average deficit of 17% for associated indirect costs with each grant. This deficit is largely due to limits on indirect cost reimbursement enforced by grantmaking organizations, and the general public’s misconceptions about overhead spending and what it takes to run a successful nonprofit. Smaller and newer nonprofits bear the brunt of these misconceptions, and often vastly underspend on the vital infrastructure they need to support their programs, unfortunately at the expense of their mission and the wellbeing of their staff.
The good news: foundation thought leaders are working to end the nonprofit starvation cycle, and you can join in the effort.
“Overhead” or “indirect costs” generally refer to a nonprofit’s administrative, fixed, and general costs. This can include things like fundraising expenses, staff salaries and benefits, office supplies, rent, utilities, marketing and advertising, and anything required to carry out a nonprofit’s mission beyond direct costs for specific programs and projects.
A popular misconception is that overhead is wasteful, and any spending that doesn’t directly support your nonprofit’s mission ought to be cut or minimized. The truth: spending that helps you and your staff thrive does support your nonprofit’s mission! Your beneficiaries need and deserve to receive services from staff with up-to-date training and relevant licenses. Your volunteers need and deserve adequate tools, technology, and resources so they can truly support your mission rather than become a time-suck with good intentions. And finally, though perhaps most importantly, you and your staff need and deserve the pay, benefits, and working environment required, not just to survive, but to thrive. If you’re hanging on by a thread, how can you be expected to get out of bed every day and tackle society’s toughest challenges on a shoestring budget?
According to Exact Hire, the voluntary annual turnover rate for nonprofit organizations is 19% – far exceeding the all-industry average of 12%. In a 2021 study, Nonprofit HR found that 45% of nonprofit employees plan to seek new jobs by 2025. Of that group, 23% said that they will not seek future employment in the nonprofit sector.
It’s estimated that turnover costs 33% of an employee’s annual salary. This includes expenses associated with posting a position, screening and interviewing candidates, onboarding, background checks, and lost productivity.
This data, though alarming, can inform sound strategy. Investing in employee retention and satisfaction will pay for itself whenever a staff member decides to stay with your nonprofit rather than seek employment elsewhere. Survey, interview, or even have casual conversations with your team to check in on how they’re feeling and what improvements they would like to see. There may be creative, low-or-no cost solutions you can implement right now to keep your nonprofit’s staff engaged and satisfied in their work lives.
It’s one thing to understand the value of an internal investment, and an entirely different thing to actually implement them – especially when you have limited resources. Here are some tips to get started, and we invite you to share your ideas in the comments below.
“Be grateful for what you have, AND demand what you deserve.” –Abby Wambach, retired US National Women’s Soccer captain and six-time winner of the U.S. Soccer Athlete of the Year award
For so many, a career in the nonprofit sector is less of a job and more of a calling, and that’s a beautiful thing! You have an incredible drive to help others and make the world a better place. That doesn’t mean you have to forgo the tools and resources you need to thrive, both personally and professionally. Thankfully, funders are learning that nonprofits need smart internal investments to succeed.