Funders are not the only ones stuck in the past. I recently worked with a legal rights advocacy organization that was putting together its annual report. While assembling the report, the Development Director sent an updated copy of “the chart” illustrating that 90% of every dollar is spent on programs. As the Executive Director looked at the chart, she decided not to include it in the annual report. “This is not a measure of what we do,” she said. “This is not our impact.” Yet, the Development Director persisted, “We have to include the overhead rate. Donors expect it!” After much back and forth, the Executive Director put her foot down and said no. Instead, they developed a separate one-pager that showed how much they spent on indirect costs versus direct program costs. They would provide the one-pager to anyone who asked – they were not trying to hide anything – but the chart would not be in the annual report. They focused on communicating their impact and highlighting client stories. After the report was published, how many donors do you think asked to see the chart with overhead rates? That’s right. Not one single donor.
Interestingly, the person whose life would be simplified by donors forgetting overhead rates and instead funding the full costs would actually be the Development Director! It would be much easier for the Development Director to raise money if individual donors and foundations stopped asking, “How much do you spend on indirect costs?” Yet, who was the person clinging to the idea that they had to include the overhead rate in the annual report? The Development Director!
The responsibility for changing the conversation sits with social sector leaders. As long as nonprofits continue to promise outcomes at 80 cents on the dollar, we will continue to operate in a flawed and broken system. How can nonprofit leaders change the conversation? What can they do to move to a “Think Money First!” mindset?
Own Your Numbers
Know what it really costs you to deliver on mission. The full cost includes more than just programmatic expenses, a portion of the shared and indirect expenses. It also includes your liquidity and working capital needs, investments in your revenue and fundraising business, reserves, and debt payments. All of these elements should be built into your full cost of doing business.
Starbucks doesn’t apologize for the price of its lattes, and you should not apologize for what it costs you to do your work. You are doing work that for-profits cannot figure out how to make money doing. You are tackling complex, multi-dimensional, and intergenerational social challenges. It is not easy work and it is certainly not cheap.
Understand Both Your Revenue and Capital Needs
All enterprises – for-profits, nonprofits, and social enterprises – need regular revenue, generated from selling programs and services, to cover the cost of running the organization. They also need investment dollars for product development, growth, new revenue or business ideas, infrastructure, capacity, and long-term financial health.
Share Real Overhead with Your Board and Your Funders
If your board is to truly be your champion, they are going to be out there asking for money. They need to know what it really costs to deliver on the mission, so they can ask for the right amount and types of money to ensure your long-term sustainability.
Articulate Your Financial Story: Focus on Communicating Impact
There is an old saying in sales, “If you are negotiating on price, you have already lost the sale.” This means you have failed to communicate your value proposition. Likewise, in the social sector, if you are negotiating on overhead rates, you have not sold the impact and value of your program. Ultimately, donors and funders want to achieve the outcomes and impact. When you assist them to understand what it takes to deliver those outcomes, you can avoid falling into the overhead trap.
The reality is that 100% of every dollar goes to impact.