How to Squeeze Outcomes From Overhead
Your funders want as much of their funds to go toward the mission and to create positive impact on the world. They don’t like it when their money is going to overhead or administrative expenses—even though we know that without proper spending on these things, we wouldn’t have things like computers or someone to answer the phone. It’s a fact of life that between 20 to 30 percent of a nonprofit’s budget is spent on managing the other 70 to 80 percent of the budget.
But it doesn’t mean that 100 percent of your budget can’t be used to generate reportable outcomes that are worthy of sharing with your donors. Here are three ways you can turn your overhead into outcomes:
1. Buy local.
It might be cheaper to buy things at Wal-Mart, but does Wal-Mart’s mission match yours? When you spend your money at locally owned businesses, your dollar goes further and you are reinvesting your donors’ funds in the local economy.
For every dollar spent at a locally owned independent store or business, 45 cents is reinvested in the local economy. This is called the Local Multiplier Effect. This means that if you track how much money your nonprofit spends at locally owned independent businesses, 45 percent of that total can be added to your nonprofit’s economic impact on the local economy.
You also can try to focus your spending on minority-owned businesses, B-corps or other businesses that focus on social impact.
2. Bank local.
Banking locally also keeps your assets working locally as well. Sometimes it’s hard to do this as the bigger banks are often bigger donors, and you should always bank where your line of credit lives. But, if you can, even it’s just part of the funds you are managing, try to keep them in a local community bank or credit union.
The more money under the management of local banks, the more money those local banks can loan to local small businesses, families, etc. Just like we learned in “It’s a Wonderful Life,” the bank borrows your deposits to lend to other borrowers.
The minimum reserve ratio banks are held to is 11 percent, which means that banks will lend out as much as 89 percent of your deposited funds to local businesses and individuals. This is economic impact you can take from the bank.
3. Reduce your staff turnover rate.
A recent study showed that, on average, a nonprofit’s turnover rate is 19 percent. Employee retention will save you money in the long-term since the cost of turnover is high—up to nine months of the position’s salary is the cost equivalent to cover the recruiting and training of new staff.
Say your total annual payroll is $1 million. Nine months salary is equal to $750,000. If you have the industry average turnover rate of 19 percent, then your nonprofit is averaging $142,500 in costs related to your nonprofit’s turnover rate. Compare this number on what you spend on your staff’s professional development and general morale.
Quantifying the costs associated with your nonprofit’s turnover rate can give you the ammunition you need to spend money on professional development and other dreaded overhead expenses that will make your employees happy to show up for work.
Every dollar you get from a funder should be put to good use. We, as nonprofits, need to respect that. But as a sector, we also need to be better at communicating how we spend our money and that it’s done in a fair way.
Donors, as conscientious consumers, want to know that their money is being spent in every way possible to improve the social and economic standing of everyone. Look at fair trade chocolate, clothing and coffee—people are happy to spend a little more on products because they know workers are being treated fairly, and they are improving local economies.
There’s no reason that nonprofits can’t justify treating their workers better and improving local economies via fair overhead.
Tivoni Devor, MBA, has spent his entire career in the nonprofit sector. While working for diverse institutions in many roles, Tivoni has often found himself developing earned revenue models and designing strategic partnerships. Tivoni currently works as manager of partnerships and outreach at Urban Affairs Coalition, where he helps social entrepreneurs leverage fiscal sponsorship to jumpstart their nonprofit endeavors. Tivoni lives in Philadelphia, with his wife Jennifer and daughter Ava. The thoughts and content of his columns are his and his alone.