Nonprofits that are fortunate enough to have extra money in the bank are often reluctant to part with it, especially if they’ve been through hard times recently – a recession, or the current pandemic – and income streams have dried up.

That’s normal. Nonprofits are run by humans, after all, and as humans we have been conditioned to save for a rainy day. Indeed, it’s good nonprofit stewardship to have enough in reserve to cover at least a year with little or no income.

If your organization is not investing the rest, however, those rainy days may come sooner rather than later. We’re not talking about investing in stocks, bonds or mutual funds; we’re talking about investing in overhead.

The O word is a loaded one, we know. Charities in particular can face public backlash if they are perceived as spending too much on overhead at the expense of their mission. Donors, especially individuals, want their gifts used to feed the children or fight the disease, not pay for an executive director’s salary, travel expenses or office rent. Many foundations have rules about what percentage of their grant money can be spent on overhead versus programs – and that percentage is often unrealistically low.

“You have to spend money to make money” is not just a saying. An organization needs to invest in infrastructure – staff salaries and training, facilities, equipment, fundraising – to achieve the best results from its programs, properly measure those results, and effectively communicate them to donors and prospective donors.

There’s a name for this: the Overhead Myth. In 2013 and 2014, the CEOs of America’s three leading sources of information about charities -- GuideStar, Charity Navigator and the Better Business Bureau Wise Giving Alliance -- published a pair of open letters, one addressed to donors and one to nonprofits, explaining why the overhead-to-mission funding ratio is not a reliable measure of an organization’s effectiveness.

“In fact, many charities should spend more on overhead,” they wrote in the donor letter. “These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

“When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called ‘The Nonprofit Starvation Cycle.’ We starve charities of the freedom they need to best serve the people and communities they are trying to serve.”

In the letter to nonprofits, the authors suggest three things organizations can do to dispel the Overhead Myth:

• Demonstrate ethical practice and share ethical data about performance.
• Manage toward results and understand their true costs.
• Help educate funders on the real cost of results.

“Too often nonprofits contribute to the Overhead Myth by highlighting financial ratios as their core accomplishment – especially in their fundraising materials,” they write. “Tragically, this can be at the expense of meaningful performance metrics and reinforces funders’ confusion. Funders need to understand the truth if they are to change their behavior.”

This applies equally to professional trade associations and other nonprofits that rely on member dues and sponsorships for their income. For these organizations, investing in overhead may take the form of hiring a lobbyist to beef up their advocacy work, a highly sought-after speaker to attract more conference attendees, or a consultant to assist with overhauling their education or certification programs. All these things add value to the member experience; without them, members and sponsors will desert the organization, taking their dollars with them.

Of course, these spending decisions are ultimately up to an organization’s board. We encourage association executives reading this to share the resources linked above with their treasurers, other officers and board members. If you need help convincing them of the importance of investing in the organization’s long-term health, give ADG a call.