RICH SOLUTIONS BLOG

The general wisdom around non-profits (for anyone not involved in non-profits) is that the lower the overhead the more effective and efficient the organization. I recently attended a presentation by Jan Masaoka of CalNonprofits who quickly put this idea to bed. Masaoka was presenting on the work of The Overhead Project which is alerting non-profits about new OMB standards and making way for some breakthroughs in how overhead is seen by both private funders and the federal government. (http://calnonprofits.org/overhead/about-the-nonprofit-overhead-project)

Masaoka told our group about the dance that all non-profits currently perform because each funding source has a different formula for how they will pay for programs. Nearly all funders currently insist that their money goes entirely or nearly entirely to support programs. That is, of course important, but in order to do the program a non-profit must also pay rent, pay utilities and buy a new computer from time to time. Despite the obvious need for these overhead costs, funders typically don’t not want to include them in their grants.

Because the cost of keeping the lights on is a real cost to non-profits, they must do all kinds of financial gymnastics to budget around the individual demands of the individual funders. Determining the actual cost of their programs can prove a daunting task.

Masaoka explained that because of these gymnastics, most non-profits spend about three times more on accounting than similarly sized for-profit companies. She insisted that this was not because non-profits do not have good accountants or that their books are shoddy. She claimed that the bookkeeping for non-profits is just that complicated.

Ironically, the funders’ desire to have as much money as possible go to programming ends up backfiring. Because of the higher cost of non-profit accounting, the overall costs for the programs end up being higher than if the operating costs were transparent and included as a budget item.

Masaoka and the folks at CalNonprofits recognize that the change needs to come from the funders and recommends educating them about the overhead issue. She also recommends not supporting groups like Charity Navigator which propel the myth that companies with low overhead are more efficient.

For more information on this topic, go to the CalNonprofits website: http://calnonprofits.org/overhead/about-the-nonprofit-overhead-project

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