Overhead costs are an unavoidable part of running a nonprofit. These expenses are necessary to operate your nonprofit, even if they don’t specifically relate to your cause. It is important to address your overhead spending; every dollar spent on operating costs is a dollar not being used for your mission. The easiest way to measure your overhead spending is by determining your overhead spending ratio.
How to Calculate the Overhead Ratio
Your overhead rate is the sum of all operating costs divided by total expenses. Your total expenses should include the costs that support your cause. If you operate a nonprofit that teaches reading, the costs of your books and tutors is included in total expenses but not the operating expenses. If you have $15,000 of operating expenses and $75,000 of total expenses, your overhead rate is 20%.
What Counts As Overhead
Overhead costs are operating expenses that don’t directly tie to your mission. Although overhead costs are unrelated to your cause, they’re required for your organization to exist. Overhead costs include administrative expenses, such as the cost of your support staff and rent. Your utility bills and office supplies are part of overhead. Your fundraising expenses, cost of transportation, and professional fees for an accountant or lawyer are also included.
Ideal Overhead Ratio
Recommended overhead ratios vary between sources according to your industry. In general, your nonprofit should try not to exceed an overhead ratio of greater than 35%. It is often recommended that you should attempt to reach an overhead rate of less than 10%. Anywhere between these two rates is the standard breadth you’ll find most nonprofits. Different industries, causes, and sizes have different ratios. You should strive to have your overhead spending as low as possible while efficiently maintaining the right amount of support needed to reach your goals.
Grant and Funding Stipulations
Some funding organizations set limits and requirements on overhead costs. Some organizations don’t issue grants if your overhead rate is too high. Others allow only a specific amount of funding to be used on overhead costs. Certain individual donors may refuse to contribute your nonprofit based on your overhead ratio. For these reasons, it’s in your best interest to minimize your overhead ratio; it may result in getting more funding.
Importance of Finding Balance
Your nonprofit may be evaluating what the right level of overhead costs. Often, this means you may try to reduce these costs. However, you should consider situations where your operation costs may be too low. If your overhead ratio is extremely low, do you have enough staff on hand or are your employees being spread too thin? What are the qualities of your building space? Are you paying all licencing and regulatory expenses? Should you spend more on fundraising? Determining how much you should spend on operating costs can be evaluated as being too high as well as being too low. The first step is to calculate your overhead ratio. Then, with an understanding of what’s normal for similar nonprofits, determine what your optimal overhead ratio should be and strive to meet your overhead spending goals.