In a recent study of over 10,000 New York nonprofit organizations, “Understanding Overhead: A Governance Challenge for Nonprofit Trustees,” the authors, John MacIntosh of SeaChange Capital Partners and George Morris and Dylan Roberts of Oliver Wyman, highlighted the following patterns existing among the organizations, with respect to overhead (administrative and fundraising expenses):
Median overhead ratio is 16.3%; for one-quarter of nonprofits it’s 10% or less; for one-quarter it’s 24% or more.
Median administrative ratio is 12.8%; for one-quarter of nonprofits it’s 8% or less; for one-quarter it’s 19% or more.
Administrative ratios differ very little by sector, but indicate clear economies of scale.
In aggregate, fundraising expenses represent 1.4% of total expenses and 10% of total overhead expenses.
Fundraising ratios differ considerably by sector and scale.
Fundraising efficiency (fundraising expenses divided by private funds raised) varies far less by sector and not at all by size. The median organization spends $0.17 per private dollar raised.
In aggregate, 50-60% of overhead is directly related to staff (salary and benefits, etc.).
As management teams continue to fight the daily challenges of diversifying revenue streams, negotiating rate increases with government funders, convincing foundations of the strengths and merits of unrestricted dollars and overseeing programs that are already strapped for resources, trustees should be asking: How well do I understand the organization’s overall business model, including its full cost and overhead structure?
A place to start: Ask yourself the following questions: Do you know your organization’s key ratios (overhead, administrative, fundraising efficiency)? How have these ratios trended over time? Are they in line with the strategic objectives of the organization? How can economies of scale be maintained/achieved? How can we, as a Board, be more effective in our governance and leadership of the organization? What information do we need to fulfill our fiduciary responsibilities?
The study authors said it well: “Overhead is a dry subject. People don’t join nonprofit boards to read spreadsheets or study expense allocations. … So, the commitment to make analysis part of everyday leadership and governance must come from within.”
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