This article is originally published on Bristol Strategy Group which is a “knoweldge” partner of Your Funding Network.

The “overhead myth” still haunts us. That’s the myth that says your “overhead ratio,” the amount you spend on boring things like rent, payroll, and employee benefits, should be some teeny-tiny fraction of the total. We know it’s wrong, but some funders still believe it – and worse, some nonprofits still buy in.

Folks, we have to end this practice. Not only is it destructive, it’s also misleading. First of all, the amount we spend on running the business of the nonprofit varies from year to year. It will fluctuate when you’re making big capital investments, like new technology, fixing your air conditioning, re-roofing the building, or staffing new positions.  Other years, it will be lower. But if we continually restrict so-called “overhead,” guess what happens?  Stuff like:

  • Angry, disgruntled employees who haven’t had a salary raise in too long.
  • No budgetary room to invest in technology, consulting or training.
  • Burnout among leadership and staff, who try to do too much with too little.

Enough already.  Here are a few things you can use immediately to start laying this destructive myth to rest.

Things to DO:

  1. Raise as much unrestricted income as you can.  Stash it in Cash Reserves if you don’t need to use it right away.
  2. Brag about your ability, willingness, and interest in investing in professional development (or technology) so you can strive for greatness.  If need be, buy another copy of Jim Collins’ classic monograph Good to Great and the Social Sectors.  Read it (or read it again). Give it or quote from it liberally when cultivating or stewarding major donors and corporate sponsors.
  3. Encourage your board to understand the need to have adequate operating cash-flow AND reserves. An under-capitalized business is a vulnerable business.
  4. Encourage your fundraising team, both staff and volunteers, to help donors understand the value of adequate capital, cash-flow and cash reserves.
  5. If grant-makers bug you about low overhead, help them understand your determination to become great, which requires recruiting the best staff, training them regularly, investing in technology and other infrastructure, and doing all that’s necessary to achieve  mission impact.

Things NOT to do:

  1. Don’t brag that you have low overhead. You’re just encouraging the funders who still think it’s important.
  2. Don’t try to fudge the numbers so it looks like you have low overhead.
  3. Don’t fail to confront funders who still have the mistaken idea that low overhead is good. Tell them it’s bad, or at the very least it’s a misleading metric.

Remember this. It takes great motivated, committed and engaged team to do the work of your nonprofit’s mission.  That means paying your team competitive wages, giving them up-to-date, functional technology (and decent furniture) and providing effective management and motivation so your team can do what needs to be done eagerly, and with love and joy.

Managing your team for greatness means asking them for the highest performance and integrity. These investments are not a luxury.  They are the difference between running a struggling nonprofit that can’t deliver on its promises, and running a thriving one that’s achieving them.

Comments, anyone?