Overhead: Good vs. Evil
July 28, 2015
Every organization in the world has overhead. It is a fact of life. Expecting an organization to not have overhead is like asking someone to stop breathing for a couple of hours each day to conserve oxygen for the rest of the world. There are watch dogs agencies that have put out edicts on the level of overhead that not-for-profit organizations should have. However, have you ever heard of someone criticizing a for-profit company for incurring overhead? Ever hear the saying “Gotta spend money to make money?” We generally support for-profit organizations in spending money to make money, yet we handicap not-for-profit organizations by encouraging them to keep their overhead ratios as low as possible. There is a movement currently happening against this “overhead myth”.
A not-for-profit should not be locked into the concept that overhead is bad when it expects to continue to survive, let alone grow, in this economy. Because not-for-profits are cautious about increasing their overhead, they often have issues attracting talented individuals as well as retaining the talent they might have been lucky enough to get because they can’t meet their compensation requests. Not-for-profits might not invest in their infrastructure or take the time to plan strategically because those would be considered overhead costs. Without a competitive infrastructure or a clear strategic plan, how does a not-for-profit continue to grow its footprint?
I don’t have an answer for your organization on how to overcome this “overhead myth” right now. It is something that has to happen nationally in the minds of millions of individuals but here are some ideas that might help the not-for-profit survive in this world when it has to incur more overhead than society might want to see.
#1 – Add a Management’s Discussion & Analysis to your financial statements. For-profit companies do this frequently – whether they are required to do it or not. In this MD&A (as we accountants affectionately call it), you can address all of the questions readers are going to have before they even see the financial statements. If you had a rough year because the organization decided to invest in a new program, this would be the place to explain that – before the readers even see the loss on the statement of activities. Knowing the reason behind some of the results before seeing them eases the surprise and helps them really understand the organization.
#2 – Consider revising/expanding/enhancing the “Nature of the Organization” footnote within the financial statements. Did you enter a new market? Start a new program? Get a new major funding source? Some of those types of qualitative updates can be included in this footnote – the FIRST footnote that the readers see.
#3 – Write a cover letter for your financial statements and include in all packages sent to funders, potential donors, banks, etc. Similar to the MD&A, yet a little less formal (and the auditor really isn’t involved in this process at all since it is not included in the audit package).
#4 – Add a “Cost of Programs” report or schedule to the supplementary information at the back of the financial statements. We all have seen the functional expense statement with just the three columns – Program, Management & General, and Fundraising. Why not break down the program column into the specific programs your organization has? Let the readers see where the money is being spent within the programs so they understand why there is so much allocated to salaries, subcontracts, etc. This report together with an expanded Nature of the Organization footnote (which could describe each program) would be a good combination to consider.
#5 – Change the presentation of your financial statements to disclose operating vs. non-operating items or the availability and use of certain assets. This would require a little bit of footnote disclosure to explain the two categories, but would give the readers a better sense of what is “real” and what is ingrained in the organization and not really a part of the mission.