Nonprofit Overhead Ratio: 7 Practical Ways to Reduce It ASAP

by | Sep 3, 2020

It’s not a shocker that nonprofits are facing tremendous challenges during the coronavirus pandemic. To help, our recent blog posts, Nonprofit Survival During a Pandemic and Fundraising Tips for Surviving COVID-19, include methods nonprofits can use to stay afloat (and even thrive) during this time. Now we’re diving into nonprofit overhead ratio — what it is, how to calculate it, and most importantly, seven practical ways to reduce it during the coronavirus crisis.

What is nonprofit overhead?

Nonprofit overhead is all of the expenses necessary to operate a nonprofit that don’t directly tie to its mission. Examples of nonprofit overhead include:

  • Administrative expenses
  • Rent
  • Utility bills
  • Office supplies
  • Equipment costs
  • Legal fees

As you can see, overhead expenses are indirect costs necessary for running a nonprofit but don’t directly contribute to the organization’s profits.

How is nonprofit overhead calculated?

Nonprofits that file IRS Form 990 must allocate their annual expenses into three categories:

  • Program expenses – expenses directly related to carrying out the nonprofit’s mission
  • Administrative expenses – expenses for the nonprofit’s management and overall operations
  • Fundraising expenses – expenses for publicizing and conducting fundraising campaigns, donor mailing list maintenance, and all other activities involving soliciting contributions

When you combine the totals of the last two (the administrative and fundraising expenses), you get the nonprofit’s overhead.

7 Practical Ways to Reduce Nonprofit Overhead Ratio

How is nonprofit overhead ratio calculated, and what’s the ideal result?

To calculate the nonprofit ratio, divide the overhead (which is all operating expenses) by the total expenses. The resulting percentage is your overhead ratio. Most nonprofits have a ratio of around 37% and should strive to keep it under 35%. But overhead ratios can vary depending on the industry and cause. For example, if a nonprofit has a heavy emphasis on fundraising, those expenses will be higher than typical. Nonetheless, all nonprofits should keep overhead spending as low as possible but still keep the support they need to attain goals — especially during the pandemic.

Seven practical ways to reduce nonprofit overhead:

Not only will lower overhead help a nonprofit survive the coronavirus crisis, but it also puts the organization in a better position to attract more donors during fundraising campaigns. Here are some practical ways to reduce nonprofit overhead:

  1. With so many people social distancing, quarantining, and working from home, reconsider how much is spent on things like rent, utilities, and maintenance. Think about it — big changes here can account for big savings.
  2. Transition the majority of fundraising efforts to virtual or digital. We outlined some ideas for this in our article, Nonprofit Fundraising: Tips for Surviving COVID-19.
  3. Increase volunteer recruiting efforts. Don’t ever stop — always be recruiting. Also, be sure to make each volunteer feel valued. They can be the lifeblood of the organization.
  4. Transition to a paperless office. You’ll save tons on paper, printer ink, printers, photocopiers, and more.
  5. Seek savings on subscription-based services. Are there special prices for nonprofits? Can you save money by purchasing annually rather than monthly? Every bit of savings here can add up.
  6. Outdated technology can hold you back. If you need to upgrade, many technology manufacturers and retailers offer discounts for nonprofits. Better yet, find a group willing to donate modern computers. You never know until you ask.
  7. Explore affordable outsourced accounting services for reporting, preparing your Form 990, and more. Are you getting all the tax breaks you qualify for? Think about how much time and expense you’re putting into accounting efforts. You may realize that the most cost-effective way of getting this work done (and done right) is by outsourcing it to the experts.

You’ve got nothing to lose and everything to gain.

Coping with the impacts of COVID-19 is going to be a long-term initiative. Our accounting team at Qbix has worked with hundreds of nonprofits to help them survive and thrive during challenging times. Will you be next? Let’s find out — schedule a free consultation call today.

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Qbix was formed in 2008 in Macon, Georgia, just south of Atlanta. Our goal is to provide the latest cloud accounting technology, while delivering real-time visibility into your nonprofit's financials 24/7. Numbers are our passion, but providing your nonprofit business with the financial expertise needed to facilitate growth and profitability is our top priority. And because no two organizations are the same, Qbix offers the flexibility you need to accomplish your nonprofit's goals.

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