The Overhead Dance: Transparency Part II

By Janet Brown from her blog Better Together

In my early years as an arts administrator, I remember thinking it was best to keep grant applications simple in order to limit the questions that granters might have. One line I always left blank was “indirect costs.” I did this because it just seemed a good idea to make the application financials less complicated. But how wrong I was.

In my own way, I joined numerous nonprofit managers in being complicit with a grantmaking culture that stressed project benefit without acknowledging the real costs to produce the project.

Overhead. It was for the longest time a dirty word for the nonprofit sector, (and to some, it still may be.) Made worse by charities that abused it and by funders who under-estimated needs of a business to operate at a capitalized level. How many times have we heard nonprofit’s bragging, “all contributions go directly to __________” (fill in whatever constituency you’d like here.) The over-whelming publicity created by outliers who have broken the public trust by lavish spending or inadequate financial oversight created a climate of distrust that, I believe, has added to an impoverished arts nonprofit sector.

None of this is helped by the over-simplification of financial analysis provided by watchdog nonprofit sites like Charity Navigator. Don’t get me wrong; when you’re looking at national or international big (and I mean BIG) nonprofits, it’s nice to know some of this information. But, the air of distrust that these sites have created has done no favors to small and mid-sized organizations struggling to pay staff and keep an office open.

The result for most nonprofits is the realization that if you run a lean machine (meaning doing something with nothing) you will be rewarded if your overhead and salaries and benefits are low. Another don’t get me wrong…I’m not saying we should increase overhead and staff for no reason, but I think we’ve been working in a culture that challenges us to be honest about the real needs of staffing an organization appropriately and running programs effectively.

It’s not sexy. That’s how nonprofits often describe the lack of interest in supporting overhead and salaries. Individuals and even some institutional funders aren’t excited about keeping the electricity on or making sure the development director has an assistant, or that an organization has enough funds to hire a qualified development director in the first place. But the reality is staff benefits can easily be over 25% of salaries these days. Rising fixed costs of health insurance, rental space and utilities need to be addressed, often at the expense of product and services. Arts groups often determine that fewer administrative costs are the price they’ll pay in order to maintain the artistic product. A good nonprofit manager and artistic director really need to understand the actual costs of the business…producing the product, marketing the product, fundraising for the product plus paying for the fixed costs including staff benefits, facility maintenance and administrative support.

This is not a culture easily changed. Both granters and grantees can begin to change how we talk about overhead and administrative costs. Grantees need to fully understand their overhead. Sometimes I don’t think we’re actually teaching nonprofit managers to be able to make these calculations. What percentage of total general operating costs is credited to this project? What’s the formula to find that number? This includes salaries and benefits. When we know this number, then we can begin to talk more candidly with funders about it. This takes a bit of courage. It’s not easy to say to someone who is considering giving you money, “Sorry but we can’t do the project without more support.” Instead we dwindle the project down to make it more appealing. What gets dwindled is, often, the funds nonprofits really need to keep the doors open. Transparency and honest talk are needed.

For their part, experienced program officers for foundations, corporate and government entities should challenge the nonprofit on the accuracy of their numbers. In GIA’s Conversations on Capitalization and Community, we talk about the fact that it is most likely that grantees are under-estimating these numbers in order to make their projects more palatable to funders. There are actually funders out there who are saying, “Can you really do this program for this amount?” “Let’s go over your breakdown of G&A costs to make sure we understand your operating needs?” Kudos to them.

This is the dance. Instead of admitting real costs or possibly even understanding real costs, the nonprofit arts sector is always tempted to underestimate in order to get something from funders. Which, of course, is always better than nothing. In the long run, however, we’ve weakened our sector with this behavioral norm. Maybe with more efforts for honest assessment and honest communication between funders and nonprofits, we can stop dancing solo and begin dancing as real partners.