Is 0% Overhead for Nonprofits Possible, Fair, or Necessary?

What is a good overhead ratio for nonprofits?

When strategizing how to run a nonprofit effectively, financials are everything. One of the most significant and sometimes challenging questions that comes up during the process of nonprofit accounting is, what is a good overhead percentage for nonprofits specifically?

One nonprofit overhead cost study suggests that a for-profit business should spend no more than 35% on overhead expenses, but nonprofits typically have overhead costs closer to 20%.

Nonprofit overhead expenses will directly tie into the way you budget around fundraising costs. Below, we'll help you understand the benefits of investing in your nonprofit overhead ratio.

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Overhead meaning for nonprofits

It would be great if the average overhead rate per industry was straightforward, but for now let’s work with what we know. The average overhead ratio for nonprofits will include the same costs as any other business. The only real difference is that the average nonprofit overhead ratio can be scrutinized, questioned, and judged on how little you spend—not how much you accomplish.

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Your nonprofit’s overhead ratio will depend on a few variables:

• Your size

• Your cause or purpose

• Where your funds come from

• Your board

• Your donors’ understanding of overhead

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A nonprofit organization overhead definition

There are more than a few realities unique to the world of nonprofits (just spend a few minutes on Shit Nonprofits Say if you don’t believe me). Nonprofit overhead is one of those. It includes any costs that aren’t fundraising expenses or directly invested in your cause or purpose. This can mean everything from your nonprofit administrative costs percentage to the budget you set aside for advertising.

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Nonprofit overhead costs can include:

• Office space and supplies

• Administrative costs

• Employee salaries

• Advertising 

• Human resources

• Nonprofit leadership

• Program expenses

• Office equipment

• Information technology (IT) support

• Application fees for grants

• Marketing

• Lobbying

• Trips

• Events

• Fundraising software

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How to calculate overhead for nonprofit businesses

Nonprofit overhead ratio formula: Total overhead costs/ Total monthly revenue

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Ways to reduce overhead costs

Finding savings within your overhead costs can be complicated, but a straightforward way to save would be using fundraising software that doesn’t charge you crazy transaction fees like Zeffy.

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Your nonprofit organization can also reduce overhead spending by:

• Transitioning to remote work

• Paying your employees as little as possible

• Spending next to nothing on marketing

• Cutting back on fundraising events

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Every area you cut back on can impact fundraising, but as you determine your biggest ROI-driving activities, you can plan ahead to cover overhead expenses in your budget.

Yes, you can claim that more or even 100% of your money goes directly to your cause or purpose, but will you raise as much money? Will you have the same impact? Will you accomplish what you set out to do?

Even if more or even 100% of your overhead spending goes directly to your cause or purpose, incoming donations can be impacted.

Studies like “Avoiding overhead aversion in charity” showcase that donors would rather not have any percentage of their donation go towards overhead. This can help demonstrate the full cost of not knowing your overhead rate or how spending can impact your nonprofit's growth.

For years, the nonprofit overhead myth told us that a measure of a nonprofit’s success has been how it spends money on its cause and not how successful it has been at change. Donors strongly prefer giving when the nonprofit's finances don't include high overhead spending regardless of cost-effectiveness.

Slowly, the times are changing, and building trust and financial transparency can help to educate donors on the importance of nonprofit overhead spending.

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How much do nonprofit employees make?

“How does a nonprofit pay employees?”, “How do nonprofits pay employees?” and their many variations are popular Google searches. But do you know what has almost no Google searches? “Do nonprofits pay employees well?”. 

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These search results showcase the assumptions of:

• Volunteers mostly run nonprofits

• Organizations can operate without nonprofit leaders

• Staff salaries are not as good as for-profit equals

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This is a problem for two reasons. First, the nonprofit industry represents 8.3% of Canada’s GDP in 2024, a 6.6% increase from 2023. In the United States (US), it represents about 5.6%. There’s no way that it could be run entirely by volunteers.  

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Here are some important stats from the National Council of Nonprofits’ 2023 report:

• 74.6% of US nonprofits completing the survey reported job vacancies.

• 51.7% of US nonprofits reported having more vacancies now than before the COVID-19 pandemic.

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In 2021, nonprofit organizations employed about 2.5 million people and represented 14.5% of all jobs in Canada.

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Attracting quality talent without sacrificing funding

People who work for nonprofits are among the most educated, dedicated, and passionate employees—most have university or college degrees. However, they tend to justify and accept the lower salaries nonprofit jobs pay because they care about their work. Because nonprofit jobs have been under-compensated for so long, they no longer attract the same talent.

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Here are a few ways to balance strong talent in your organization and how many donors will be willing to invest in that crucial asset:

• pay wages above the market rate to motivate highly-qualified employees to join

• Give an unexpected pay raise to boost moral and productivity with enough money to correlate to the value they bring

• Be open with donors about how each employee plays a role in the greater mission and scale of your organization

• Encourage talent to stay with you and grow with regular incentives instead of starting from scratch on hiring new talent

• Consider a shift to a remote workplace to save up to $11,000 per employee

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Informing your donors about the realities of why overhead costs help your organization run smoothly will help them better understand that overhead spending often plays an essential role in your work.

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Necessary fundraising expenses

Fundraising software

Fundraising takes money (and time). There are often expensive fees charged by fundraising platforms. With most nonprofit fundraising sites charging anywhere from 3% to 10%, raising money can add up quickly and represent a hefty chunk of your overhead that could be invested into your cause or purpose.

Zeffy can help you by charging 0% in fees. There are no nonprofit fundraising platform fees, transaction fees, or anything else.

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Advertising costs

Dan Pallotta’s TED Talk: The way we think about charity is dead wrong shows us why advertising is so strong for nonprofits looking to maximize their overhead ratios. In 18 minutes and 38 seconds, Dan shares the “double standard that drives our broken relationship to charities.” A big part of that double standard is related to advertising.

Advertising works. Building demand for something creates a desire to give, which changes the amount and number of donors who will give to your cause. Sometimes, donors have difficulty understanding why some of their money is being invested in advertising.

However, charitable giving is worth the long-term investment in overhead to make it a more significant, more present part of our everyday lives.‍

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The word “spend” and overhead

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The word “spend” can have a lot of negative connotations, but what if that shifts to "investing" instead? We've talked a bit about this mind-shift nonprofits need to create within donors when it comes to their affinity for low overhead. Language does matter.

Educate your donors on why investing in employees and operational expenses leads to nonprofit effectiveness. Better yet, if you can explain why investing in marketing helps you raise more money by creating awareness for your cause, well, now you’re talking.

Stats will be your best friend. For example, on average, nonprofits that invest in digital advertising raise $1 for every $0.12 invested.

People like numbers and concrete returns on their new investments.

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Be transparent about your overhead investments

Finding the correct overhead ratio for your nonprofit will mean a lot of trial and error. And, like any good business model out there, maintaining low overhead with a strong sense of how general costs lead to nonprofit effectiveness is how you'll learn more as you go.

We know the nonprofit overhead myth presents outdated and unfair criteria. At the same time, people are increasingly interested in accomplishments and want to understand why you invest their hard-earned money the way you do.

Keep your nonprofit website up to date, communicate frequently, and lean on review sites like Charity Watch and Charity Navigator. Sharing as much as you can, as often as possible, keeps you honest and helps your donors understand the importance of investing in what you and they believe in.

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Next steps for nonprofit organizations

The trust-based philanthropy project suggests nonprofits should have a clear set of values to guide everything they do. These values will ensure your nonprofit’s culture, structures, leadership, and practices work together. They ultimately reassure donors that every dollar invested—even in overhead spending—helps your cause.

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As you think about how to take action, here are some last reminders:

• Donors are curious about how nonprofits spend their donation money, but don't take that skepticism as a defeat. Most will happily support administrative expenses when they see a clear tie to outcomes.

• Evaluate each overhead expense (both indirect costs and direct costs) with a careful eye to be sure it's producing results you can share openly.

• The overhead myth limits nonprofits, and you can feel empowered by how you spend money when it leads to your nonprofit's effectiveness.

• The nonprofit sector is vast, so comparing notes on how other organizations are doing isn't always the best approach to budgeting for your fundraising efforts. Your nonprofit's overhead ratio is unique, as it should be.

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