How Much Can a Non-Profit Legally Spend on Overhead? (2024)

FAQs

How Much Can a Non-Profit Legally Spend on Overhead? ›

This total should not go over 35%, the cap recommended by the Better Business Bureau here in the U.S. Although the IRS does not have rules on how much a 501c3 can spend on overhead, spending more than 35% on overhead could hurt your credibility and drain funds that should be going toward your programs.

Ideally, nonprofits should not exceed a 35% overhead rate. A percentage higher than this might indicate spending that's disproportionate to the amount of money a group can raise.

Most nonprofits who spend more than 30% of their budget on overhead get no bonus points. The Better Business Bureau says that no more than 35% of a nonprofit's budget should be spent on operating expenses. Unfortunately, the desire to keep overhead costs as low as possible has had pernicious effects on many nonprofits.

Nonprofit organizations have a variety of revenue streams and expenses to pay to maintain their daily operations. A 501(c)(3) organization's expenses primarily fall into three categories: administrative expenses, fundraising expenses, and program expenses.

Overhead is calculated by adding Management & General expenses to Fundraising expenses, then dividing by total expenses.

Overhead as a percentage of sales

Typical overhead ratios will vary significantly from industry to industry. For restaurants, for example, overhead should be about 35% of sales. In retail, typical overhead ratios are more like 20-25%, while professional services firms may have overhead costs as high as 50% of sales.

As a general rule, it's best to make sure your business doesn't exceed a 35% overhead rate, but there's no cut-and-dried answer to what your overhead should be.

To calculate this ratio, divide total program service expenses by the organization's total expenses. A general rule of thumb is that a nonprofit should have approximately 80% program expense, and 20% general and fundraising expenses. The average nonprofit on CharityNavigator achieves 67% program efficiency.

This nonprofit ratio is key in the eyes of donors. Charity Navigator generally gives the highest rankings to those organizations whose ratio of program expenses is 85% or higher of their total expenses. Other agencies, such as the Better Business Bureau's Wise Giving Alliance, recommend a ratio of 65% or higher.

What is the 80 20 rule for nonprofits? ›

The 80/20 rule, also known as the Pareto principle, suggests that a small number of causes (20%) often lead to a large number of effects (80%). In the context of fundraising, this principle suggests that a small number of donors (20%) may contribute the majority of funds (80%).

When there is a surplus of nonprofit cash it can lead many board members and staff of the organization to question what to do with the extra money. The money will need to be reinvested back into the organization in a number of different ways.

For example, some watchdogs believe nonprofits should spend no more than 35% of their donations on overhead. The Better Business Bureau specifies that nonprofits should spend less than 10% on executive compensation. According to Charity Navigator, nonprofits should spend less than 10% on fundraising spending.

Overhead + Profit: Calculating Your Margin

That's fairly close to the “10 and 10” of 10% overhead and 10% profit which is often considered industry standard.

To allocate overhead costs, an overhead rate is applied to the direct costs tied to production by spreading or allocating the overhead costs based on specific measures. For example, overhead costs may be applied at a set rate based on the number of machine hours or labor hours required for the product.

Indirect costs are finances that can't be allocated to a specific product, project, service, etc. This includes costs that are associated with running the nonprofit as a whole, such as administrative salaries, rent, office supplies, etc.

If the overhead rate is 30%, it means the business spends 30% of its operating expenses on producing a good or providing a service. You can also calculate overhead costs relative to other reasonable measures, such as machine hours or labor (wages).

Overhead costs are those that are not directly related to the production of goods or services, but are necessary for the operation of a business. Examples of overhead costs include rent, utilities, insurance, legal fees, office supplies, advertising, payroll, and accounting fees.

If your overhead rate is 20%, the business spends 20% of its revenue on producing a good or providing services. A lower overhead rate indicates efficiency and more profits.

Overhead expenses are all costs on the income statement except for direct labor, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.

What is the average nonprofit expenses? ›

97 percent of nonprofits have budgets of less than $5 million annually, 92 percent operate with less than $1 million a year, and 88 percent spend less than $500,000 annually for their work. The “typical” nonprofit is community-based, serving local needs.

A commonly used reserve goal is 3-6 months' expenses. At the high end, reserves should not exceed the amount of two years' budget. At the low end, reserves should be enough to cover at least one full payroll. However, each nonprofit should set its own reserve goal based on its cash flow and expenses.

Typically, any expense ratio higher than 1% is high and should be avoided, however it's important to note that many investors choose to invest in funds with high expense ratios if it's worth it for them in the long run.

Grants can make up a significant portion of a nonprofit's budget, accounting for around 10% of all nonprofit funding.

Society for Human Resource Management reports that the voluntary turnover rate for nonprofit organizations is 19 percent. This is higher than the industry average of the overall labor market (12 percent).

Financial planning is vital to the success and sustainability of an organization. The Better Business Bureau recommends that nonprofits spend under 35% of their funding on overhead expenses (facility costs, licensing fees, equipment costs, etc.) and spend at least 65% on programs.

In the absence of a standard definition, let's consider a small organization as having 20 or fewer staff members and a large organization as having 100 or more.

Some nonprofit organizations with budgets under $1 million set their percentage of nonprofit budget for a salary of the executive director at around 10 percent of their budget, whereas large major nonprofits with budgets in the tens of millions sometimes use a percentage from 1 to 2.5 percent.

Yes! Not only are nonprofits able to have a savings account, it is highly recommended.

They often earn even more. Surprisingly, executives at the head of leading nonprofit foundations earn as much as $1 million to $4 million a year, according to The Chronicle of Philanthropy. These compensation packages often include salary, bonuses, health insurance and other benefits.

Can a nonprofit make millions? ›

Myth: Nonprofits can't earn a profit

Reality: The term "nonprofit" is a bit of a misnomer. Nonprofits can make a profit (and should try to have some level of positive revenue to build a reserve fund to ensure sustainability.)

In Should Your Budget Balance? No!, Kate Barr of Propel Nonprofits argues that break-even budgets are not only not required, but they are the biggest barrier to building reserves and ultimately a financially healthy organization.

Most general contractors are looking at about a 35% margin, so they need a markup of 54%, or 1.54. Subs can often get a profit margin of 50%, so they need a markup of 100% or 2x, as shown in the table on the right. For some contractors, they have 35% gross profit and 25% goes to overhead and 10% is left in the company.

Profit is the amount of money left over after subtracting overhead, labor, and materials costs from a contract price. For example, in a contract worth $20,000 that required $15,000 of labor and materials and $2,500 of overhead, the remaining $2,500 is the profit.

Along with choosing what you'll use to allocate your overhead, you'll need to choose how you want to calculate it. You can think of two different categories of methods, either: a rate of costs or revenues, or. a proportion between your jobs.

Simply put, if an expense benefits or relates to a specific segment of the company, it would likely be considered overhead. Conversely, G&A expenses benefit the entire business as-a-whole.

Examples of indirect costs are accounting and legal expenses, administrative salaries, office expenses, rent, security expenses, telephone expenses, and utilities.

Indirect costs include supplies, utilities, office equipment rental, desktop computers and cell phones. Much like direct costs, indirect costs can be fixed or variable.

Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).

While no two nonprofit organizations will have identical needs, structures, or budgets, an indirect cost rate of between ten and fifteen percent has served as a longstanding rule of thumb.

What are typical overhead and profit percentages? ›

Overhead + Profit: Calculating Your Margin

A national survey from NAHB showed an average net profit of 9% and 10% overhead. That's fairly close to the “10 and 10” of 10% overhead and 10% profit which is often considered industry standard. (Your overhead and profit may differ, but let's use 10 and 10 as an example.)

A good overhead percentage for small businesses is typically between 10-30%. This will depend on the industry and type of business. For example, a service-based business will have a lower overhead percentage than a manufacturing company. Lower overhead costs mean that there is more profit for the business.

Charity Navigator generally gives the highest rankings to those organizations whose ratio of program expenses is 85% or higher of their total expenses. Other agencies, such as the Better Business Bureau's Wise Giving Alliance, recommend a ratio of 65% or higher.

Examples of indirect costs are accounting and legal expenses, administrative salaries, office expenses, rent, security expenses, telephone expenses, and utilities.

Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).

If your overhead rate is 20%, the business spends 20% of its revenue on producing a good or providing services. A lower overhead rate indicates efficiency and more profits.

Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.

Overhead costs are those that are not directly related to the production of goods or services, but are necessary for the operation of a business. Examples of overhead costs include rent, utilities, insurance, legal fees, office supplies, advertising, payroll, and accounting fees.

Overhead costs are required to run the business and cannot be avoided, while operating expenses are needed to perform services and create products. Standard overhead costs include rent, utilities, and insurance payments, while operating expenses may include salaries, depreciation, and delivery charges.