3 Ways to Minimize Your Nonprofit's Overhead Ratio

Your nonprofit overhead ratio can sometimes be difficult to calculate, understand and minimize. Often, it takes up funding you didn't know you could reduce. During the era of COVID-19, however, working with that ratio gets even more complicated.

From calculating the ratio and creating a plan to finding a balance through reduced spending, the following ways can help you work with your spending. These ways will help keep your nonprofit's message intact while still minimizing the organization's overhead ratio. The pandemic is hitting nonprofits hard, but these steps can help you navigate the bumpy road ahead.

1. Calculate the Ratio 

The first step is to calculate your overhead ratio — or recalculate it — to bring it up to date with the pandemic's effects. Your overhead costs are all the operating expenses that don't directly relate to the organization's mission. These costs include administration, rent, utilities, fundraising, transportation and anything else that doesn't directly affect the overall goal of the nonprofit. Some of these factors may have decreased already due to stay-at-home orders. However, it may bring about fewer donations and engagement, too, hence the need to recalculate.

To calculate the ratio, you'll need to add up all the organizations operating costs and divide that by the total expenses. Many nonprofits have a ratio of around 37%, however, industry leaders aim for around 23%. Also take into consideration that your ratio will depend on your nonprofit's field. If there's a high focus on fundraising, you'll see those expenses go up.

From your calculation, you then have a better visual of where the organization's funds are going, where you can save and how you can reduce the ratio quickly. Recalculating during this time is crucial since the pandemic will undoubtedly affect spending and revenue.

2. Switch to Virtual Fundraising

Fundraising is one of the biggest factors in overhead costs. Sometimes it can use up extra funding which will increase the ratio significantly. However, you may currently be seeing a drop in fundraising abilities due to the coronavirus.

Now is the time to shift fundraising to the online realm. Virtual fundraising is possible because of the vast reach of the internet. You can host an event for supporters to donate all remotely. To make the transition to digital fundraising, you may need to invest in new software. You'll want to calculate the return on investment as efficiently as possible to ensure that it will bring in the donations and support the nonprofit needs.

Then, you can focus completely on the goal of the fundraiser. How much do you need to raise in order to fulfill the mission of your nonprofit? Now that socializing in person is dangerous, the virtual world can minimize your overhead costs for fundraising with the right practices.

3. Find a Balance

With your new ratio and investment in virtual fundraising, you can create a plan to find a balance. This step involves looking over each area that contributes to your overhead ratio and making some changes. The virus is likely to stick around until researchers and scientists develop a cure or vaccine — planning for the long-run is now essential.

Some decisions may be tough to cut back on — if you need to limit sales and marketing spending, for instance. Others may come naturally with the quarantines and social distancing. Since people are working from home more and more, how much will you need to spend on things like rent, utilities and maintenance for the office?

From your plan, you can reduce overhead spending in some areas, like transportation costs, and focus on the necessary elements, like fundraising. When you take into account all budgets and calculations, you can then find a balance by minimizing that ratio.

Nonprofits and COVID-19

COVID-19 is hitting small businesses and nonprofits hard. The road ahead is uncertain, and organizations are transitioning as best as they can to remote work. With these three steps, though, your nonprofit can minimize its overhead cost during the pandemic. Afterwards, it can emerge with a more well-rounded budget and plan for the future.