The “community” in community foundation

January 11, 2017

Do we have a belief system that keeps social profit organizations tiny?

by Cali Brooks

Recently, a Board member of Adirondack Foundation called to ask about the financial information in our 2016 Annual Report and questioned the percentage of money we spend on operations in relation to the amount of grants we make back into our communities. 

When people are looking for highly efficient social profits, they typically look for low operational overhead. A thoughtful look at financial information can reveal a more interesting story: high overhead can mean the organization is doing more effective work than the label might imply. It is helpful to think about what costs are included in operations. 

In our report, we showed program services without a footnote explaining what that means.

From total expenses of nearly $900,000, we spent $735,275—that’s 83 percent—to enhance Adirondack communities, and $161,824—17 percent—on administration and asset development (often termed “overhead”).  At the same time, we distributed $2.7 million in grants.

Operations at a social profit organization typically include administrative, fundraising, and program expenses; however, in the case of Adirondack Foundation, gifts and grant management and accounting for our 230-plus funds makes up the majority of our administrative expenses, primarily in the form of staff time.

Administrative expenses also typically include investments in an organization’s infrastructure and operations. For example, staff time dedicated to human resource activities, information and data technologies, and investment and fund management costs.

According to The Overhead Myth, “fundraising expenses include any costs incurred in the process of or with the intent of asking potential donors to contribute funds, materials, or time.” This may include staff time spent on donor development, publications, mailings, and fundraising events. In the case of a community foundation, asset development includes personal meetings with donors who wish to establish charitable funds or legacy plans with us.

 

Above: Part of Adirondack Foundation's work is connecting generous people like Bunny Goodwin, right, with organizations like Mountain Lake Services, which runs a Seed to Table program for its residents in Moriah.

Both fundraising and administrative costs are necessary to the sustainability of public charities. The assumption that low overhead costs are inherently desirable can correlate “with poor organizational performance and sustainability—trapping organizations in what Ann Goggins Gregory & Don Howard in the Stanford Social Innovation Review called, ‘The Nonprofit Starvation Cycle.’” (The Overhead Myth) It’s important to consider much more than an overhead number to judge a social profit’s effectiveness.

Program expenses are costs related to providing the organization’s programs or services—fulfilling the mission, in other words. For established social profit organizations, program service expenses generally represent the majority of the overall cost of doing business. If an organization’s budgeting attributes all staff costs into the administration column, a reader can be misled into thinking the organization is inefficient.  This might also happen if an organization is in a growth spurt, preparing to undertake an important, impactful program.

For the last four years, Adirondack Foundation has intentionally been in transition from a “foundation” to a “community foundation.” We no longer simply manage funds and make grants for our donors; we are also proactively engaged in community leadership. Therefore, our program expenses include working closely with donors to achieve their personal charitable goals, convening stakeholders toward finding solutions together for an identified problem, training nonprofit boards and staff in effective management, working with community members across the region to understand emerging needs and opportunities, and generally being a resource for Adirondack region communities.

 

Above: Adirondack Foundation is involved in a number of community leadership initiatives, including the Adirondack Diversity Advisory Council, which features a Youth Exchange program.

This change has increased both our operating costs and our ability to support the sector. We allocate time and expenses to appropriate cost centers based on an internal cost study.  We continue to work on budgeting that accurately reflects what we are really doing, as opposed to popping all time and expense into administration, where it doesn’t belong.

While it is relatively rare to find an organization that over-invests in administrative expenses, it is important to remember that these expenses help support mission and goals. Fundraising expenses, while also crucial to most organizations, are more complicated. As overheadmyth.com puts it, “There is no doubt that it takes money to raise money,” yet there may be times when fundraising costs per dollar raised extend beyond a potential donor’s comfort range.

If you see good work happening, but have a question about an organization’s financial statement, we encourage you to do what one of our board members did: she picked up the phone and called us. That conversation led the entire staff and Trustees into an important conversation. 

Below: Part of Adirondack Foundation's "overhead" goes to providng nonprofit trainings, like the one pictured below from April 2016 in Plattsburgh.

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