General operating funds, admin expenses, and why we nonprofits are our own worst enemies


sophia 2This week I was on an NDOA panel to discuss the importance of unrestricted funds. I was there with another nonprofit leader as well as two funders, and all of us, everyone in the room, agreed that general operating funds are awesome. General operating funds are like Tyrion Lannister of Game of Thrones, or Darryl Dixon of The Walking Dead, or, you know, Sophia from The Golden Girls: It is flexible, it is adaptable, and that’s why it gets stuff done.

For years I have been railing against restricted funding to anyone who would listen. I wrote a piece imagining what it would be like if a bakery ran with the same funding restrictions as a nonprofit: “I need a cake for some gluten-free veterans. I can pay you only 20% of the cost of the cake, and you can only spend my money on eggs, but not butter, and certainly not for the electricity; you have to find someone else to pay for the oven’s electricity. Also, you need to get an accounting firm to figure out where you’re spending my money, but you can’t use my money to pay for that service.” (Read the full post: “Nonprofit funding: Ordering a cake and restricting it too“).

It has gotten ridiculous: “We’ll pay for wages, but not payroll tax. We’ll pay for payroll taxes, but not food for the kids in your program. You can use these funds to hire tutors for your program, but you can’t pay them for hours they spend on lesson planning.” The amount of time and energy we nonprofits spend trying to figure out which funder is paying for what part of which program under which phase of the moon could be better spent actually helping people, improving outcomes, expanding programs, etc.

We nonprofits all know how crucial flexible funding is. Luckily, a few funders also get the importance of focusing on the outcomes and allowing us nonprofits the flexibility to do our jobs, because at the end, what really should matter is how good the cake is and whether the gluten-free veterans are happy with it. This allows the bakery to thrive and to focus on making more and better cakes. For my own organization, unrestricted funds have rescued more than a few great programs that restricted funds would have unintentionally helped destroy.

“Is there a trend toward more unrestricted funds?” the moderator asked, to which a funder on the panel replied, “There is certainly more talk. But little action.” Everyone looked sad. I ate my roasted vegetables and charmoula sandwich in silence.

Here’s the thing, the funding power dynamics make it very difficult for us nonprofits to be able to provide feedback or pushback. We can’t bite the hands that feed our clients. But funders who don’t get it are only a part of the problem. We nonprofits ourselves are unintentionally our own worst enemies. Even the most well-intentioned of us say and do things that perpetuate this myth that overhead is bad. We can’t expect funders and donors to support administrative expenses when we unconsciously demonstrate a disdain of it also. We must own our part of the problem and be a part of the solution. The revolution must start with us. After talking with the other panelists and consulting with nonprofit warrior (and my boss at Blue Avocado), Jan Masaoka, here are things we need to do:

    1. Stop saying “100% (or 98%, or 95% or whatever) of your donations go into programming.” This usually happens at annual fundraising events during the raise-the-paddle or fund-the-need part of the event. It implies that programming expenses are good, and anything else is no good, very bad, like funding terrorism or buying rocks to throw at the elderly or something. I recommend not saying anything at all. It should be obvious that 100% of donations are being used to support the organization and its work. Or call out the importance of funds to support infrastructure. We need to stop reinforcing donors’ philosophy that only program expenses are legit. The next time you attend a fundraising event that says “100% of your donations…,” forward them this blog post. Or, raise your paddle and then loudly proclaim, “I want my donations to support administrative expenses!”
    2. Publically recognize funders who support general operating funds. There are some awesome funders who support unrestricted grants. But they are outnumbered and sometimes looked at funny, like that kid on the playground whose family does not own a TV (“Haha, Timmy’s family reads books and plays board games together after dinner. Weirdos!”) We need to frequently and vocally recognize them. The more we do it, the stronger their influence on their peers will be. These are our strongest allies, like Unmi Song of the Lloyd A. Fry Foundation or Paul Shoemaker of Social Venture Partners. Call them out at your annual event. Say something like, “We want to provide special recognition to XYZ Foundation for understanding the importance of providing general operating funds. Without unrestricted funds, our organization cannot run its programs.” Speaking of this, I want to recognize VFA’s funders in this area, Social Venture Partners, the United Way of King County, the Seattle Foundation, and the Medina Foundation, without whom we would not have been able to serve the thousands of people we have been serving. Seriously, my organization, VFA, would not be where it is without your support all these years. (And heck, this blog wouldn’t exist).
    3. Stop using the term “overhead” or “indirect.” We need to change these crappy words and phrases with all the negative connotations. “Overhead” sounds like something you want to remove from your face: “Blemish-B-Gone, guaranteed to get rid of blackheads, whiteheads, and overheads in just three days and keep your skin looking youthful and radiant.” “Indirect expenses” also sucks, since it implies that these are wasteful, unnecessary spending not directly related to programs. Even “administrative expenses” has developed a negative connotation. From now on, in all our annual reports and in general, let’s call it “critical infrastructure” or “core support” or “Things We Need in Order to Do Our Jobs and Make the World Better Dammit” (TWNODOJMWBD)
    4. Stop artificially deflating numbers and apologizing for percentage spent on critical infrastructure. Really, your organization only spends 10% on core support? This number depends on your definition of these various categories, as well as how clever your bookkeeper and Treasurer are. We all spend a lot of time allocating rent, insurance, fundraising, and other “non-program” expenses across different programs. And we should spend some time, since they are necessary to run those programs. But if they can’t be neatly allocated across programs, just record accurately and move on. There are more important things to do than relearn algebra and calculus so we can reduce our percentage. The more we time we spend competing with one another to see who can have the lowest percentage, the more we as a field lose. It sets unrealistic expectations among funders and donors. If anyone asks why your admin expenses are 25% while so-and-so organization only reported 15% on their annual report, just say, “There is no standardized way to calculate admin expenses, so the comparison is meaningless. Plus, we strongly believe that investing in critical infrastructure like staff development leads to much better outcomes.”
    5. Stop seeking the approval of charity watchdog organizations like Charity Navigator, Charity Watch, and Better Business Bureau/Wise Giving Alliance. I know, they just released a joint letter debunking the Overhead Myth, which is great and very timely. But until they figure out a way to accurately measure organizations’ effectiveness, their rankings are misleading and distracting. Do not waste time and funding trying to get their seals of approval. I hear from Blue Avocado that if you want a “BBB Accredited Charity” Seal, your organization has to pay $1,000 to $15,000 a year. THAT, ironically, would be an indirect expense, and anyone who pays for this seal with donors’ money should be hissed at with much scorn and derision.
    6. Write in a line-item for reserve funds in your organization’s operating budget. How much you need varies from organization to organization (maybe start with 5 to 10% of your revenues). But the presence of some reserves protects our organization, especially when the nonprofit funding system is so nebulous and unstable. Build in a line for reserves, and if anyone whines about it, explain why it’s important and ask them to support it or else to stop asking about sustainability.
    7. Push back, and be willing to lose a funder. We have to take more risks, you guys. Sometimes, telling the truth or refusing to break down our expenses and forcing people to focus on outcomes, or refusing to accept funds to do things that would ultimately cost us more than it brings in revenues, may cost us a funder or donor, but this short-term sacrifice may be far better for our organization and for our sector in the long run.

For too long, we nonprofits have been fuming during happy hours about restricted funding. It is frustrating that people don’t understand how critical things like rent and insurance and electricity and computers and professional development and staff time are to our mission. It is insulting that people think we nonprofits would run amok and buy gold-plated business cards encrusted with Swarovski crystals if left unchecked (that’s ridiculous; we all know that those crystals would scratch up our smart phones). It is annoying and sometimes aggravating having to constantly figure out who is paying for what. But we can no longer just fume among each other and with a few funder allies. I’m looking forward to a day when all funding is unrestricted and we can all just focus on outcomes and impact. But in order to get there, we ourselves need to stop perpetuating donors’ and funders’ propensity to restrict funding. It’ll be tough. Like Sophia from the Golden Girls says to Blanche, “Fasten your seatbelt, slut puppy. This ain’t gonna be no cakewalk!” But we’ll get there if we do our part and keep at it. 

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33 thoughts on “General operating funds, admin expenses, and why we nonprofits are our own worst enemies

    1. Vu Le

      Thank you, Sheena. The bakery analogy is better than my first analogy: We are plumbers fixing the broken pipes of society.

  1. cpetersky

    True, true, true. I read the above, tears filled my eyes, I reposted it to my personal wall, and then to the wall of the national organization whose Facebook page they (mistakenly?) let me administer. I recommended that everyone read it, and then repost it to their own timelines and pages. Is there anything more true than what you have written here? Why does everyone who works for a nonprofit know this, and no one else seems to? Especially those people with funding?

  2. Jenna N.

    Thank you for saying this! It’s also interesting and distressing to place this in the context of philanthropy in the US where the Right is much more strategic than the Left about funding long-term strategy, investing through general operating support, etc. Come on, lefty grant makers. Get it together!

    1. Vu Le

      That’s an interesting point, Jenna. I haven’t really thought much about right vs. left. But we nonprofit folks definitely need to agree to and stick to some common messages.

  3. LongmontKathy

    All I would add here is – Multi-year general operating support! Funders, promise your grantees 4-5 years continued support (and of course do your due diligence along the way) and see how well they meet your “theory of change.” Non-profit work takes time!

  4. Michelle

    Thank you for your blog! I am a new ED and can very much relate to everything you have posted! I had been feeling quite overwhelmed and stumbled upon your blog! I read everything in one go and found strength in knowing that there are good, passionate people out there who are going through the exact same thing as me. I truly appreciate your keeping this blog up and for all those who follow and share their experiences too. Go Unicorns!!!

    1. Vu Le

      Michelle, welcome to the job! Being an ED is fun. Or at least, it is never boring. You should join ED Happy Hour, a time once a month for us EDs to get together and drink and complain about stuff. Or start a chapter if you’re not in Seattle.

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  6. Norma Munn

    Amen — Again and Again!!! Just as arts non-profits, especially most performing arts groups, have been historically under capitalized, this issue of not paying for the essentials that allow programming to take place is one of the most important to survival and sanity. Next myth we need to puncture is that “in-kind” services come only from non-staff folks. Does anyone really know how many people in this business routinely work 50-60 hour work weeks? We pay for this overhead out of our volunteer hours in a way that no funder is prepared to recognize. I started proposing several years ago that we count all the extra staff hours above a 40 hour work week and add them to the “in-Kind” category of non-cash funding. Needless to say, it has not happened — yet.

  7. Elaine Fogel

    Hear, hear! I am so fed up with people equating overhead with unnecessary expense. I developed a donor booklet dispelling this myth and haven’t done anything with it yet. Not sure where to take it. But, I had to do something.

    1. Vu Le

      Thanks, Elaine. The more work we do around dispelling the myth, the better for our field and our community. You should start giving out the booklet.

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  10. Michael Carnahan

    Fantastic post! I have been arguing for this for the past few years at my organization, and it has been difficult to get the funders to understand WHY we need these unrestricted funds. Equally important is your point about the wording. I love the idea of critical infrastructure in particular. Very, very well done! Thank you!!!

    1. Vu Le

      Thank you, Michael. It’s great to get affirmations from others on the ground. Unrestricted funds will allow us to achieve better outcomes.

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  13. Mark Rubin

    Great post … as always! Best way I’ve heard it put? “If you don’t have enough confidence in us to let us spend your money as we think we need to, why do you support us at all?” Never should it be said to a donor, but the message was transmitted to me and I’m pretty sure I haven’t earmarked a gift since then.

  14. Dan Pallotta

    Great post. I know you all care about these issues, deeply. If you REALLY, REALLY want too do something permanent and systemic about them, join us in the Charity Defense March, next June 26-28. It’s a three day march from the border of Maine to Salem, Massachusetts with sector leaders and foot soldiers fighting for precisely these issues. See the video here:

    Go to your ED and ask them to have your organization sponsor you to come as a representative of your organization. Or if you are the ED, register to march, and form a team from your org. This is the new nonprofit power movement. It’s real and it’s for you.

  15. Miguel Atuesta

    This is all very true. I am with one of the largest donors in the world, and the main problem we face is lack of information form the non-profits. There is a tool at your disposal and it’s called the Budget Narrative. If you’re paying rent, electricity, a stinking lawyer and so on, please have a good Cost-Estimating Relationship, and explain it to us accordingly. Funny thing about math, it can be used to your advantage, like the article implies!!! We trust NGOs, but we also have our checkboxes to check, and our jobs to care for. Help us be better at both!

  16. Roy Gathercoal

    When I go to get my car fixed, there is a line item for uncounted and undocumented things like oil, grease, replacement nuts, etc. People understand this. . . but too often we are just too afraid.

    Fundamentally, we have to stop taking sole responsibility for the problems we are trying to fix. They are not OUR problems, any more than they belong to anyone else. They are all community problems, if we are working within the not-for-profit structure. So let’s quit apologizing for things that are necessary to fix our joint problem! Educate where necessary. But stop pandering for pennies. Good partners are giving because they want to see the issues addressed, not because they need to hand out favors to us.

  17. Midwest Grantwriter

    I worked for an organization that pushed back against our local United Way, with the Board’s full support (we sent the Board President to one of their “optional” meetings…he barely survived), walking away from $18,000/annually. BEST decision we ever made. We gained dozens of hours that our small staff had been spending at meetings, committee events, and completing their torturous annual application. Staff morale improved (yay!! no more boring meetings!), we upped and met our annual fundraising event goal and actually GAINED a significant donor who didn’t give to UW agencies. We stopped pretending the UWay was The Giving God in town. Would do it again in a HEARTBEAT!

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