Wednesday, December 12, 2018

Get Closer to a 10% Overhead Rate

In 2005, while working as a consultant to nonprofits, I learned of the ten percent rule that most nonprofits were striving to achieve. The ten percent rule was a theoretical limit on how much funds a nonprofit should spend on Administrative costs. The tagline at the time was “ninety cents out of every dollar donated went to serving the community.” Smaller nonprofits believe that this was the cause of them not getting the funding they needed because this percentage rule was almost impossible to attain. Smaller agencies began to assess that they were not efficient enough or that because of their size they could not reach the economies of scale needed to hit this mark.
The reality is one of two things, either most large nonprofits did not even try to hit this mark with most hovering around a thirty percent administrative rate. Or they managed to label costs and positions in a way that made them seem more program centered that they were.
The ten percent rule while not a practical policy still holds an ideological truth to all businesses. How do you, a business leader, reduce the cost of the administrative work so that you can spend more resources on the core mission of your business. There is essential work for every company; accounting, human resource management, marketing, administrative support. All these are not just wishful thinking items, but instead, they are critical to the survival of your organization. But too many leaders think the cost is a deterrent and end up suffering the painful truth that lack of this work is the cause of most businesses failing.
One way of avoiding this painful truth while also getting the most out of your limited resources is to outsource some the work.  A cost-effective and efficient consultant should be able to fit into one of four categories.
1.      Consulting: Find an agency that can help you develop the structure and guidance on business systems
2.      Training: Find an agency that can give you a formal understanding of how to manage items internally
3.      Support: Find an agency that can assist you in some tasks when you are not ready to outsource the functions
4.      Management: Find an agency with qualified specialists that will do the day to day administrative work leaving you with time and resources to invest on your core mission.
 Utilizing one or all of these categories will strengthen your ability to focus on your core mission, increase you and your company’s effectiveness, and get you closer to the ten percent rule.

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