QUICK SHOT: Stop the Cycle of Underfunding

Understanding and preventing the overhead starvation cycle

When it comes to maintaining operations, many nonprofits encounter a common challenge called the “overhead starvation cycle.”

In order to run your organization effectively, you need to budget for administrative and operational expenses, which include such items as staff salaries, facilities rent, utility and technology expenses, and other infrastructure necessary to function. 

However, donors often prefer giving toward projects or programs directly related to an organization’s mission, rather than overhead expenses.

As a result, many nonprofits find themselves in an overhead starvation cycle where they underfund their overhead costs to appear more efficient and direct more resources toward their programs. While this might seem like a good strategy to ensure that more money is going directly to the cause, it can lead to harmful effects in the long run:

1. Diminished Organizational Capacity: Insufficient funding for overhead costs can lead to understaffing, lack of resources and inadequate technology. This can hamper an organization’s ability to effectively deliver your programs and services. 
2. Burnout and High Turnover: Nonprofits that consistently underpay their staff or lack proper resources often experience higher turnover rates and employee burnout, affecting organizational stability and program continuity. 
3. Lack of Innovation: Without adequate resources for research, training and development, nonprofits may struggle to innovate, adapt to changing circumstances or develop new strategies to address emerging challenges. 
4. Limited Scaling: Inadequate investment in infrastructure can hinder a nonprofit’s ability to scale its operations and reach a larger audience or impact. 
5. Transparency and Accountability Concerns: Underreporting overhead costs might create a skewed view of an organization’s efficiency and effectiveness. This can lead to misunderstandings among donors and stakeholders and erode trust over time.

To break the overhead starvation cycle, it’s important for nonprofits to communicate the importance of proper overhead funding to their donors and stakeholders. 

Demonstrate how overhead costs enable your organization to deliver on your mission effectively, innovate and build long-term sustainability of your services and programs. 

The more you are able to show how overhead costs help sustain the programs donors already like to give to, the more your donors will recognize that this is a worthy area of investment.

Preparing for overhead costs is an essential part of supporting your nonprofit’s overall impact and success. You can help prevent underfunding and stop the overhead starvation cycle when you help donors understand that giving to overhead costs provides a stable foundation for the rest of your outreach.