Written by Tyler Adams, MNLM CNP
September 15, 2021 | 4 min. 30 sec. read
How can nonprofits convince stakeholders to invest in capacity building?
“Capacity building is whatever is needed to bring a nonprofit to the next level of operational, programmatic, financial, or organizational maturity, so it may more effectively and efficiently advance its mission into the future. Capacity building is not a one-time effort to improve short-term effectiveness, but a continuous improvement strategy toward the creation of a sustainable and effective organization” (National Council of Nonprofits, 2017). For many organizations, capacity building would fall into the “overhead” category. Unfortunately for the nonprofit sector, higher overhead costs are correlated to an organization being irresponsible with its finances, ineffective, unable to carry out its mission, and even unethical.
Overhead is defined as a “percentage of a charity’s expenses that goes to administrative and fundraising costs” (Guidestar, 2014). The Overhead Myth is created when donors believe that nonprofits should keep these overhead expenses below a certain percentage of the nonprofit’s total expenditures – usually no more than 15 to 20 percent. In Dan Pallotta’s TED Talk, he discusses the Overhead Myth and how it can negatively affect nonprofits by hindering their ability to create long-term sustainable growth. Both internal and external stakeholders need to be better informed about why it is okay for overhead costs to be higher when the organization is trying to grow, become sustainable, and ultimately achieve its mission more effectively. Looking at overhead alone is a poor way to measure a nonprofit organization’s overall performance (Letter to the Donors of America, 2014). Therefore, other factors such as program performance, governance structure, staff professionalism, fundraising efficiency, and other practices should be considered as part of the bigger picture.