How can you run a business successfully if you don't turn on the lights, have a telephone, pay staff, and use up-to-date computers?

You can't and no one would expect a for-profit business to do so. But donors and funders do expect nonprofits to run successful, effective programs with unrealistically low overhead.

How can the nonprofit sector survive when its cost of doing business isn't funded? That was the question addressed by panelists at the October 15 Governance Matters Roundtable discussion.

Inspired by The Bridgespan Group report, The Nonprofit Starvation Cycle, panelists discussed who is responsible for the perception that overhead and indirect costs are unacceptable in nonprofits and what can be done to change that perception.

The consensus was that government and foundation funders, individual donors, nonprofit rating agencies, the media, and nonprofits themselves all bear some of the responsibility for what has become accepted deception.

Donors often seek a charity that will use 100 percent of their donation for program and none for administration. While that ratio is extreme, it is not far off the standards set by government and foundation grants.

For their part, nonprofits please funders and score well with charity rating agencies by minimizing legitimate overhead costs. According to the Nonprofit Starvation Cycle, nonprofits achieve unrealistic overhead rates by such devices as reporting zero fundraising costs; one in eight reports no management or general cost.

In other contexts that would be regarded as "cooking the books" but in the nonprofit sector it is what must be done to survive. Among the causes:

• Media and rating agencies focus on raw data (fundraising costs, administration) instead of outcomes.
• Foundations and governments are unwilling to give money for operating costs or capacity building, such as staff training, computer upgrades, new software.
• Funders often want data on performance and cost of programs but do not fund staff or technology to gather that data.

So ingrained is the idea that nonprofit overhead is "bad," that a 2001 survey conducted by the Better Business Bureau's Wise Giving Alliance found that American adults rank overhead ratio and financial transparency as more important than program success.

Yet investment in overhead can lead to better outcomes for existing clients or the ability to serve more clients.

No where is this more evident than in technology, which has the potential to save staff time, provide more accurate financial reports, and add new services to clients. But computers, software and staff training cost money upfront.

The NonProfit Coordinating Committee of New York switched from a voice-mail and email reservation system for events to an online, self-registration system for its workshops, using NYCharities.org. The change freed up one full-time staff position for program-related tasks. Investing in technology increased the organization's capacity and decreased overhead costs.

The Shabazz Center was deemed too important to fail by a wise funder who was willing to underwrite capacity-building. Its new accounting system allows allocation of expenses by programs; tracks the use of restricted funds; and generates audit-ready reports. A policies and procedures manual was also created that clearly segregates board oversight responsibilities from management's day-to-day procedures. .

Two problems loom that may force nonprofits to make their case for realistic rather than idealistic, overhead costs:

• IRS reporting requirements, which require more accuracy and honesty in financial reporting. Coupled with this is more board accountability: boards must understand and then sign off on all financial reports.
• Nonprofits have become adept at doing more and more with less and less, but at some point, no more can be done without investment in overhead. An organization cannot continue if it is given 13 percent to deliver programs that really cost 20 percent to run effectively.

The solution lies with both funders and boards, panelists agreed.

Funders must look at the effect grants for infrastructure will have on program outcomes. The overall quality and effectiveness of programs should be evaluated, not just the ratios of indirect and direct costs. Indirect costs are essential to program delivery. Programs cannot be run well and effectively without trained staff, electricity, computers, strategic planning, fund-based accounting software and fundraising.

For their part, boards must make the effort to understand what each of their programs really costs -- directly and indirectly -- and then make the case to funders for full support. The board also has a responsibility to learn about new technology that may make their organizations more efficient and effective, and make that case to funders as well.

Finally, nonprofits as a group should come together to advocate against the misguided rating systems and funder standards that focus only on percent of income used for program and ignore the need for operational quality.

Panelists

Cristine Cronin, president, NYCharities.org, an e-philanthropy website dedicated to providing free/low-cost technology tools to New York State's 98,000+ charities and their donors.

Terence Cook, consultant, Fiscal Management Associates, LLC, which provides fiscal management, accounting, and organizational and technology consulting services customized to the specific needs of the not-for-profit sector.

Judy Katz, president, On Target Strategies, which consults with corporate and nonprofit organizations in strategic planning, organizational development, and operational improvement.

Craig Weinrich, Membership, Outreach and IT Coordinator, Nonprofit Coordinating Committee of New York, which is an information source and voice of New York City area nonprofits on sector-wide issues.

Ron Lawson, Interim Executive Director, The Shabazz Center, which promotes human and civil rights through knowledge of the history and culture of the African Diaspora; education and self-empowerment; family values; and racial and religious reconciliation.