Calculating overhead rates and managing overhead expense are important staff roles. Board members are not required to know how do staff accounting work, but we do need to bring an informed perspective to our oversight:
Harvard's indirect cost rate is 68% while Iowa State's is 48%. Should the board members of either institution be concerned? As a alumnus of one or the other, should these numbers affect our donations? As a parent of a high school senior, do these numbers influence where we want our child to go? Should they?
Amid the crosstalk about nonprofit overhead, board members and staff do need to understand what the conversation is really about, and how to interpret "what is overhead" for your own organization. Here are eight key things to know about overhead:
1. Apples, oranges, and alligators: One of the more surprising facts about overhead is that while it seems that everyone is talking about it, everyone is actually talking about the different things. The word "overhead" isn't an accounting term, so different people define it differently.
Some accounting terms which are similar to "overhead" and often confused with it are:
- Indirect costs
- Administrative costs
- Shared costs
- Fixed costs
In one study, respondents were asked which of the above was the closest synonym . . .