Can You Afford To Hire Another Employee: Nonprofit Answers

|
Can You Afford To Hire A Nonprofit Employee

The nonprofit sector has many challenges that are not experienced in the for-profit sector. The most significant challenges are the lack of resources and the absence of profits. The challenge of limited resources often leads to the need to cut back in terms of paid staff. One of the most common questions nonprofits ask is “can we afford to hire a new employee?”

Let’s look at the costs of hiring an employee, calculations, and even the average number of employees in nonprofits of different sizes that we analyzed recently.

How many employees should a nonprofit have?

How many employees a nonprofit should have is a question with no easy answer. The answer depends on a number of factors, including the size of the organization, the amount of revenue it brings in, and the scope of its programs.

Nonprofits with fewer than $100,000 in assets, for example, tend to have an average of 4.63 employees. Those with between $100,000 and $500,000 in assets have an average of 8.79 employees. And nonprofits with more than $50 million in assets have an average of 389.31 employees.

So, what does this mean for your organization? If you’re bringing in less than $100,000 in revenue, you’ll likely need to keep your staff small. If you’re bringing in more than $50 million, you’ll need a much larger staff to support your programs.

The best way to determine how many employees you need is to assess your organizational needs and then create a staffing plan that meets those needs. Consider your programmatic goals, your budget, and your staff’s skills and experience when creating this plan. With a well-thought-out staffing plan, you can ensure that your nonprofit has the right number of employees to achieve its goals.

Nonprofit Total Assets (IRS)Total Revenue (Avg.)No. of Employees (Avg.)
Under $100K$256,064.984.63
$100K-$500K$499,773.338.79
$500K-$1M$695,710.9112.82
$1M-$10M$2,588,973.7043.68
$10M-$25M$9,904,957.72139.85
$25M-$50M$19,599,503.30201.26
Over $50M$63,828,981.28389.31
The average number of employees by nonprofit size (Total Assets) – Source IRS 990 extract 2020

The Costs Of Hiring An Employee

We have to first understand the total costs of hiring an employee.

In general, there are three types of costs associated with an employee. These are direct, indirect and opportunity costs.

  • Direct costs are the costs directly related to the position. These would be wages and benefits, required equipment, and expenses related to the job.
  • Indirect costs are costs that are related to the operation of the entire organization, but not specifically tied to the employee being hired. For example, rent, utilities, and administrative staff.
  • Opportunity cost represents the dollars missed out on by the business or nonprofit as a result of choosing one option over another. For example, choosing to hire a new employee versus investing those same dollars in a money market account for savings. The expected returns from each choice are different.

Direct costs are the most straightforward to calculate. Indirect costs are a little more difficult to determine, but generally can be estimated. Indirect and Direct costs will be reviewed as our total costs for ROI.

With this information in mind, what is the ROI for a new hire position? ROI in this situation is the ratio between the total costs of the new hire position and the contribution income the nonprofit receives from the position.

Let’s get our total year-1 costs together:

Wages:         54,300
Comp/Benefits:  1,400
Equipment:      2,300
Travel:           800
Overhead:       1,200
______________________
Total Costs:   60,000

ROI

ROI stands for Return On Investment and represents the projected return (revenue) for an investment (expense).

A simplistic formula for calculating ROI of an employee position in the world of fundraising is:

ROI = ((Contribution Income from Position)-(Total Costs of Position)) / (Total Costs of Position) 

Let’s look at an example.

A new position in our nonprofit comes with a total cost (direct and indirect) of $60,000 per year. We project that hiring this position will allow the organization to raise an additional $93,000 or contribution income per year.

Using our handy dandy ROI formula, this position would have an ROI of 55%.

(93,000 - 60,000) / 60,000
33,000 / 60,000 = 0.55 * 100 = 55% ROI

ROI represents a financial ratio between the return (benefit) and the investment (cost). If the ROI is below zero, you are losing money. 50% or greater might be great for one organization while that same ratio is terrible to another organization. 100% or greater is essentially doubling your money. Whether that is good or bad depends on your organization.

Opportunity Costs

Opportunity cost is a difficult measurement to quantify and depends on the individual situation. However, this is another piece of information to share with your board to help make decisions.

There is no one formula for determining opportunity costs, but one fairly common approach is to calculate the difference between the best non-chosen option and the chosen option.

Opportunity Cost (OC) = Return On Non-Chosen Options (NO) - Return On Chosen Option (CO)

For example: Let’s say we are comparing investing $60,000 in either hiring a fundraising specialist or a money market account. Investing $60,000 in a money market account will generate a 3% return while you project that hiring a fundraising specialist for a total cost of $60,000 per year will generate a 16% return.

We are choosing to hire a fundraising specialist. The opportunity cost would be 13%. You are foregoing a 3% return in order to achieve the 16% projected return, thus a 13% opportunity cost.

(NO) 3% - (CO) 16% = (OC) 13%

Costs Conclusion

The direct, indirect, and opportunity costs of a new position are just one of the factors to consider when you are weighing the decision to hire a new nonprofit employee.

It is important to keep the perspective of the organization as a whole. Hiring a new position does not just affect the organization in the short-term, but also in the long term. Play the long game.

Bring Options To The Board Of Directors

Bring your board options

When you have made the decision that it is time to hire and you have done your analysis of the situation to make that decision, it’s time to bring it to the board. But, don’t just walk in and say we need to hire, and here’s how much it will cost. Instead, bring context and options.

The context is you building the backstory of what the need is, how you’ve been handling it up to this point, and what the consequences are of not hiring. This then allows you to communicate 2-3 options for hiring such as the classic case of a lower-cost entry-level role (A) vs. a more costly, experienced role (B)

Option A has a lower price tag on it. However, you can assess how long it will take this employee to learn the role, fully own the role and reach full effectiveness. If this is a fundraising specialist role, then perhaps the additional contribution income they bring in during the 1st year is less than the costs for their position. Year two may be a break-even scenario and it is not until year three that they have a 50-100% ROI.

Option B has a higher price tag but they get to provide significant value to the organization from day one. The first year in the role may provide 75%-150% ROI.

Don’t forget that in year three, options A is now experienced and can demand a higher salary or go elsewhere.

The key here is that you want to provide the board with as much information as possible to make an informed decision. Having this analysis done ahead of time shows that you have thought about the pros and cons and are making a recommendation based on what is best for the organization – not just what is best for you.

It’s a business decision.

Will Hiring An Employee Negatively Impact Program Dollars Ratio?

Nonprofit and charity organizations are keenly aware that it is important to ensure most dollars go directly to their programs. So, will paying an employee take away from that program investment?

Hiring a nonprofit employee may not negatively affect the ratio of dollars going to program activities. Consider the type of employee and what they are doing. How much of their time will be spent on delivering, supporting, planning, and doing program-related activities?

All of these activities allow us to apply those costs to program activities. Hire a site director for a health clinic and I bet almost all of their costs end up being program-related activities. Hire an advancement representative and very little of their expenses will be applied to the program activities category.

Just remember that it’s not all or nothing with each position. You can estimate percentages of time applied to program, admin, and fundraising activities. Then allocate those expenses accordingly.

How Do You Know When It Is Time To Hire Another Employee?

There are a few key indicators that it may be time to start considering hiring another employee for your nonprofit organization.

If you’re seeing a consistent and steady increase in the demand for your services, programs, or products, it may be time to start thinking about growing your team. Additionally, if you find that you and your current staff are regularly working long hours and weekends, it may be time to hire some additional help. Finally, if you’re starting to see a decline in the quality of your services or programs, it may be indicative of a need for more staff.

Of course, before making any decisions, it’s important to consult with your board of directors and run a cost-benefit analysis to determine if hiring another employee is the right decision for your nonprofit.

When it comes to fundraising, some key indicators that it may be time to hire another fundraiser include a consistent and steady increase in the amount of money you need to raise each year, a decline in the success rate of your current fundraising campaigns, or a lack of time and resources to devote to fundraising.

But be careful, these same symptoms could be due to a lack of skills or experience of current staff, lack of process clarity or efficiency, or simply having the wrong person on the bus. Address these areas first and then look at expanding your overhead for increased impact.

Revenue Per Employee [Table]

Average Nonprofit Number of Employees and Revenues

It is interesting to apply a simple revenue per employee formula against the average revenue of nonprofits in seven revenue categories.

Based on the average number of employees per category that we found above, nonprofits under $100K to $10M in total assets have a similar revenue per employee rate of around $55K.

That number only begins to increase in nonprofits having more than $10M in total assets

Total AssetsTotal Revenue (Avg.)Revenue Per Employee
Under $100K$256,064.98$55,306
$100K-$500K$499,773.33$56,857
$500K-$1M$695,710.91$54,268
$1M-$10M$2,588,973.70$59,271
$10M-$25M$9,904,957.72$70,826
$25M-$50M$19,599,503.30$97,384
Over $50M$63,828,981.28$163,954
Calculated Average Revenue Per Employee – Nonprofit Average Number of Employees By Total Assets – Source IRS 990 extract 2020

I’m curious how this compares to your nonprofit? Tell us in the comments below.

Keep Great Nonprofit Employees

Once the decision is made and you find that awesome teammate, you want to be sure to keep them as long as possible.

Employee retention is an important aspect of growing your nonprofit because turnover is costly. Make sure you are not micromanaging your team and don’t turn a blind eye to the reasons for turnover just assuming people don’t stay at jobs more than 1-2 years.

You can help understand where staff is in their journey by conducting stay interviews and building positive relationships with them.

Wrap Up

There are a lot of factors to consider when deciding whether or not to hire another employee for your nonprofit organization. These factors include the direct and indirect costs of hiring an employee as well as the opportunity costs. You can plan and consider these factors before making any decisions.

When it comes to fundraising, some key indicators that it may be time to hire another fundraiser include a consistent and steady increase in the amount of money you need to raise each year, a decline in the success rate of your current fundraising campaigns, or a lack of time and resources to devote to fundraising.

But be careful, these same symptoms could be due to a lack of skills or experience of current staff, lack of process clarity or efficiency, or simply having the wrong person on the bus. Address these areas first and then look at expanding your overhead for increased impact.

Additional Resources

Disclaimer: This post may contain affiliate links. These links, if used and purchases made, we may earn a small commission. These affiliate programs do not impact the recommendations we make or the resources we refer you to. Our focus is on providing you the best resources for your nonprofit journey.

Similar Posts