The Overhead Myth: Non-profit overhead is critical for growth

There has been a war declared in the nonprofit sector.

I’m not sure if you heard of it, but it’s a war against the “overhead myth”, or the idea that financial ratios are the sole indicator of nonprofit performance. Recently TLC Volunteer Jennifer Cunningham set out to do her part in debunking that myth by writing the article below. Thank you Jennifer and all the warriors out there who are doing their part to encourage donors to focus on outcomes rather than overhead!

We try to be careful with our money. When it comes to charitable giving, we tend to be even more protective, wanting to ensure it is put to its best possible use. Most often, we look to an organization’s overhead numbers to determine whether they are worthy of our dollars.

But strictly considering overhead as a gauge may be short-sighted. Let’s compare. Organization A has an overhead of 23 percent. They are providing many services to many individuals, growing their program offerings through fundraising, reaching established goals and possibly saving some in reserve for leaner months. Organization B, on the other hand, has only 8 percent overhead. They too are meeting basic client needs, but there is high turnover due to low salaries, no new programs and they live quarter to quarter in their budget, hoping a significant need does not arise.

Which would you rather support?

The difference here is the amount of money Organization A has invested into promoting their programs, compensating their employees and investing in infrastructure. They are strong. They may be spending more, but they’re also generating more in dollars and outcome. Organization B is barely hanging on and doesn’t have the capital to grow.

Which agency is more successful at meeting their projected objectives?

There is a very pervasive and entrenched attitude when it comes to non-profit performance and expenditures.

As Dan Pallotta, a staunch advocate for non-profit success, states, “Charities should have the same tools and permissions as the for-profit sector, or they will have no real chance of solving the world’s problems.”

His first example relates to compensation. In order to attract the best and brightest in any industry, there needs to be monetary enticement. Granted, the individual with a heart for non-profit work may expect a lower salary than a corporate position. However, everyone has a need to support a family and plan for the future. There shouldn’t have to be a choice between doing good for your household or doing good for the world. The added benefit to competitive wages is lower turnover. When an organization lacks continuity or commitment, the overall mission and vision suffers.

Perhaps the biggest area where expenditures are vilified is in fundraising. Large for-profit corporations spend millions, possibly billons, on advertising and marketing with stellar results. Why is this same allowance not given to the non-profit sector? Increased exposure equals increased support, resulting in increased assistance to the clients. People can only give to charities they are aware of.

“The only way organizations are going to grow is to increase public awareness of the work they do,” insists Pallotta.

Fundraising sometimes requires risk, another area non-profits are discouraged from pursuing. The fear from board of directors is, “what if it doesn’t work?” Money that could have been spent on programs is now gone, leaving the organization vulnerable to criticism. But without trying something new, non-profits are left to the same, mundane, low-income generating activities.

There is also little allowance for structured growth. Start-up, for-profit businesses aren’t expected to generate revenue immediately. However, non-profits are held to an almost unreasonable standard of producing results as soon as their doors open. This emphasis on the “do” leaves no time to develop, formulate tangible goals and objectives or create strategic plans.

So what is a donor to do? Very few of us have the time or knowledge to dig into the financial records and reports of a non-profit. Even if you simply compared overhead numbers, this wouldn’t provide you with an accurate picture. Every organization groups expenses differently, resulting in an apples to oranges comparison, which can be misleading.

Thankfully, the answer is simple. Organizations like GuideStar.org, CharityNavigator.org and GreatNonprofits.org have done the work for you. These organizations are replete with information on every non-profit and neatly organize the information you need to make an informed decision.

Smaller non-profits, like those found in the Tri-Lakes region, will not be listed on CharityNavigator due to their lower revenue. However, GuideStar does list them. In the search bar, type “Tri-Lakes” and the site will prompt you for the state. After clicking Colorado, our local charities will be neatly listed. Here you can compare reviews, financial and impact summaries, as well as donate. Look for organizations that have been given the Gold Star seal.

Giving is good. It feeds our soul and deepens the connection to our communities. When deciding to give, don’t simply ask for overhead numbers. Ask for outcomes and feel good knowing you are making a difference.