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Overhauling the Overhead Myth

by Kelsey Gardipee | Nov 12, 2020 3:38:49 PM

There are many ways to measure performance and success. In a race, whoever crosses the finish line first, wins. In business, you could consider profit margins, customer satisfaction and employee performance, to start. In most cases, the closer you are to meeting or exceeding your goals, the more successful your efforts have been.

Somewhere along the way, however, donors have lost sight of these traditional measurements of success when considering which charities to support. Over the years, there’s been a detrimental focus on overhead as a means of judging a charity’s performance. That is, the percentage of their expenses charities allocate to administrative and fundraising costs.

Shattering the Myth

There’s a damaging belief that the more a charity spends on its programs, the better the organization. This overhead myth places pressure on nonprofits in numerous ways. When a charity claims that 100% of its expenses are spent directly on programs, it could be it has arrangements with its boards or corporate sponsors to cover administrative and fundraising costs so general donations aren’t spent on these functions. It could also be that administrative and fundraising roles are handled by volunteers.

Either way, these administrative and fundraising expenses still exist. Without sufficient information to supplement the 100% claim, it falsely leads donors to believe the organization has little or no overhead costs and perpetuates the myth. From there, organizations without similar arrangements are pressured not to invest in overhead or may feel compelled to hide overhead expenses in with their program expenses under the falsehood that “everything they do is for their programs.”

So what's the problem?

Overhead expenses are necessary, and most charities could benefit from spending more on them. Investments in overhead can lead to improved performance and allow a charity to make a stronger impact through training, planning and evaluation, as well as upgrading technology and internal systems. Plus, it costs money to attract and retain donors, even for a charity run by a team of volunteers on a shoestring budget. Never assume that low overhead equates to high efficiency.

Imagine this: Your work computer runs on a suite of programs released years ago and each time you open a new program, your computer stops responding and needs to restart. You’ve got deadlines to meet and projects to complete but technology is holding you back and now you’ve missed a meeting with a prospective client because your computer was still rebooting. It’s obvious you need an equipment upgrade to do your job well, so you demand your company invest in the overhead expense. Donors not wanting to spend money on overhead means many charities don’t have the wiggle room in their budgets to make these upgrades happen.

Here’s another scenario to drive the point home: You look forward to attending your favorite charity’s annual fundraising event because it makes you feel connected to their mission and the impact they’ve made with the help of your donation. The organization’s development team puts on a great event every year and they raise a substantial sum in donations – great! The cost to get donors to the event, including the invitations, event promotion, staff time planning the event, etc., are all fundraising expenses. Simply put, it takes spending money on fundraising to earn the fundraising revenue that charities rely on.

How much is too much?

BBB’s Standards for Charity Accountability recommend that a minimum of 65% of all expenses be allocated to program services. Yes, a minimum of just 65% because overhead expenses are necessary to an effective organization. Administrative expenses include but are not limited to general business management and oversight, accounting, human resources, legal services, insurance, state licensing and registration and board-related expenses. Fundraising expenses vary depending on fundraising methods but commonly include payroll for development staff, printing and mailing fundraising appeals, state registrations to permit fundraising, office supplies based on staff use for fundraising activities and the cost of office space based on square footage used for development team.

Now that we’ve dispelled the overhead myth as a poor measurement of performance, it’s important to clarify what measurements qualify as appropriate factors in judging a charity’s effectiveness and impact. The catch is there’s no one-size-fits-all method. With some approaches devoted to short-term needs and others aimed at addressing long-term change, comparing one organization to another is often apples to oranges.

Next steps.

Better Business Bureau suggests donors consider the full picture: governance and oversight, results reporting, transparency and financial management. Focusing on anything less or taking financial ratios out of context creates a blurry illustration and lacks confirmation of overall accountability.

A mission statement is a charity’s guiding goal and primary purpose – start there. Ask for information on how well it is achieving its mission and stated goals, as well as how often it is reviewing and updating those objectives. How is the charity making an impact? What information does it share with donors – is it accurate and truthful? How does it protect personally identifiable information? Is the board active and informed? Are there any conflicts of interest? Are board members directly or indirectly compensated?

There are so many questions to ask to accurately see the full picture of an organization’s impact and accountability. BBB knows because we ask all these questions and more, substantiating the answers with a stack of documents provided by the charities we evaluate. We take the guesswork out of giving by accrediting only those charities that have the policies and practices in place to meet all 20 Standards for Charity Accountability. You can give with confidence to a BBB Accredited Charity and trust that your donation will help make an impact. Find an accredited charity to support at give.org.

And remember, your community and the charities dedicated to serving it don’t need low overhead, they need high performance.

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