Balancing the Mission Checkbook

Overhead – good, bad, or both?

Kate Barr July 1, 2013

In an interesting alignment of the stars, the nonprofit sector has been discussing and responding to two big news items about how organizations spend their money. In both stories, the commonly used term “overhead” is used as Guidestar, Charity Navigator, and the BBB Wise Giving Alliance made news with their joint letter challenging The Overhead Myth. Like many others, I’m thrilled to read the CEOs of these leading organizations state clearly that:

The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance. We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results.

This simple, common financial ratio is the easy fallback for too many donors, accountants, writers, and reporters. The real myth is that this ratio is a valid measure of the efficiency and cost effectiveness of a nonprofit. Fortunately, the joint letter is getting lots of attention (and appreciation) and we have a chance to build on this message and communicate better ways to assess the impact and effectiveness of nonprofits.

Just before the Overhead Myth letter was issued, the investigative report America's Worst Charities was released based on thorough research about nonprofits that raise millions and spend a pittance on direct cash aid to recipients. As reported in the Chronicle of Philanthropy, the reaction to the report has been strong, with calls for action from some and for caution from others. In particular, a few nonprofit leaders have “criticized the coverage for focusing on the percentage of money the charities spent on overhead, which she says is not a good way to evaluate whether a charity is doing a good job.”

This is an important question. Didn’t we just read that the overhead ratio “is a poor measure of a charity’s performance? Does the percentage spent on overhead ever matter? This is addressed in the joint letter:

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.

But is all “overhead” the same? I don’t think so. The intent of challenging the overhead myth is to clear the way for nonprofits to direct adequate resources to core infrastructure and capacity building activities such as evaluation, staff development, planning, IT systems, and financial and human resources management. In the case of the “worst” charities, the very high percentage wasn’t on building organizations - it was for soliciting more and more donations.

If one of your important and long time donors asked you to give some details about what caused your overhead ratio to increase by 5% last year, would your answer pass the “smell test?”

This isn’t about good or bad overhead; it’s about stewardship. Good stewards invest appropriately in organizations in order to improve and continue to serve their mission. Maybe we need some new terminology to bust the “overhead” term along with the myth. 

Kate Barr believes that every nonprofit financial question relates to strategy, structure and mission impact. She enjoys interpreting financial information to find stories numbers can tell. She loves writing, teaching, and talking with interesting people.