By Jim Hussey, Chairman | If one nonprofit organization only spends 3% of its funds on overhead, while another spends 30%, which is better managed? Until recently, the automatic answer by those who monitor such things would be the first organization. The percentage of overhead has been the chief determinant to designating the best charities.
But recently, the three major watchdog organizations which monitor the nonprofit community … the Better Business Bureau, GuideStar and Charity Navigator … released a joint statement entitled “The Overhead Myth”which acknowledges that the true answer is not so clear cut.
In fact, they acknowledge that relying solely upon low overhead is a “poor measure of a charity’s performance.” They argue that other factors should be considered, including transparency and effectiveness. Their statement even states that many non-profits should spend more on overhead to adequately support their staff and their ability to fundraise and maintain their independence.
Kudos to the Better Business Bureau, GuideStar and Charity Navigator!
For too long, the simplistic tactic of focusing on the seemingly all-important overhead percentage has driven too many non-profits to focus upon reducing staff levels and compensation, and dismissing fundraising efforts to focus upon corporate and government backing.
Here’s an example about how this can negatively affect a charity.
One organization which I worked with for many years advocated for corporate and government accountability. As a result, the group did not accept any form of corporate or government support. They depended upon raising funds from individuals to maintain their independence. But as a result, they had to spend around 30% of their overhead to raise funds, and for many years the group received negative ratings due to this.
The second organization also does great work serving the needy, largely in Third World nations. This group consistently receives great ratings because the organization had an overhead expense of only 3%. How can this group maintain such a low overhead expense? This organization focuses more attention toward receiving government grants and corporate contributions rather than generating contributions from individuals.
So which group is most effective and efficient? The group that spends more on overhead to generate funding from thousands of individual gifts … or the group which maintains a lower overhead by taking taxpayer dollars and corporate assistance? You see, the answer is not that simple.
Don’t get me wrong, excessive overhead expenses can be a signal that an organization is inefficient or even corrupt. Anderson Cooper’s excellent reporting on CNN over the past few years concerning charities with truly excessive overhead expenses has highlighted groups which seemingly operate only for the benefit of a few individuals or companies.
But for the majority of nonprofit organizations which work hard every day to serve their causes, overhead expenses alone do not tell the whole story. Hopefully this move by these three charity watchdogs will lead to a new era in which nonprofit organizations are allowed to focus on other important factors such as effectiveness and independence instead of stripping expenses to maintain artificially low overhead expense.
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