For many, overhead is a near profanity.
We all know stories about charities behaving badly with donated funds. Take the American Red Cross. Following the 2011 earthquake and subsequent aid response, researchers at ProPublica assessed the impact of the American Red Cross in Haiti. Their findings showed that although the American Red Cross had raised $500 million to help rebuild Haiti and the plan was to “focus [on] building homes,” four years later they had built just six houses. Much of their expenditures had been wrapped up in overhead to cover legal expenses, salaries, insurance, rent, licensing and government fees…you get the picture.
Well-reported stories like this create the impression that all nonprofits behave in the same fashion. As a result, each year I have countless conversations in which the spotlight shines brightly on overhead ratios.
A recent study published in the Chronicle of Philanthropy showed that 60% of the survey respondents believe nonprofits spend too much on overhead. Six years ago, respondents suggested $.22 per dollar spent was a reasonable amount for nonprofits to spend on overhead. This year, respondents suggested $.19 per dollar was a reasonable amount, a decrease of 14%. Given the trends, there’s no reason to believe the preferred overhead percentages won’t continue to decline. The public wants nonprofits continuously doing more with less.
Now, I am overhead. It would be fair to say this is personal for me. For the past decade, I’ve worked as a salaried, nonprofit fundraiser. In my role, I manage a fundraising team and oversee a $1.3 million budget situated squarely beneath the overhead umbrella. Not only am I overhead, but I recruit and manage a team of overhead employees!
With scandalous headlines ringing in my ears, the growing scrutiny about nonprofit overhead spending, and my status as overhead always on my mind, here are five reflections:
- Overhead ratios are squishy. How much of my salary is devoted directly to raising money for HOPE International? …and how much is devoted to educating the public about microfinance, poverty, and our mission? It’s a murky question and there’s no option for “all of the above.” But the answers to these and hundreds of similar questions inform the ratios we report each year. Our auditors weigh-in on how we allocate our expenses, but there’s quite a bit of ambiguity.
- Overhead ratios are important. The squishiness of overhead ratios is not reason enough to ditch the metric entirely. It serves as an important bellwether and a key dimension of the overall picture of nonprofit financial health and stewardship. There’s a reason independent evaluation agencies like Charity Navigator (a founding partner of the “Overhead Myth”) and Excellence in Giving continue to assess the metric.
- Overhead is important. Bridgespan estimates most successful businesses spend 34% of their budget on “overhead.” These businesses invest in fundraising, marketing, people, and systems because they believe they can create great products and services only if they have a firm foundation. Likewise, nonprofit overhead expenses create a healthy base from which these organizations can fulfill their mission. Equally as concerning as nonprofits investing too much in their fundraising and administrative functions are those investing too little.
- Overhead ratios reflect leadership. Almost daily in my role, I engage with my peers in leadership of all sorts of nonprofit organizations. There isn’t enough space to name them all, but these men and women lead well. They have rightfully earned the trust of the public and are capable caretakers of their budgets and missions. They are the most concerned about ensuring their overhead spending is appropriate. For every story of one nonprofit behaving badly, there are five or ten (non)stories of nonprofits like these behaving admirably.
- Overhead is leveraged giving. This year, for the first time in my tenure, a foundation designated their donation specifically toward fundraising expenses. They restricted their donations to overhead costs, funding the most-difficult expenses to fund. Likewise, many of our supporters today give unrestricted donations, trusting HOPE’s board and management to spend where resources are most needed. Remarkably, even as HOPE’s total budget has grown each year, the percentage of total unrestricted giving has grown as well. This unglamorous giving is one way donors can make a leveraged impact on the financial health of the organizations they most trust. Investing in things like fundraisers, updated software, and marketing campaigns allow nonprofit organizations to reach more people in more places.