In Canada, it appears that the acceptable limit of how much a charity can spend on overhead is about 15 percent, leaving a full 85 percent to be spent on its mission. While that might sound like a pretty solid distribution—after all the point is to achieve that mission—the goal of a 15-percent overhead can actually do a lot of damage to nonprofits.
While most nonprofits want to spend more money on their mission, when it comes down to it, that mission requires people, primarily employees, who should be paid a living wage. That’s overhead. Looking for ways to solve problems requires research and experimenting with new techniques. That’s overhead.
However, for many people, the smaller the overhead, the better the charity, and, according to author Gail Picco, that leads to less effective nonprofit work overall. In order to actually solve problems, which should be the goal of nonprofits and charities, organizations need to spend money, and not all of that money can be on “tangible” things that go directly to the mission.
In 2013, GuideStar, the Better Business Bureau Wise Giving Alliance, and Charity Navigator began a campaign to end the “overhead myth,” the false concept that financial ratios of administrative and fundraising costs to program expenses are the only indicator of nonprofit performance.
The Overhead Myth campaign aims to correct the assumption that low administrative costs are inherently desirable. In fact, they say, under-investing in administrative costs is consistently linked with poor organizational performance and lack of sustainability.
Instead of looking solely at a nonprofit’s overhead ratio, the Overhead Myth campaign encourages potential donors to take the following steps to minimize the chances of waste and fraud.
- Look at the organization’s website to learn about program activities, the board of directors, and a financial summary.
- If it’s not already on the website, ask the organization to provide information on results reporting and other available information on its goals, strategies, and accomplishments.
- Review the organization’s IRS Form 990, as well as audited financial statements that have been reviewed by an independent CPA firm (smaller organizations may not have audited financial statements).
- Talk to the nonprofit and ask questions. Responsible nonprofits are transparent about their operations and are happy to help donors who are doing their due diligence so they can make informed decisions.
A different point of view comes from Charity Watch, which argues that overhead ratios are essential for informed giving. Although the organization agrees that “overly simplistic overhead ratios or computer-automated ratings absent of critical analysis are of extremely limited value to donors,” they strongly believe that the ratios provided by deeper study can be useful giving tools. (It should be pointed out here that CharityWatch is in the business of putting together these “carefully considered and analytical ratios.”)
One argument CharityWatch uses to support its justification for the importance of sharing overhead ratios as a tool for wise giving is that many expenses mistakenly classified as overhead could actually be considered program expenses rather than administrative expenses. One example the organization gives is a disaster relief charity that pays for first aid training for its staff. This is not an overhead expense, CharityWatch says; it’s a program expense because the charity’s purpose is to provide disaster relief and first aid skills are crucial during a disaster.
What do you think about overhead ratios? Do they accurately determine a nonprofit’s success or responsibility? Why or why not? Please share your thoughts in the comments.