What to Say When Your Donor Asks: How Much do you Spend on Overhead?

help written in paper clips 300x225 What to Say When Your Donor Asks: How Much do you Spend on Overhead?

When you ask for help do your donors want to know about your use of paper clips?

I’ve been asked this question many times.

One of the ways I’ve answered is with my own question: If you could invest 20 cents to get a dollar, would you? If you could invest 50 cents to get a dollar, would you?

If one dollar was old, wrinkly and ripped and the other was mint, would that matter to you? Maybe not. If you’re a collector, it would matter a lot.  Change that to 50 cents to buy a bag of fresh, nutritious produce (that will last a full week) vs. 20 cents to buy a bag of old and rotten vegetables, and you begin to understand.  All things are not created equal.

Part of the problem with measuring overhead is that every nonprofit does it differently. So we’re comparing apples to avocados. Some put a bunch of salaries into “program”, while others consider it “administrative” expenses (aka overhead).  Some put a percentage of “fundraising” into “program”, rationalizing that some of this is “marketing” and a way to support/get the word out about their services. And it’s all completely valid.  There are no uniform standards for counting these things.

Measuring overhead also does not neatly correlate with a nonprofit’s impact or effectiveness.  A charity that spends 20% on overhead and knocks its mission out of the ballpark is not less worthy of support than one that spends 10% on overhead but helps relatively few people. It’s one way of assessing things, but not necessarily the most meaningful.

This is one of the reasons Charity Navigator is changing the way they award stars. And it’s why Guidestar and BBB Wise Giving Alliance joined in, with Charity Navigator, in writing a Letter to the Donors of America stating 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.” So, there we have it. Right from the watchdogs’ mouths.

Here’s more – directly from the watchdogs:

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.”  We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

Resist the temptation to starve your organization – and those who rely on you – by focusing too much on your overhead percentage.

Consider Dan Pallotta’s argument that we’re not spending ENOUGH on overhead [If you haven’t seen Dan Pallotta’s great TED talk it’s worth watching, even if you don’t entirely agree with either the message or the messenger].  After all, it costs money to build programs. It even costs money to fundraise.

If, in the end, you create more value by having slightly higher overhead, then why not? Plus there’s the fact that a start-up or younger organization will have a higher overhead than a large, well-established one. It takes the same amount of time to write an appeal letter that will be mailed to 200 people as it does to write one that will be mailed to 30,000 people.

So, there’s really no one simple answer to the overhead problem. It’s like the Goldilocks story. You don’t want to spend too much or too little. You need to spend the “just right” amount to get the job done well.

Cutting corners just to “look good” to your donors is not going to get the job done.  It’s like cutting your medications in half because you can’t afford them.  One aspirin won’t take away your head-ache if you need two.

To be fair, donors do need — and deserve — some way to assess their investment before they make it.  I wrote about this – with my thoughts – back in June when all the hoopla began: Less is not Enough:Why Your Nonprofit Needs to Spend More on Fundraising. Elizabeth Blair of NPR wrote about it here, and she got a lot of comments. Clearly, not everyone agrees how to measure this.

What do you think? If overhead is not the right measure of a nonprofit’s performance, what is?

Photo: Flickr, banspy

mab image What to Say When Your Donor Asks: How Much do you Spend on Overhead?
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Comments

  1. What is the right measure of a non profit’s performance? We know that it is not how much it spends, but how much good it does. But it is really hard to measure outcomes. Even when outcomes improve, how much of the improvement is attributible to the non profit, to the work of other non profits, or to factors outside of the control of one organization?

    I think it comes down to having a clear mission and measures of achievement related to the mission. Failing clear measures of outcome, the non profit should at least have a theory of change– how doing what they do is expected to create the change they envision. Then they can at least show that they have / or are carrying out the actions that they believe will bring about change.

    It occurs to me that power is a key factor. Does the non profit performance demonstrate that they have the power to bring about the outcome they seek?
    I would define power as the ability to influence others to achieve your goals.
    Looking at power and where it comes from, one might for example assume that an organization that has many resources might have more power than one that has few. Or, we might assume that an organization that has close relationships with stakeholders may have more power than one that has distant or infrequent contact.

    Perhaps , instead of looking at power for insights to performance, we could look at trust- the belief that an organization will behave in a way that meets expectations. How would we measure trust? By the amount of donations or donors that contribute? Through surveys of clients? By employee turn over?

    Of course this all might beg the question “can you trust a powerful organization?”

    As you can see, I don’t have answers, but your question certainly provoked more questions

  2. When I am asked, “How much money actually goes toward the actual cause?,” my answer is “all of it goes toward the cause. Everything we do gets us closer to the ultimate goal of ____(whatever your mission is).” No nonprofit can operate without electricity. I’m in Florida, and whenever there is a hurricane, we try working without electricity for a few days. It doesn’t work. So yes, the electric bill is to benefit the cause. You can’t operate without raising money, so yes, the fundraising expenses get us closing to curing a disease or educating the uneducated or whatever the mission is.
    Also, one of the criteria I use in my personal giving is that if a nonprofit includes their overhead percentage in their marketing material (regardless of whether it is 0% or 100%), I will not give to that nonprofit. Why not? Nonprofits created the overhead myth problem by promoting the heck out of our ratios. So it is up to us to solve it. The nonprofits who continue to advertise their ratio are exacerbating the problem.

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  1. […] costs more.  And it’s one of the reasons I’ve written a lot about revisiting your notions of how much you should spend on overhead. Because you’ve got to spend money to make money. The primary reason the digital revolution has […]

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