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“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.” This is a line from an open letter to donors drafted by GuideStar, the BBB Wise Giving Alliance and Charity Navigator in 2013, addressing the problem of the “overhead myth.” Around the same time, a TED Talk by Dan Pallotta resonated across the country, challenging people to change the way they view the administrative costs of nonprofit organizations.
And yet still today, most nonprofits feel an obligation—a burden, in fact—to do as much as possible with as little as possible when it comes to running their organization. The overhead myth still exists, and donors still scrutinize nonprofits, wondering what percentage of their gift actually goes toward the “cause.” As if dollars that support administrative expenses are somehow wasteful.
Why is this still a problem? Because of the stigma of operating costs. Donors want to believe every dollar they give goes directly to the people who need it—straight to the mission. They forget about the fact that helping the cause doesn’t happen if you don’t have the appropriate infrastructure to deliver that mission.
How can you help educate your donors about this issue and dispel the overhead myth with your constituents or perhaps even your board or staff? By being upfront, honest and transparent with questions like these:
Administrative expenses include anything necessary to keep the organization running. Without them, we’d have more money to give to our cause, yes. But then we wouldn’t have an effective organization to support the cause. Administrative costs support the general infrastructure, including staff salaries, IT setup and maintenance, training, leadership development, strategic planning, marketing, PR and the like.
Organizations are required to show on their Form 990 how they allocate administrative, fundraising and program expenses. Donors take one look and go, “How much of the dollar that I give directly saves shelter animals or feeds the hungry?” Too often, they judge an organization by the percentage of administrative costs out of the total expenses the nonprofit has for the year, or the overhead ratio. It’s like “overhead” has become a dirty word.
The example in the 2013 TED Talk was this: You can run a bake sale and earn $75 for your nonprofit with no overhead. Or you can spend $200 on a radio ad campaign, reach more people and bring in $500 while also increasing your exposure and donor base. Why is it wrong to spend more if you end up better off? It’s shortsighted to think spending less is somehow better when oftentimes spending less gets you less—and renders you less effective in the long run.
If your organization doesn’t pay for a good accountant or accounting staff, it won’t have adequate controls and fraud is more possible. If your IT system isn’t current, you can be limited by outdated technology, run into storage issues, have costly computer crashes and waste time doing things that you could easily automate.
The mentality of “do more with less” often doesn’t really allow you to do much. Many administrative costs are not expenses, per se—they’re investments. By allocating money toward the right things, you invest in your brand’s reach, influence, donor base and long-term planning.
Of course, the place to begin is in knowing your nonprofit’s goals and what it takes to achieve those goals. For example, if you’re building a new facility that will further your mission, the administrative costs will go up significantly—but that’s not necessarily a bad thing if, in the end, it multiplies your impact.
Donors may be concerned with expenses and overhead, so be transparent and educate them. Instead of only looking at the overhead ratio, encourage them to ask questions like these:
- How effective is this organization?
- How efficiently do they carry out their mission?
- How many lives are they impacting?
- Do they seem to have a vision for the future and long-term growth?
Just like in corporate America, every nonprofit needs to consider ROI and value. Look at your fundraising efficiency: How much does it cost you to raise one dollar and how successful are you in doing that?
Dispelling the overhead myth doesn’t mean you can spend willy-nilly or let administrative costs get out of control. But it may mean taking on a different mindset and understanding you can potentially lose much more than you gain by being too tight with the money you spend on your infrastructure.
At Firespring, we understand the delicate balance between operating with a budget and investing wisely. We’ve helped thousands of nonprofits create an engaging online presence for over a decade now and have seen so many significantly grow their organizations with smart investments in the right kind of website and online tools.
Forming relationships with donors and communicating the value of their gift is essential. Firespring creates beautiful websites that make it easy to accept online donations, plan fundraising events and communicate with donors. To explore our nonprofit platform and website tools, request a free demo site at firespring.org/demo or call 877.447.8941 to learn more.