Are you a charitable person? If yes, there are a few things you should know about nonprofit overhead. What you think it financially takes to run a nonprofit is probably incorrect. If you plan to continue investing in charity, you may want to learn more about the overhead myth.
In a study by The Chronicle of Philanthropy, a survey of 1,000 donors indicated that the majority of people still believe in the overhead myth, where nonprofits who keep overhead low are the same nonprofits with higher effectiveness and larger impact outcomes.
It doesn’t make sense
This has led to an unrealistic mentality among givers. The average person really knows next to nothing about what their favorite organization is spending on overhead. In fact, most argue that it’s significantly more than what is appropriate. That mentality means would-be great organizations may be getting judged by the wrong criteria. This misjudgment is causing them to either miss out on needed funding or not expand in a way that raises their overhead ratios. Impact is not directly related to the amount of overhead in which a nonprofit utilizes.
In the nonprofit sector survey, called “Elephant In The Room: Charitable Overhead Ratios And Donor Decisions,” researchers asked charitable contributors to indicate what they thought was an appropriate level for overhead and what they thought groups might really be spending. Turns out, donors’ expectations have gotten more rigid in recent years. Overall, 60% of respondents felt organizations are overspending.
When the last survey was done in 2012, respondents indicated that 22 cents per dollar was a feasible allowance for overhead. In a recent study, they indicated that 19 cents are now expected. At that same time, disapproving donors estimated that today’s organizations are more likely to spend around 28% on these expenses.
It’s hard to assign a fixed number on what charities should be spending, but Bridgespan has found that for sustainable businesses, the back-end number is more like 34%, and often that will double for tech companies. In contrast, many foundations cap this line item in grant requests at 15%, which may be contributing to the perception problem.
Here’s the reality
Researchers asked respondents to name their favorite charity and what they thought it was spending overhead. Then, they went and pulled data on those organizations. Half of the donors named organizations that were spending above the donor-imposed limit of what was supposedly responsible. At least a quarter of respondents favored organizations spending at least twice that threshold. What people say they approve of, is not necessarily in line with what they truly support.
The perception problem is real. Nonprofits feel obligated to try and keep their overhead unrealistically low and it’s hurting the bottom line. The problem is when you have this unrealistically set number, you neglect opportunities like training staff and investing in infrastructure or systems that will help you become better at your job and better at serving your cause. It’s important that organizations don’t place all their focus on keeping the overhead number too low that they end up hurting themselves and therefore hurting their mission in the long run. Nonprofits are trying to better define what overhead looks like within their organization as they communicate with donors, but the reason for overhead spending is still misunderstood.
Start seeing overhead as an investment
Nonprofits must invest in their overhead if they want to continue to be effective. Placing dollars into infrastructure, people, systems, etc., is essential for growth. Nonprofits need boots on the ground and visibility. Without the overhead, without the talented individuals, without the correct systems in place, the mission lies dormant and remains a dream.
Stop comparing apples to oranges. Overhead does NOT equal impact.