Nonprofit Overhead

Overhead has become a key measuring tool for donors when deciding where to invest their philanthropic dollars.  Consider the following…


Overhead is Necessary

  • Overhead expenses include administration, employee salaries, and fundraising expenses.   
  • Charity leaders who run multi-million dollar operations do not work for FREE.  Learn about national charity CEO’s and their financial compensation from Charity Navigator's 2016 CEO Compensation Study, at
    http://www.charitynavigator.org/index.cfm?bay=studies.ceo#.Vi_pymSrSg5

  • Spokane, the Journal of Business produces a list of "Largest Social-Service Nonprofits" in their annual Book of Lists, which gives information on about 50 of the local nonprofits.  The information includes their annual budget, number of board members/employees/volunteers, the name of their Executive Director, what percentage of funding is delivered to services, and more.  http://www.spokanejournal.com/special-publications/
  • Fundraising increases the organization’s visibility and helps bring in large donations.  Fundraising also helps to expand the organization’s reach.

Funders

  • Many donors do not trust nonprofits to use their money responsibly and wisely, and therefore place overhead restrictions on their donations.
  • Widespread financial waste has been reported from Wall Street to large corporations and the government, creating widespread sensitivity to financial waste. 


Overhead Percentages

  • Americans currently believe that charities should spend no more than about 23% of their funding on overhead.  (2012 survey, Phoenix-based Grey Matter Research & Consulting) 
  • Donors perceive that excessive overhead diminishes the number of people who could be helped with donated money.  Therefore, donors use overhead as a measuring tool, because that is a metric they can understand. 

  • Nonprofits feel that skimping on overhead makes it difficult for them to fulfill their mission; therefore, they are tempted to minimize their true running expenses, under-report their expenses, and convey the idea that they can run their organization on next to nothing. 


Overhead and Effectiveness

  • The idea that nonprofits should not use their money on overhead is extremely powerful and widespread; however, there are no agreed upon standards for measuring the success of nonprofits. 
  • Businesses do not look at overhead to measure their success; and unlike businesses which have profitability and returns to shareholders to show their effectiveness, it is much harder to understand if a nonprofit organization is working efficiently. 
  • It is difficult to affirm that there is a correlation between what is spent on overhead and the outcome of objectives. 

Nonprofit Responsibility

  • Nonprofits have a responsibility to honestly clarify their expenses, objectives, and results. 
  • Nonprofits have a responsibility to provide accurate data, not distortion, of the cost of running their organization.  They may risk losing some funding, but they will gain something far greater in the long run—the trust of their donors and their continued commitment to that nonprofit. 
  • Charities create unrealistic expectations about overhead when they advertise such things as “95% of donations collected from this fundraiser will go directly to the people affected.”  This sends a message that low overhead is what is appropriate and expected.