Business Magazine

Overhead Isn’t a Fair Measure of a Nonprofit’s Effectiveness

By Pjfaur @peterfaur

overheadFor years now, nonprofit organizations have touted low overhead as a measure of effectiveness and a reason for donors to trust them. At first glance, it makes sense.

The less an organization spends on administrative and fund-raising costs, it appears, the more it can spend to further the purpose that attracted donations in the first place. And a donor certainly doesn’t want the head of a nonprofit living so luxuriously that those who receiving services are shortchanged.

Three organizations that serve as watchdogs over nonprofits – Guidestar, Charity Navigator and the BBB Wise Giving Alliance – recently called this conventional wisdom into question. By obsessing over low overhead, they said, nonprofits often are shortchanging critical needs and crippling their ability to deliver services and sustain themselves for the long term. The organizations issued a letter called The Overhead Myth to address the issue.

“Many charities should spend more on overhead,” the organizations said. “Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest
in college tuition).”

The outcomes of inadequate spending in overhead often can be seen in poorly run nonprofits. They include limited or no staff for key administrative roles; inexperienced, poorly trained staff members and high turnover; poor IT infrastructure; and poor systems for managing donor relations and measuring performance.

The organizations that came together aren’t throwing out concern about overhead altogether, but they are encouraging donors not to look at it as the king of metrics. More important, they say, are transparency, governance, leadership and results.

I serve on the board of the not-for-profit Phoenix Zoo, which supports itself almost totally through admission fees, memberships, special event revenue and donations. We keep a close eye on revenue, expenses, overhead and all the key financial metrics. We’re most concerned, however, with helping our visitors understand their relationship to nature, educating them about conservation, delivering meaningful exhibits and a growing collection, and giving them an experience so strong that they’ll want to become more involved with the zoo. We’re constantly trying to invest in the zoo to make it stronger and to deliver more for our visitors and to be in a better position to help conserve species worldwide.

What do you look for when you commit yourself to supporting a nonprofit? Let me know.

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