We’ve all seen the Facebook posts, calling out nonprofits on their overhead ratio and the percentage of donations that go directly to programming. I get it—these are questions that raise eyebrows, and you certainly deserve some answers as donors. That said, I’d like to unpack and contextualize what those statistics mean, as it relates to your gift and to the mission of the organizations you choose to support.
What is Overhead? How is it calculated? Let’s start with the basics. Nonprofit organizations have tax exemption status, because their work benefits the public good. To be in compliance with the IRS, tax-exempt organizations must file a Form 990 each year, which includes a detailed overview of their expenses such as: programming costs, management and operating costs, and fundraising costs.
The overhead ratio is determined by adding “management and operating expenses” to “fundraising expenses”, then dividing by the total cost of operations for the year.
“While the overhead ratio seems like a nice, simple equation, it does not tell the full story of an organization’s impact and fulfillment of their mission.”
We support nonprofits because we’re passionate about their work—of course we are more inclined to want our dollar to go directly to programming. But what is compromised when nonprofits underfund administrative and operational expenses, just for the sake of keeping “overhead low”?
Low overhead within a nonprofit organization can create…
- Less Accountability: If organizations are unable to invest in good bookkeeping software, or pay for adequate accounting and HR staff, that puts financial oversight at risk, making your dollars vulnerable to mismanagement.
- Staffing Issues: Tackling huge social issues, like poverty and inequity, takes the best and the brightest. It can also be incredibly emotionally taxing. In order to prevent burnout and turnover, nonprofit staff should be paid competitively for their work and have access to training and professional development.
For funders and donors, low overhead impacts…
- Sharing Results: If nonprofits don’t have staff or software to document their results and present that information to the public, they cannot inform donors of the impact of their dollar. You can’t print a newsletter when you don’t have a working printer.
- Leveraging Dollars: Without investment in fundraising, organizations become more dependent on fewer sources of funding. Additionally, many funders don’t offer multi-year support or have stipulations against spending dollars on overhead.
For the community, low overhead creates…
- Inadequate Facilities: Perhaps most importantly, the places where people are served may be substandard, subjecting the most vulnerable among us to seek the critical help they need in places that are, at best, unpleasant and, at worse, unsafe.
- Fewer Service Providers: Essential services may be offered at lower levels or providers may struggle to supply quality services, because they have inadequate staffing or infrastructure.
This is not an unabashed defense of excessive overhead spending. What this is meant to be is a call to take a more in-depth look at organizations doing excellent work to protect the people, places and animals we love. In addition to overhead, we need to also take a closer look at an organization’s transparency, governance, leadership and results. The organizations we love are fighting every day for our rights, our environment and our wellbeing; our donor dollars are what make that possible. When we allow them adequate resources and invest in core infrastructure, we are also investing in innovation and increased program success to better move the dial on the most urgent and complex issues in our communities.
A 2001 survey by the BBB’s “Wise Giving Alliance” found that over half of adult Americans felt nonprofit organizations should have overhead rates of 20% or less. In fact, those surveyed ranked overhead ratio and financial transparency to be more important attributes in determining their willingness to give to an organization than the demonstrated success of the organization’s program.
We too, believe financial transparency is tremendously important and is a pillar of our values here at United Way. When donors understand financial structures and processes for allocating program dollars, we can build mutual trust. A trust that ensures our generous donors’ philanthropic investments are going back to the community and impacting the causes they are most passionate about. This is where transformative change happens, and that work cannot be done without you.