Why You Shouldn’t Judge Nonprofits by Their Overheads
How do you choose which nonprofits are worthy of your money or hours of volunteering? Nobody wants their donations to enrich the pockets of some overpaid CEO, which is why we’re often told to stay away from organizations that spend too much on overhead. Our own charity advice cites the rule of thumb that 20% overhead is enough, but is it?
While giving to charity often involves looking it up on Charity Navigator or Guidestar, another way to understand overhead is to think about people you know who actually work for nonprofits. These jobs are notoriously underpaid and under-resourced. A small, underpaid staff is not the best way to get any job done, come to think of it. So what are we left with when we look at the financial performance of a non-profit organization?
A recent study looked at non-profit arts organizations (museums and theaters) and compared their attendance to their budgets. As the authors explain in The Conversation , they found that attendance increased the most over the years in organizations that spent about 35% on administrative expenses. Those who spent significantly more or less did not see as much growth.
What are the overhead costs of a charitable organization?
The authors do not want this number to be used as a new benchmark. (They’re very forthright: “In short, we’re not recommending a new rule of thumb for all nonprofits.”) For performing arts organizations, travel costs make up the bulk of the cost of doing business. Museums need to spend money on security. And arts organizations in general may require more overhead than other types of charities.
This brings us to the question of what is overhead. An executive salary may come to mind when we look at charities on a comparison site, but that’s only part of that category. There are also salaries of other employees. People working in business shouldn’t be paid less, I think we can agree, and many non-profit organizations are paid much less than their for-profit counterparts, that they find it hard to keep people who do a good job. And organizations that cannot pay the state in full often rely on volunteer work, which can create its own problems for both the organization and its volunteers. How are you going to hire enough people to do your mission well if you’re not going to pay them fairly?
Overheads also include rent, equipment, training, and technical support, just to name a few things that any business needs. Organizations that try to keep overhead costs low are, in effect, penalized for investing in their mission.
The non-profit fundraising and administrative expenses project reported that austerity measures often backfire. They detail inappropriate and outdated computer equipment, for example, which may be cheap to acquire but cost the organization time when something breaks or cannot work properly. Employees were scattered across all levels, from executives down. “There was no back-up for key roles,” they write, “leaving core functions like payroll, benefits, and network support dependent on a single person, even at the largest nonprofit we spoke to.”
This report also doesn’t mention the magic number, but its authors agree that overhead is a very poor indicator of performance – which is what it’s actually used for. You want to know how good a charity is at what they do, so you’re looking for a rating. This rating, in turn, is formed from several positions in the organization’s financial documents.
It seems likely that overheads are the most obvious way to value nonprofits , because they are easy to calculate , not because they make sense. Understanding the inner workings of a charity is a complex thing that probably cannot be reduced to a single number.
So, if we don’t judge a non-profit organization by its overhead, then what should we judge it by? There is probably not a single statistic to look at here; rather consider the work the charity does, the unique challenges and costs associated with doing that work, and then see how they measure the results and success of their work. A paper from the Stanford Review of Social Innovation states that funders need to “shift focus from cost to results.” Or to put it another way: judge an organization not by how it budgets, but by what it actually achieves.