First things first, what is “overhead” and what does it include? Normally, it is a loosely used term which encompasses all or some of the following categories:
• Indirect costs (all non-program costs)
• Back office costs including the accounting department, Human Resources, IT and the administrators of the charity
For the purposes of this post, “overhead” is going to mean all indirect costs and fundraising will be addressed separately.
Just as with for-profit businesses, it is imperative to invest in the organization’s infrastructure and operations; most of which fall under indirect costs. Charities, just like businesses, need a support staff to administer all of their accounting needs, ensure compliance with Human Resources rules and regulations, create and distribute any literature or annual reports, and more. All are necessary functions of a successfully run charity.
Beyond what is required to maintain the standard of the organization, it is necessary to fund overhead in order to cover the expense of evaluating the program and/or services and ensuring outcomes are meeting programmatic and donor expectations. It is through the overhead budget that organizations can also be innovators and pilot new and creative ways of fulfilling their mission. It is overhead that covers the cost of grant researchers and writers, which are vital to any organization looking to continue their work.
Fundraising, which has been separated out of the above, is also vital to the health and sustainability of a charity. As the saying goes, you have to spend money to make money.
What makes this topic more challenging is that it is difficult to compare overhead and fundraising expenses across organizations and it is actually discouraged by the 3 leading nonprofit resources on charities (Charity Navigator, GuideStar and the Better Business Bureau’s Wise Giving Alliance), due to legitimate differences in organizational models and mission. In 2014, these 3 groups came together and began an initiative called “The Overhead Myth”. Their collective goal was/is to teach the public that solely looking at the percentage of overhead a charity reports is a poor metric of its success or failure. One should instead focus on the charity’s “transparency, governance, leadership and results” to get a more complete picture of the vitality of the organization.
The flip side of this is there are organizations that underreport their overhead expenses and rob themselves of the flexibility to innovate and create programming and/or services which best suit their communities. Not only is this a disservice to their organization but it also creates a false expectation that similar programs can also thrive while having unrealistically low overhead expenses.
This implies two key takeaways: (1) each charity should be evaluated individually with more emphasis on measurable outcomes, leadership, innovation and transparency and (2) if you need a quantitative benchmark, I’d note that the Better Business Bureau’s Wise Giving Alliance published a recommendation in 2003, stating at least 65 percent of the nonprofit’s total expenses should be for program expenses and no more than 35 percent for fundraising.
For more information on “The Overhead Myth”, please visit: http://overheadmyth.com.
Happy (overhead) giving!