Why You Shouldn’t Judge Nonprofits by Their Overhead Costs

Why You Shouldn’t Judge Nonprofits by Their Overhead Costs

How do you choose which nonprofits deserve your money or volunteer hours? Nobody wants their donations to enrich some overpaid CEO’s pockets, so we’ve often been told to steer clear of organisations that spend too much on overhead. Our own charity-giving advice has cited the rule of thumb that 20% overhead is plenty — but is it?

While donating to charities often involves looking them up on Charity Navigator or Guidestar, another way to understand overhead is by thinking about people you know who actually work for nonprofits. These jobs are notoriously underpaid and under-resourced. Small, underpaid staffs aren’t the best way to get any job done, when you think about it. So where does that leave us when we’re looking at a nonprofit’s financials?

A recent study looked at arts nonprofits (museums and theatres) and compared their attendance to their budgets. As the authors explain in The Conversation, they found that attendance rose the most, over the years, for organisations that spent about 35% on administrative costs. Those who spent significantly more or less didn’t see as much growth.

What is a charity’s overhead, anyway?

The authors don’t want this number to be used as a new benchmark. (They are very explicit: “In short, we are not recommending a new rule of thumb for all nonprofits.”) For performing arts organisations, travel costs are a big part of the cost of doing business. Museums need to spend money on security. And arts organisations in general may require more overhead than other types of charities.

That brings us to the question of what overhead costs even are. Executive pay may come to mind when we’re looking at charities on a comparison website, but that’s only part of that category. There are also the salaries of other employees. People who work for the business shouldn’t be underpaid, I think we can agree, and many nonprofits pay so much less than their commercial counterparts that it’s hard for them to retain people who are good at their jobs. And organisations that can’t pay a full staff often rely on volunteer work, which can bring its own problems for both the organisation and its volunteers. How do you get enough people to do a good job of executing your mission if you’re not going to pay them fairly?

Overhead also includes rent, equipment, training, and tech support, to name a few things that are essential to any business. Organisations who try to keep overhead low are essentially penalised for investing in their mission.

The Nonprofit Fundraising and Administrative Cost Project has reported that cost-saving measures often backfire. They detail mismatched and outdated computer equipment, for example, that may have been cheap to acquire but costs the organisation time when things break down or can’t perform well. Employees were spread thin at every level, from executives on down. “Backup for key roles was nonexistent,” they write, “leaving basic functions like payroll, benefits, and network support dependent on a single person in even the largest nonprofit with which we spoke.”

That report doesn’t name a magic number, either, but its authors agree that overhead makes a very poor proxy for effectiveness — which is what it’s really being used for. You want to know how good a charity is at their job, so you look for a rating. That rating, in turn, is generated from a few line items on the organisation’s financial documents.

It seems likely that overhead costs are the most visible way we have to evaluate nonprofits because they are easy to calculate, not because they are meaningful. Understanding a charity’s inner workings is a complex thing that probably can’t be boiled down to a single number.

So if we don’t judge a nonprofit by its overhead costs, what should we judge them by? There probably isn’t a singular stat to look to here; rather, consider the work the charity does, the unique challenges and costs that are associated with doing that work, and then look at how they measure the effects and success of their work. A paper from the Stanford Social Innovation Review says that funders need to “shift their focus from costs to outcomes.” Or to put that another way: Judge an organisation not by how it budgets, but by what it actually accomplishes.

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