It’s Time to Get Over Overhead: An Age-Old Debate Continues

There’s been a heightened focus on nonprofit “impact” lately.  And as a result, it’s refueling an age-old debate about whether the traditional view of overhead continues to be a valuable metric when it comes to gauging an organization’s overall effectiveness.

Why the debate?

For many years, a large number of people have held the belief that a nonprofit with low overhead costs equates to an efficiently run, solid organization. However, while overhead ratios do help compare nonprofits across various, hard-to-equate issue areas, in reality, these numbers offer no valuable data for what is actually happening on the ground.

Overhead in a Nutshell 

What is overhead anyway? A loose term, overhead refers to the percentage a nonprofit spends on fundraising costs and administration, including things like electricity, office supplies, administrative staff and executive director salaries.

All too often, due to the common misconception that nonprofits spend “way too much” on overhead, some donors place specific requests on their gifts, with instructions like, “I want 100 percent of my gift to go directly to X.”

However, restricting gifts in this way makes it very challenging for organizations to carry out their true missions.

We Must Measure What Matters

So if we should not judge a nonprofit by its overhead, what should we judge it by? I believe that overhead – especially when standing on its own – says nothing about the actual impact a nonprofit is having on the people or groups it serves.

In fact, as long as the impact, via the nonprofit’s mission and actual work on the ground, is strong, overhead does not really matter.

Today’s nonprofit leaders must work harder to help the masses realize that effectiveness should first and foremost, always be evaluated by the positive impact they are creating, not by what the organization spends on overhead versus their programs.

Industry experts at GuideStar suggest paying attention to a broader set of factors about nonprofit performance, including: transparency, governance, leadership and results, as well as finances. According to their research, these above-mentioned areas are indeed what donors truly care most about.

Shifting focus from overhead to genuine impact is a chance for nonprofits to tell their story in a structured way. It also forces them to articulate what they are trying to accomplish, how they plan to get there as well as how they will measure progress along the way.

Shifting Away From the Financial Bullseye

Moving forward, we must continue to transform the way people think about overhead in nonprofit organizations. Donors – both large and small – need a new frame of mind that encourages outcomes over stringent financial targets.

Remember, peoples’ lives are not improved by nailing the “bull’s eye” on an organization’s financial statement. There are still far too many people in the world not receiving the services they need to live the life they deserve.

Instead, today’s donors must focus on what is really important: the people that nonprofits are supposed to serve.