There's another problem with looking at “overhead rates.”
There is no standard for how overhead is calculated. One organization may consider an expense to be overhead while another may consider the same thing to be a “program” expense. Both may be honest characterizations, and there's too much gray to dictate a “one-size-fits-all” solution. What is clear, however, is that the common perception of what is an acceptable level of overhead is forcing nonprofits to manipulate their accounting data in a way that will satisfy stakeholders. In the end, an organization's overhead percentage becomes a useless number.
Fortunately, the nonprofit sector has begun to rally around the idea that overhead is only part of the picture.
Three organizations that evaluate charities, the BBB Wise Giving Alliance, GuideStar, and Charity Navigator, jointly published “The Overhead Myth” to dispel the notion that expense ratios are a reliable indicator of charitable effectiveness. Perhaps most importantly, they suggested many charities should spend more on overhead to improve long-term stability and effectiveness. This is consistent with the findings of a five-year research study identifying “The Nonprofit Starvation Cycle” as a real threat to nonprofits.
The most effective nonprofit leaders are recognizing that the sector should focus more on sustaining excellence and less on blind austerity.
Counterpart CFO can help you evaluate and improve your organization's capacity for long-term sustainability. Contact us for a free, no obligation consultation, and we'll identify specific ways we can help you.