In my previous article, I pointed out the difficulty of measuring nonprofit effectiveness by quantitative measures alone. Clearly, there’s a need to look at qualitative measures, as well. There’s another problem with looking at nonprofit overhead.
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.
The Overhead Myth
Three organizations that evaluate charities, the BBB Wise Giving Alliance, GuideStar, and Charity Navigator, jointly published “The Overhead Myth” to dispel the notion that nonprofit overhead 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 the need to focus more on sustaining excellence and less on blind austerity.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFOs specializing in nonprofits. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.