The Nonprofit Overhead Conundrum

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The “overhead” percentage has become the hottest topic of conversation in the nonprofit world.

Interest in this area spiked when media organizations reported on charities for which the apparent mission was to enrich the individuals who were paid to raise money for them. Apparently, it’s not difficult to find charities that spend as little as 1% of the money they bring in on their charitable mission.

It’s only natural that donors and other stakeholders would begin to rank charities based on the money spent on their missions as a percentage of total revenue. For example, an organization that spends 95% on its charitable programs (i.e., 5% overhead) might be deemed more effective than one that spends 90% (i.e., 10% overhead).

Why is this a problem?

Qualitative outcomes must be considered along with quantitative comparisons. Is it more important that a charity deliver high outcomes at a reasonable cost or mediocre outcomes at a low cost? Without knowing the qualitative outcomes, it would be difficult to answer this question, but clearly it’s not just about costs.

A well-funded nonprofit that pays its staff market rates, operates in Class A commercial space, and has the latest in technology may or may not be cost-effective in its charitable purpose. Likewise, a nonprofit run on a shoestring may or may not be worthy of support.

With only rare grass-roots-supported exceptions, it costs money to deliver excellence. When it comes to personnel and other resources, the nonprofit sector must compete with for-profit organizations. It must pay fair wages to attract and retain the best leadership and staff. The argument that “we’re a nonprofit, so we can’t afford to have the best” is self-defeating and a recipe for ultimate failure.

Stay tuned for more on why overhead comparisons aren’t effective…

 

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.

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