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Fact or Myth? “Nonprofit Overhead Is a Huge Problem”

How many times have you gotten the “overhead” question from potential donors? “Why does everyone think that all nonprofit overhead is too high?

nonprofit overhead
 

Donor Misconceptions

Donors think they know what it takes to financially run a nonprofit, but in reality, most of them are misinformed. By now, though, the myth that all nonprofit overhead is too high is an urban legend. Donors think they’re doing the right thing by attaching stipulations to grants or donations regarding overhead, but sometimes this just hurts the overall cause.

Grey Matters Research and Opinions 4 Good surveyed 1,000 donors. Guess what? Most still believe that most nonprofits pay too much in overhead. They also believe that nonprofits with low overhead costs do a better job or are more effective. Neither is true, but nevertheless.

A Few Bad Apples

Unfortunately, a few bad apples in the bunch have spoiled the bunch for all nonprofits. The sensational stories about charities spending tons of money indulging their employees or their own pocketbooks have created a stereotypical negative reputation that is damaging to nonprofits across the board. When donors hear news stories like that, they become mistrustful and jaded.

The reality is that when asked, most donors actually have no idea about what their charitable organizations are spending on overhead, but unfortunately, most speculate that it is way above a reasonable amount. In fact, 60 percent of donors in the above-mentioned survey answered that their charities were overspending, despite having all the facts to the contrary. They speculate that organizations are spending 28 cents on the dollar on overhead, but the donors think it should be 19 cents.

It is also a myth that staying under a certain percentage of nonprofit overhead costs keeps you lean and mean and on-mission. Organizations are so different and have so many costs, that there is no cookie-cutter answer to what their overhead rate should be. Some organizations operate at a fairly steady pace. Others launch campaigns like build-outs or massive training initiatives that mean a spike in cost to reap the benefit later. However, many foundations cap their grants at a 15 percent overhead rate.

RELATED: Special Discount for Education Organizations

Real Vs. Perceived Overhead

The survey participants were then asked about the missions of their favorite charities. Interestingly, most of the charities that donors ranked very high regarding a job well done were actually spending way above the 19 cents rate these donors thought acceptable. In some cases, the groups were spending double that amount.

Charities are drawn into the fray, with some fixing their overhead rates to be extremely low in an effort to attract donors. There’s a problem, though. Choosing a fixed overhead rate that is low is often just arbitrary and not based on any real costs. The danger there is that squeezing your costs lower and lower can impact your mission in the long run. What if you live in a city with a high living expense? You might need to invest in training or infrastructure, which you can no longer do because you’ve set your rate way too low.

Can we just pay what it takes?

Organizations should pay attention to nonprofit overhead costs but not keep it so low as to hurt their cause. The term “overhead” means different things to different people. The truth is that donors don’t likely understand what it means for your particular mission.

Nonprofits that are effective in convincing donors to pay what it takes to do the job, rather than focusing on overhead costs, can find success. Low overhead does not necessarily tell the story of your deliverables. Find other measures of success and resist the urge to communicate that overhead pie chart. Spend some time on your mission outcomes stories. How would you really judge your success? Chances are, it has very little to do with overhead. Think of good ways to measure your impact, and communicate those numbers instead.

As a nonprofit director or board member, you never want donors to think their money is being wasted. However, those organizations that shift the narrative away from overhead costs as a sole focus, and on to measures that matter will likely have a much smoother path going forward.

RELATED: What You Need to Know About Nonprofit Grants


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