All Overhead is Not Created Equal: Distinguishing Fundraising and Administrative Expenses in Nonprofit Evaluation

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A month ago today, GuideStar partnered with the BBB Wise Giving Alliance and Charity Navigator to launch the Overhead Myth campaign: a attack on the ubiquitous use of nonprofit’s “overhead ratios” as the primary proxy for organizational performance. In response to our efforts, we’ve received an outpouring of support and encouragement from a vast range of nonprofit and philanthropic professionals.

Clearly, the social change sector has suffered under the weight of the Overhead Myth for too many years. GuideStar sees helping the donors of America move beyond overhead ratios toward better measures of nonprofit performance as one important step toward serving our mission: to revolutionize philanthropy by providing information that advances transparency, enables donors to make better decisions, and encourages charitable giving.

Launching this campaign has been a learning experience for GuideStar, too. In the course of reading and responding to hundreds of comments and feedback, we noticed a few strong patterns of public misunderstanding about overhead expenses that we want to take the opportunity to clear up. The first is the common conflation of administrative and fundraising expenses. Technically, both types of expenses are classified as “overhead” based on the IRS’s expense reporting requirements for organizations that file the Form 990. However, they represent two very different types of organizational investments.

Throughout our campaign, GuideStar has maintained that it does not believe that these two types of expenses are created equal. The Overhead Myth campaign is primarily concerned with changing the way donors understand the importance of administrative costs: expenses which generally represent critical investments in an organization’s infrastructure and operations. For example, information technology, management systems, and staff dedicated to accounting, human resource management, and general operations could all be classified as administrative expenses, as could resources spent on strategic planning, monitoring, and evaluation. GuideStar maintains that these expenditures are essential to well-run and sustainable nonprofit organizations. In our view, it is relatively rare to find an organization that over-invests in administrative expenses. As long as these expenses support a nonprofit’s mission and goals, they should be considered reasonable.

Fundraising expenses, while also crucial to nonprofit organizations, are more complicated. While there is no doubt that it takes money to raise money, there may be times when the fundraising costs per dollar raised reach proportions that are beyond a standards of a reasonable donor’s comfort range. This rare but deeply problematic scenario was captured well in the Tampa Bay Times expose of  “America’s 50 Worst Charities” – a project which was made possible by GuideStar’s Form 990 data.

Still, it is worth emphasizing that these situations exist at the margin. Our own data indicates that in 2011, only 3.5 percent of all Form 990 filers reported spending more than 70 percent of their budget on overhead expenses. The vast majority of nonprofits do not spend unreasonable amounts of fundraising, and their fundraising investments can yield considerable results for their mission and programs.

Ultimately, though, outcomes tell us so much more than overhead. Donors do not need a fundraising ratio to discover that the organizations profiled by the Tampa Bay Times simply did not produce results for their communities. A nonprofit’s lack of transparency about program strategies and impact is a much more powerful sign of its failure.

Instead of scaring donors with the rare-but-true horror stories of nonprofits who are blatantly flouting their responsibilities as charitable organizations, let’s focus on teaching donors how to give with both their hearts and their heads. Let’s recognize the difference between fundraising and administrative expenses, accept that extreme fundraising expenses are more likely to be seen in fraudulent organizations, and still focus our attention on what matters: getting more money to the best performing organizations.

Kjerstin Erickson

Kjerstin Erickson

Kjerstin Erickson is a Special Project Fellow at GuideStar, where she works on initiatives to improve the effective flow of philanthropic capital. Prior to GuideStar, Erickson spent 9 years as the Founder and Executive Director of FORGE, a strategic-impact nonprofit that provided education, skills training, and entrepreneurial resources to more than 70,000 refugees in war-torn Africa. Having started FORGE at age 20, Erickson established a reputation for her commitment to bringing more frankness and transparency to the nonprofit sector. Erickson’s awards include the Skoll Scholarship for Social Entrepreneurship, the Do Something Award for public service, and the Stanford Haas Public Service Fellowship. She has also been named a “Top 40 Leader Under 40” by the Young Leaders Council, a “Person You Should Know” by CNN, and a “Top 10 College Woman” by Glamour Magazine. The above can also be found on the Overhead Myth Blog: http://overheadmyth.com/all-overhead-is-not-created-equal/.

7 responses to “All Overhead is Not Created Equal: Distinguishing Fundraising and Administrative Expenses in Nonprofit Evaluation

  1. Pingback: All Overhead is Not Created Equal: Distinguishing Fundraising and Administrative Expenses in Nonprofit Evaluation | The Overhead Myth·

  2. The new focus on transparency rather than overhead will lead to greater donations for legit causes and reduce those unfortunate illegitimate ones that crop up. Thank you GuideStar for your work on this!

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  5. Pingback: The Irony of Overhead | GuideStar Blog·

  6. Is the a Federal or state (CA) requirement on the percent of operating expense?
    I’ve heard 25% but cannot find anything to back it up.

    I appreicate your feedback

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