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GuideStar Blog

Is “overhead” dead?

Lindsay Nichols

For too long, the nonprofit sector has been ill-equipped to determine which nonprofits are achieving success, and which are truly able to stick it out for the long haul. The public focuses on “overhead,” which is really how much an organization spends on administrative costs – such as keeping the lights on and paying their people, etc. – in relation to its total expenses. Popular opinion is that if the overhead ratio is too high, then the nonprofit can’t be doing enough to accomplish its mission.

GuideStar has been preaching for a long time about how arbitrary this ratio is, and how it just doesn’t get to the heart of the question – is the nonprofit doing what it should, doing it well, and will it be able to keep doing it? For example, if a nonprofit’s board of directors say that the organization needs to focus its energies on, say, upgrading its technology and expanding its IT staff next year, the organization’s overhead ratio might be high due to the cost of recruiting and retaining the best in the business, but that’s not necessarily a bad thing. Once in place, the technology could improve communications with staff in the field, automate processes so that the nonprofit can shift more resources to programs, or accomplish any number of things that will enhance the organization’s ability to achieve its mission. So who cares if the nonprofit has a high overhead ratio that one year?

The problem was that we haven’t had many tools in our arsenal to help us turn the page on the subject of overhead. That’s not to say that there aren’t any tools: our GuideStar Exchange program gives nonprofits the ability to tell their full story on GuideStar, through additional documentation, photos, videos, etc.; Charting Impact gives nonprofits a standard for defining and describing effectiveness; and the findings of our Money for Good II research show us that there are 6 steps nonprofits can take to help demonstrate their progress.

Financial SCAN, however, which we created in partnership with Nonprofit Finance Fund, gives us another tool for our arsenal – and what a robust tool it is. With Financial SCAN, we finally have the ability to analyze years and years of complex financial data to determine an organization’s true financial condition. And the financial condition is a big piece in determining the true state of an organization’s ability to meet its mission in the future.

Check out our short YouTube video by Pam Jowdy, GuideStar’s senior product manager, about all Financial SCAN has to offer here. If you’re interested in hearing more from the brains behind this new platform about how it can help you in your daily professional lives, join us for a free webinar on May 3.

For those of you that have taken a look at Financial SCAN, what do you think? Do you see it changing the way we value overhead when assessing nonprofits? Please leave your comment below or Tweet about it using the hashtag #FinancialSCAN.

Topics: Products and Services