Busting the Overhead Myth on International Skeptics Day

Jan 12

Written By

Tomorrow is International Skeptics Day. "Skeptics Day encourages you to respect and listen to your inner skeptic, and all of the skeptical people that you know."

Given that theme, we would like to rise to challenge of joining the nonprofit community in addressing the Overhead Myth.

What is the Overhead Myth?

For many years, individuals, foundations, government agencies and other donors have looked to the overhead ratio as a way of evaluating the efficiency of a nonprofit organization. The overhead ratio refers to the percentage of expenses that an organization spends on administrative and fundraising costs as compared to direct program costs.

Nonprofits have long suggested that donors should take into consideration the need for these costs and have encouraged donors to look at other measures to evaluate organizations. Recently, the charity watchdog community has supported this notion, and launched a movement to overcome the Overhead Myth.

In an open letter to donors, Guidestar, BBB Wise Giving Alliance, and Charity Navigator describes the myth, "The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance."

Further making the case that overhead costs are necessary to the success of nonprofit work, last month the federal goverment reformed its policy and now guarantees reimbursement for at least 10 percent of indirect (overhead) costs on federal grants.

Busting the Overhead Myth:

Real Costs: Overhead can be a good thing

Nonprofits work to make a change in the community that it serves. Making that change requires expertise, evaluation, time, and money--a lot of this is considered overhead, and it is necessary.

Just like investing in infrastructure and talent is important for for-profit businesses, nonprofits must fund all of its costs in order to be effective. The Donors Forum, the Illinois association for grantmakers, nonprofits, and advisors, has great resources that talk about the Real Costs of making change, including this video.

Other ways to measure effectiveness

Donors and supporters should do their due diligence in finding out about an organization before they get involved. So if the overhead ratio isn't a good measure of a nonprofit's performance, what should you look at? Depending on the mission of an organization, the answer to that question varies. Here are a few things to consider:

Program outcomes & results
Leadership & governance
Financial stability & transparency

Reasons to give to a nonprofit

Reflect on why you are considering getting involved or giving to a cause. Does the organization you are thinking about address issues that impact you, your community, or your beliefs? Here are some things that you can look to to answer that BIG question:

Mission & values
Population and community served
Impact of programs

For many nonprofits, a great place to find out more is on their website. (See our About Us Page for much of this information for H.O.M.E.)

Engage with nonprofits

Glenwood_Sunday_Market_7.13.14 Directors, staff, and volunteers at nonprofits are almost always happy to talk to you about what their organization does for the community that it serves. Get in touch with them! The organization you are interested in giving to may be able to let you visit its sites so that you can see firsthand what it does, how it achieves its goals, and who is impacted by the funding that the organization receives. If you have questions about what administrative costs pay for, they can give you real answers or direct you to someone who can give you more information.