OUR THOUGHTS ON:

Overboard with Overhead: Assessing The Overhead Myth

Not-for-Profit

By Lauren Weddell

As donors, employees and board and community members, we’ve all heard the term "overhead" used in the nonprofit community. Overhead is the percentage of charity expenses that goes to administrative and fundraising costs, and is often one of the primary measures of a nonprofit’s performance. But is that the best means to measure the success, stability and results of a nonprofit?

In 2013, the CEOs of Guidestar, Charity Navigator and BBB Wise Giving Alliance issued a joint letter to the donors of America about the "Overhead Myth" asking them to look at other factors when determining which charities to donate funds to and support.  While they believe overhead can be one measure, they want donors to place greater focus on other nonfinancial measures such as transparency, governance, leadership and results.  If a nonprofit were to only be concerned with low administrative and fundraising costs, they may very likely be underinvesting in various areas that will impact their future long-term success (technology, training, finding the right people and increasing their donor base).

Again, in October 2014, Guidestar, Charity Navigator and BBB Wise Giving Alliance issued a second letter to the nonprofits of America asking them for their help in ending the "Overhead Myth."  This letter requested three items from nonprofits (1) demonstrate ethical practice and share data about your performance, (2) manage towards results and understand your true costs and (3) help educate funders (individuals, foundations, corporations and government) on the real cost of results.

We’ve seen a similar focus out of the combined efforts of the Financial Accounting Standards Board (FASB) and the Not-for-Profit Advisory Committee (NAC) as they discuss potential financial statement changes that will better inform users of financial results, liquidity and cash flows.   Make sure that your funders are knowledgeable about your mission and who you serve and how you serve them; and not just focused on one ratio in your financial statements. 

Read the full letters on the Overhead Myth.

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