Fellow consultant Julie Mikuska declares nonprofits that succeed in obtaining low overhead, "winners in the race to the bottom." While still popular in the culture, nonprofit insiders privately roll their eyes when asked about their overhead. In 2013, GuideStar, BBB Wise Giving Alliance, and Charity Navigator wrote an open letter to American donors "to end the overhead myth--the false conception that financial ratios are the sole indicator of nonprofit performance." In short, judging a nonprofit solely by its overhead percent represents last century thinking.
Should You Be Concerned About a Nonprofit's Overhead?
It is true. Scoundrels exist who use nonprofits for personal gains. In his blog, Ken Berger, President of Charity Navigator, wrote, "Show me a nonprofit that uses 70 percent of its funds for overhead, and I predict with a great deal of certainty that it is an organization that is either clueless or focused on lining someone's pocket rather than effectively serving others."
As a crude tool, use overhead to eliminate egregious nonprofits:
Red Light: Overhead 70 percent or higher--represents, as Berger suggests, lack of principles or na´vetÚ.
Yellow Light: Overhead 30-69 percent-inquire, "Your overhead is high. Tell me about it."
Green Light: Overhead 0-29 percent. Since the pressure for low overhead remains, and because nonprofits want money for mission, almost all nonprofits keep their overhead here. This level allows for flexibility and infrastructure development.
Is There a Substitute?
Two Questions Instead of One.
Overhead allowed us to make snap judgments about quality and to compare nonprofits. Except it did a poor job at both. It also stunted many nonprofit's success. Under the yoke of low overhead, nonprofit leaders managed for a low percentage instead of their triple bottom line (mission, income, and community).
What substitute can you use? Ask these questions:
1. How do you know you change lives and what's the change?
2. How much does it cost to change one life?
(All costs, not just direct costs.)
The answers will give you insight into the heart of the nonprofit's work. You will learn about what matters.