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, you can use overhead to eliminate egregious players:
Red Light: Overhead 70 percent or higher–-represents, as Berger suggests, lack of principles or naïveté.
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, infrastructure development, and stepping beyond this historic boundary.
Is There a Substitute?
Not a quick one.
Overhead allowed us to make snap judgments about a nonprofit’s quality. We used it to compare nonprofits. Except it did a poor job at both, and it 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? You can use these questions:
While imperfect, the answers will give you insight into the heart of the nonprofit’s work. You will learn about the opportunity you have to change lives and what changing lives cost.
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Karen Eber Davis provides customized advising and coaching around nonprofit strategy and board development. People leaders hire her to bring clarity to sticky situations, break through barriers that seem insurmountable, and align people for better futures. She is the author of 7 Nonprofit Income Streams and Let's Raise Nonprofit Millions Together.
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