The “Overhead Myth” is one of my favorite topics to talk about because it’s one of the most concerning challenges nonprofits – and funders – face.
“Overhead” is the percent of a nonprofit’s expenses that goes to administrative and fundraising costs. For decades, overhead was seen as bad, wasteful. It was seen as money that could be supporting the organization’s mission that was going to bloated administrative and fundraising budgets. Rating agencies, such as GuideStar, Charity Navigator, and the Better Business Bureau, would rate nonprofits based on their overhead percentage as if this was an indication of effectiveness.
Most – if not all – of us in the nonprofit sector know that overhead has nothing to do with effectiveness. We also know that depending on your type of nonprofit, you can have very different overhead costs. And that’s okay.
In 2013, GuideStar, BBB Wise Giving Alliance, and Charity Navigator wrote an open letter to the donors of America in a campaign to end the Overhead Myth. You can read that letter here. They released a second letter to nonprofits in 2014. The same agencies that perpetuated the Overhead Myth now ask us to consider other ways to evaluate nonprofits.
So what are those other ways? How should donors and the organizations themselves evaluate their effectiveness?
- Does the organization have a clear mission?
- Can it clearly articulate how its programs address a need?
- Does it have SMART (specific, measurable, attainable, realistic, time-specific) objectives?
- How is it investing its funds to make a real impact?
- Do you see a ROPI (return on philanthropic investment) of your money?
What other ways do you think donors should evaluate nonprofit organizations?