If you read the numerous nonprofit trade periodicals and various newspapers in 2013, you know that the topic of “the overhead myth” was a big one last year. Dan Pallotta gave a TED talk about it that went viral on the internet. Nonprofit writers and bloggers posted articles about the need to be more realistic about overhead costs. The state of Oregon passed a law removing charitable status from organizations that spent too much on overhead. The Tampa Bay Times, The Center for Investigative Reporting, and CNN collaborated on an expose of fifty charities that took in vast amounts of money and spent a fraction on charitable causes called “America’s Worst Charities.” Charity watchdogs BBB Wise Giving Alliance, Charity Navigator, and Guidestar joined forces on an open letter to funders asking them not to judge charities solely on overhead costs. The “overhead myth” is the talk of the nonprofit world.
Overhead costs are part of doing business. Organizations have utilities, leases or mortgages, technology costs. They have employees that deserve reasonable salaries and benefits like health, dental, and retirement programs. They have to spend money on administration and fundraising. It’s reality. Donors understand that since they have their own bills to pay.
The problem is that the “overhead myth” was created by the nonprofit sector itself, not individual donors. It was a reaction to stories of excessive salaries that some charity CEO received that caused a drop in giving. In an effort to entice donors to give to their organizations, some nonprofits started reporting less overhead costs by hiding them with accounting tricks instead of showing their true costs of operations. It became a competition like “Name that Tune.” An organization would report to their supporters that they can solve that problem with 75% of the money going directly to the program, so a competing organization would tell them they can do it with 85% of the money going to the problem, and then another would say it create the solution with 95% of the money going directly to the mission . It created a snowball affect that spread across the sector. This game has misled the donors and the public into unrealistic expectations, painting the nonprofit sector into a corner, and it will have a difficult time extracting itself. The charitable sector has caused its own dilemma.
Another problem is when it comes to grants. Funding sources, foundations and local, state, and Federal government bureaucracies want to measure the effectiveness of the programs they support. I think that is understandable and fair. Unless your organization already has the capacity in place to report the necessary information required by the funding organization, you should include those costs in the budget of your grant proposal. You may need to hire an extra person to collect the information and write the reports, and then you have their salary and benefits to pay. You may have to upgrade technology that is more efficient. Failing to include these additional costs will surely hamper your organization’s ability to provide the required information, and you will be left scrambling for resources needed elsewhere. Do not be hesitant to include these administrative costs in your proposals.
Finally, there are fundraising costs to be considered. As the saying goes, “It takes money to make money,” and that is the reality in the nonprofit sector. This can be where nonprofits find themselves in hot water. Is your organization spending an incredible amount of money for a poor return on your investment? Has your nonprofit contracted with a business that makes more money for itself than it puts in your coffers? Do you report the gross proceeds for your annual run/ride/walk or gala event, or do you responsibly report the net results on your website or annual report? Are there less expensive and more efficient ways to reach your supporters that you could be using? These are questions that you must answer.
Those of us in the nonprofit sector need to take responsibility for the myth that we started and continue to perpetuate. We must stop blaming the donors for wanting their money used wisely and efficiently. We need to be honest with our donors and more transparent with our reporting. We must cease trying to mislead our supporters by hiding our true costs with accounting shell games. Unless we start acting more ethically with more integrity and honesty, donors will lose their trust in our organizations and our sector, and once we lose their trust, we lose their moral and financial support.