Do Nonprofits Spend Too Much on Overhead? Most Americans Think So.
If I could bust all of the myths and misperceptions that Americans hold about nonprofits, I’m not quite sure where I would begin. The one about nonprofit employees not needing to make a decent salary? The one about us being expected to work in the seediest of office environments? The one about nonprofits not having to make money? Now that’s a really good one.
But the one that has me all roiled up is the one that nonprofits waste money. Waste suggests frivolous expenditures. Offices, for example, that are so far removed from “not seedy” that they rival the poshness of the most opulent corporate offices. It suggests flying first class when you could easily fly coach. It suggests five color printing when two colors would have done the job. That’s waste. Have I seen this in the sector? Absolutely. But truth be told, and you who toil in the nonprofit sector know this to be true, it is absolutely the rare exception, not the rule.
And just to clarify: waste is not fraud. What may be judged as wasteful can theoretically be done on behalf of the betterment of the organization: a better image, a reward for the staff, etc. It may be unethical, but it is not illegal. Fraud, on the other hand, is both unethical and illegal, and is done for the betterment of the individual(s) committing the fraud: art for the walls of the second home, a speed boat, limo rides and luxurious trips, a laptop for your child, a padded personal bank account for whatever the current whim dictates, etc. But, again, truth be told, fraudulent behavior is the rare exception, not the rule.
So, where is this misplaced perception of waste coming from? If we look at the report released last month by Ellison Research in
According to the Americans surveyed in the Ellison study, the “reasonable” (and the study clearly states people were asked reasonable, not ideal) amount of money nonprofits should spend on overhead should be $.224 out of every dollar, compared to the $.363 on the dollar that people reported they thought nonprofits spend. (Thus the perception of waste.) How many of these people have ever run a nonprofit and know what it takes to do so?
Do they know that it takes more money, for example, to start a development function than to sustain one? Do they know that the amount of money you spend on overhead is likely to increase when you are involved in a capital campaign, or experiencing a growth spurt in your organization? Do they understand that more and more nonprofits are developing competitive compensation packages for employees? Do they understand that larger organizations may be able to bury their overhead costs in program costs more readily than smaller ones? And do they understand that because of this ridiculous emphasis on the idea that there is such a thing as a “right” or “correct” percentage of a dollar that should go for administration and fundraising, many nonprofits have become very creative at allocating those costs into program costs, just to keep that overhead ratio looking “reasonable”? Do they understand that by focusing on an arbitrary distribution ratio they are, in essence, “encouraging” nonprofits to engage in subterfuge? to be less than transparent? perhaps less than fully trustworthy? But the perception will be better!
Do they realize that by deciding that a random ratio—a ratio that is built not on particular information but on an uninformed call of what is reasonable—makes an organization less than trustworthy, they have created a self-fulfilling prophecy? That totally trustworthy organization, accurately reporting its overhead expenses, becomes untrustworthy as it works to report its financials to fit the magic formula.
Where are the funders willing to pay for the audits? For insurance? For utilities? People forget that nonprofits have these expenses and then penalize them for administrative costs. How many people automatically send in donations without being asked?; yet fundraising costs are demonized.
The public has to accept that nonprofits have the same costs they have in operating their businesses. Only nonprofits do it in offices with unmatched furniture, with inferior salaries, facing multiple other demands that those outside the sector cannot appreciate.
I’m so glad you are adressing this issue. I could not agree more with you on all your points.
It seems we have an opportunity here to educate people on these issues. As the previous commenter indicated, people do need to understand these issues. But I think that we as nonprofit folks need to modulate our tone from one of indignation bordering on outrage to one of sincerity and passion for our cause(s). If people already have negative perceptions of nonprofits, we do not need to add to them with the way we express our messages.
Think of any other campaign to educate and change people’s knowledge, perceptions and attitudes toward anything. This is the sort of campaign that could let people know just what the real challenges are. Of course the question is, who will pay for it? I do not have an answer, but I think there are opportunities out there that we are missing. I am open to ideas and truly believe that when people become aware of the true challenges facing nonprofits, they will think differently about the spending that nonprofits do.
While outrage is good for fueling action, it is not, as you point out, good as the message. We do need to educate everyone, from the media to foundations and corporate funders, to the individual donor at every level, to the IRS, to those organizations giving the “Good Housekeeping” seal of approval to nonprofits. Charity Navigator reports that the national average spent on programs is 77%-85% of budgets, indicating that we need to be educating nonprofits themselves who have bought into the myth of this arbitrary standard. Education begins one step at a time, with each nonprofit launching its own education campaign as it woos donors, talks with foundation program officers, reaches out to the media, etc. But crafting the message of this education campaign is tricky. While we understand that it is tough to teach kids to read if there is no light by which to see the books, and that it is hard to cook a meal for the hungry when there is no gas, given the choice of buying books for kids or food for the hungry as opposed to paying the electric bill, which will win?
Your last question cuts right to the heart of the matter and is part of the message we need to communicate. The idea that donors and nonprofits and the public must choose between electricity for nonprofit which distributes the book and the book itself is a false dichotomy. There cannot be a choice; both are necessary.
I think this is part of the reason nonprofits get very creative at burying overhead in program costs. Each book requires light; therefore the cost of the light can be reasonably added into or considered part of the cost for the book. Think of the cost to purchase something from a for-profit business–all the costs of development, management, production, etc. associated with that product are factored in (along with market issues of course) to create a price. It seems reasonable to me to do the same for nonprofits–to factor in all the costs of providing a service into the cost for that service. So it is not only doing a disservice to the nonprofit and those it serves, but it is also simply inaccurate and false to consider that the cost for the book is only the price a nonprofit may get from a publisher. The costs for the nonprofit to obtain, hold onto, account for, and distribute that book are real costs that are in fact part of the cost of the book.
I agree that we must think carefully about what the message is. I don’t have an immediate answer to this question. It will take thought and deliberation.
To temper my entry on your other topic of double standards, perhaps part of the message, and the solution, needs to be better self-regulation of the non-profit industry. In my experience most non-profit employees are extremely cost-conscious and selfless when it comes to comfort and compensation. There are of course cases when, especially at the topmost levels, this is not the case. I have seen a non-profit decide that a fancy office was more important than the mission, and close within a year.
No matter…it is the job of the board or directors to understand what is really going on at the organization. And how many really do? And perhaps it should be the job of non-profits to know more what is going on at other non-profits. Perhaps having some kind of industry seal of approval, and not just media top ten lists and funder-driven evaluations, would help public perception and take some of the pressure off non-profits to prove themselves worthy.
I would love to see a comparison study of forprofit and nonprofit overhead costs. I think it would be very informative to see the range of overhead % in forprofit corporations (a list of ridiculous expendatures would also be fun!), then comparativel,y to see the range of overhead % in NP orgs.
The very interesting point you make in the peice, is truly how much overhead is appropriate. Why would anyone think that there ought to be an “acceptable level” of overhead. How can the overhead for running a shelter be the same as for running a literacy program, or a boys and girls club the same as the United Way? Perhaps the public just isn’t thinking about any of these issues when they are being polled about “acceptable levels”.
More importantly, since the boom of NP organizations post WWII, why have we not as sector been able not only to educate the public on the reasonableness of overhead expenses, but also educate our own funders?
Perhaps the problem is this word: Overhead. In its current commonly accepted definition, “monies not directly expended to provide programs and services: aka unrelated expenses”, it doesn’t actually exist (except for rare cases) . In order to serve the constituents/ meet the mission of nonprofit X, you must be able to sustain nonprofit X and all its functions. Therefore, fundraising is a programmatic function, as without funds there would be no program. Marketing is a programmatic function, as without people(or issues) to serve there would be no use for a program. Administration is a programmatic function, as without logistical planning/organization, there would be no program implementation, etc. etc.
Overhead as the name implies, should be defined as expense outside that necessary to implement successful, sustaining, and improving, quality programs which meet the needs of a societal challenge as set forth in one’s mission statement.
Can any of us think of a nonprofit organization (with the exception of the rare corrupt NP ala New Era Philanthropy etc.: very rare cases indeed) that is not expending all of its resources to either barely sustain or slightly improve its programs and services?
We of course can argue about whether the money used is being used as effectively as possible (thus the glut of NP learning programs and services), but any operating organization is going to have some successes and some oportunities for improvement.
I am baffled by this word “overhead” because I can’t see how any nonprofit expenses are over and above the “head” of its programs. Two major myths seem to surround this term as it relates to the nonprofit sector.
Myth #1: There are seperate funds for programs and their administration.
The general public’s (and by similar association FASB 116 117) current abuse of the word overhead implies that somehow one can seperate monies used for implementation of programs from monies used for the programs themselves. Where is the distinction? Any program’s existence is inextrably linked to its planning, marketing, development, funding and implementation. Take any of these away, and you don’t in fact have a PROGRAM: you have only an IDEA. Now how would this same public like to find out that we are spending 75-85% of their donation on an IDEA? It is in fact a miracle that with only 15-25% of our budgets we can actually conceive, develop, fund, create and market our “products.” Show me anyone in the forprofit world who can claim such stellar efficency!
Myth #2: Expendatures on “overhead” can lead to waste, if not forcebly limited by public pressure or funder restriction.
How many of us, working in the sector, would say that we spend even 1 penny more than necessary to meet our mission?
Forget about lavish expenses like business class instead of coach: we won’t even buy two-ply for our bathrooms, we water down our hand soap to make it go farther, we bring in our own coffeemakers for the breakroom and on an on, because we understand that any savings could be the difference between serving one more constituent and not.
Have you ever brought your own box of Klenex to the office, bought your own backpack for your laptop, or expected one of your board members to pay for their own travel to a retreat? Of course you have!
We need to redefine the words overhead and waste as they relate to nonprofits. We must work to raise the level of public understanding of the requirements of making programs and services happen.
The funder community (both individual and organizational) already understands the importance of the services and programs we provide, that’s why they fund our work. However, we must continue to seek ways to help them understand that there is no such thing as “unrelated” expenses. All of our expenses are related to achieving our mission.
Thankfully several well-respected folks (both funders and service-providers) are beginning to publicly make this arguement, at least indirectly, in the form of recent calls for greater access to general opperating grants and monies. Let us hope that the message gets through.
I realize that any activity generates overhead, even if it is run entirely by volunteers. I believe that those who are employed by non-profits are entitled to a comfortable living. However, I do not support lavish spending on anything, and that includes promotion: I refuse to donate further funds to any organization that obviously spends major money on a continuing stream of slick solicitation.
The gold standard for comparison is the Salvation Army. They squeeze every nickel dry. Their good works, as evidenced by press coverage, are their best advertisement, and press coverage advertises their needs for funding.
That is the sort of organization I support, not the ones with CEO’s that make half a million dollars a year and send me piles of glossy promo pieces each year.
This attitude spills over to the Arts. I never order a ticket for a concert or play without asking that my name be left off their mailing list. I keep track of these affairs by reading the paper. I’d far rather they cut down on the slick promotion and drop ticket prices. One or two attractive mailings a year are fine, but not three per event, and these mailings don’t have to be gallery quality to get my attention.
If you want my money, show me you’ll use it responsibly.
But not everyone is like Ritergal – some people want to give to every solicitation, so they like multiple asks; others need to see 2 or 3 or more before they are moved to, or remember to give. My point is, don’t condemn a nonprofit because they do more “asks” than is your preference, and be aware enough to know that you’re not the only person they’re trying to appeal to.
And about “slick” promotions – again that’s what some people need to pay attention, to decide to act (that is, give), so be open-minded enough to know that just because you might respond to an unpersonalized letter, others need more.
I just read your article entitled, “Do Nonprofits Spend Too Much on Overhead? Most Americans Think So.”
I have worked in both profit and non-profit organizations for over 25 years with fifteen years in non-profit health organizations and four years in a non-profit animal welfare organization in which I am currently employed.
We too have those who believe that non-profits can live without cost centers or run the organization on purely volunteer help with the minimum of paid staff making far less than market wages. Further, is the belief that goods, supplies and materials to run the organization can be had through the kindness and compassion of donors.
These are misconceptions that hinder the growth of the organization and become obstacles to achievement of the organization’s mission. The non-profit organization must be run as if it were a serious business if it is to be successful and continue to exist in a competitive market. In order to do this, the notion that a non-profit should not make a profit needs to be disspelled.
First: The difference between the profit and non-profit is the treatment of equity. The profit organizations re-invest and return equity to principles and shareholder or owners. The non-profit is obligated to retain equity for re-investment in the organization and/or use equity for charitable purposes. None of the profit can be returned to shareholders, owners or principles.
Second: The non-profit must act as a business and target a rate of return or profit for reinvestment in plant, equipment and future operations. Not to do so is irresponsible and imprudent.
Third: Dependable and knowledgeable staff must be paid livable salaries and benefits. Our organization provides low cost and charitable veterinary and animal welfare services. Low paid, unskilled or volunteer labor cannot perform such tasks. Low paid staff without competitive benefits results in high employee turnover which is costly in terms of staffing and reputation.
Fourth: Money must be spent on resources that help meet the organization’s mission. This means investing in computers, public relations, decent work environments, financial systems, etc. Not to do so will limit growth and result in organizational stagnation.
Fifth: The organization must be supported by a forward thinking Board that is oriented toward policy, planning and growth. Operations should be under the direction of experienced and professional administrative staff.
Sorry, but the days of supporting non-profit and charitable organizations via bake sales are over….
Fred Saunders, MA, CMPE, FACMPE
The same way you don’t want your doctor to be the last in his graduating class, don’t we want people in nonprofits to have skills and education? Do we want only those who can’t’ get jobs anyplace else to be the only ones willing to work for the lower salaries offered by nonprofits? The Ronald Reagan days of nobless oblige are long gone — nonprofits need to compensate people resonably — and that means the public has to accept reasonable administrative costs and not hold the nonprofit sector to a standard they would never be willing or able to meet.
Hi! I think this is so timely and interesting. I am now just starting to do research on building a business model for applying our companies offerings to the nonprofit sector (generally healthcare/Foundations).
Can anyone point me in the direction of additional resources – especially having to do with what resources/vendors are most in need (in other words what % of nonprofit money is spent on *what*) but also who out there provides a suite of services under one umbrella (donor management, event management, tech services, PR)?
any help is appreciated!
Mel