So, you’re talking to a donor and the first thing they want to know is: How much of this donation goes to the cause?

This has become the only standard by which a nonprofit is judged deserving of funds. And this is truly sad.

In 2004, the research firm of Wing, Pollak and Rooney undertook to create a report called “The Nonprofit Overhead Cost Project.” They asked, “Why do funders who want grantee organizations to be successful fail to fund their administrative or infrastructure costs at levels that would permit them to be effective?”

They found:

“Nonprofits in the arts, community development, and human services describe how their development efforts were hindered by inappropriate donor database software. One site described the unproductive downtime and frequent maintenance associated with free but mismatched, outdated computers. In agencies where key positions such as development director either did not exist or were filled with inexperienced staff, the CEO had to fill that role, thereby neglecting parts of the leadership role. Sites without experienced finance staff had only rudimentary financial reporting and had limited ability to involve program managers in financial management, perform more sophisticated analysis or identify financial issues for board and senior management. Backup for key roles was nonexistent, leaving basic functions like payroll, benefits, and network support depend on a single person in even the largest nonprofits with which we spoke.”

“Based on our research, nonprofits are clearly struggling with inadequate administrative and fundraising infrastructure and it is having an impact on their organizational effectiveness. Nonprofits clearly implicate the fundraising preferences of their major funders as part of the causal mix…If our model is close to correct, then the nonprofit sector is facing a very troubling situation, in which the level of infrastructure spending preferred by major funders is a key driver of nonprofit effectiveness, but the particular level preferred is not set with reference to a level of desired effectiveness, but through fundraising dynamic where nonprofits in effect compete on a price for funding by having low infrastructure costs, and exacerbate the problem by reporting even less than the minimal amounts they actually spend.” -Pg 167, Uncharitable, Dan Pallotta

So you’re applying for a grant. And they want to see your organizational budget, to see how much of your donations are going for “overhead.” Well, if there wasn’t an office, we wouldn’t have program staff to meet clients there, so offices are part of overhead. If we didn’t have a administrative assistant/bookkeeper, people wouldn’t get paid, so that person is part of overhead too. Electricity, computers, phones, someone to manage it all, all of the things that make our charity work are overhead. Everything is overhead!

And if we’re supposed to get it all donated, that doesn’t mean it doesn’t cost anything. It just means we’re passing on the cost to someone else. Overhead still exists. All of this means that fancy accounting and hair splitting will be employed to make sure that your nonprofits LOOKS like it’s meeting some arbitrary efficiency standard.

And on top of that, the foundation only wants to fund “new projects, not overhead.” Nevermind that what we’re doing is working. We need to package it in a way that looks new. We need to hide our costs and try to get our needs met without a grant. But since grantors also want instant results for their grant, we’ve got to make sure our results look good too. This system sets us up to fail. What if it takes five years to see a result from programs, because in the first four years we’re doing research on what has worked, systems creation, and advertising our program to those who can use it?

Common Misconception: Charities should maintain a low overhead percentage. This is the only way to know that any good is being done. Low overhead is moral. High overhead is immoral. -Dan Pallotta

As long as the only thing we look at is what’s on the 990 form, we can’t really start to help charities find solutions to the world’s problems.

What if we developed a series of metrics for nonprofits ability to help the world, instead of looking at overhead?

What if we Changed the definition of the cause, and then we changed the definition of how much money went to the cause?

Why should only food for the hungry be the cause? Why can’t your annual report, or a newspaper ad that helps you get more donors be the cause too?

“The more liberal an organization is in defining the cause, the higher percentage of your dollar it will be able to tell you goes to the cause. It is unfair to compare financial results between different fundraising efforts without knowing the differences in their accounting.” -Dan Pallotta

In conclusion, a charity’s overhead percentage doesn’t give you any data about the good it’s doing in the world. If charities were allowed to focus more on solving the world’s problems than on keeping overhead low, more problems would get solved.

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