FAQs

  1. What is an “overhead ratio” anyway? How is it calculated?
  2. What types of expenses get classified as “overhead”?
  3. Are both fundraising and administrative costs necessary?  Do they have different roles in sustaining an organization?
  4. Without the overhead ratio, how can you tell if an organization is wasting money or acting fraudulently? 
  5. There are nonprofit executives that get paid way too much. Are you saying that GuideStar, BBB Wise Giving Alliance, and Charity Navigator support these excessive sums?
  6. Should concerned donors restrict the use of their gifts? 
  7. How can a nonprofit help the Overhead Myth campaign?
  8. Is the Overhead Myth Campaign new? Did the three campaign partners previously focus on overhead ratios?
  9. If I shouldn’t judge a nonprofit by its overhead ratio, what should I judge it by?
  10. I don’t have a lot of time to make this decision. I’m looking for a simple, easy-to-digest statistic that tells me about a nonprofit’s performance. Are you telling me there isn’t one?
  11. Who else supports this idea? 
  12. I am a donor and I want to help out with the campaign. What can I do?
  13.  I work for a nonprofit, and we’ve been trying to keep our overhead ratio low for years. Our donors have come to believe in our efficiency based on our low overhead. How can we change the message on them now? 
  14. I work for a nonprofit, but donors want to know about cost. How can we communicate our real cost?

 1. What is an “overhead ratio” anyway? How is it calculated?

The overhead ratio commonly refers to the percentage of a nonprofit organization’s expenses that is devoted to administrative costs and fundraising costs. It is calculated by adding administrative (2013 IRS Form 990, Part IX, Line 25,Column C) and fundraising (2013 IRS Form 990, Part IX, Line 25, Column D) costs and dividing by total expenses (2013 IRS Form 990, Part IX, Line 25, Column A). Sometimes, “overhead” is construed to consist only of administrative costs and not fundraising expenses.

2. What types of expenses get classified as “overhead”? 

Administrative expenses include investments in an organization’s infrastructure and operations. For example, staff dedicated to accounting and human resource activities, the applicable portion of information technologies devoted to these functions, governing board expenses, the production of an annual report, and management systems are typically classified as administrative expenses. Fundraising expenses include any costs incurred in the process of or with the intent of asking potential donors to contribute funds, materials, or time. Examples include staff time dedicated to donor development, direct mail expenses, maintenance of donor mailing lists, holding fundraising events, and more.

3. Are both fundraising and administrative costs necessary?  Do they have different roles in sustaining an organization?

While both fundraising and administrative costs are necessary to support the sustainability of most public charities, the two types of expenses are not created equally. The Overhead Myth campaign is primarily concerned with correcting the assumption that low administrative costs are inherently desirable. In fact, under-investing in administrative costs is consistently linked with poor organizational performance and sustainability–trapping organizations in what Ann Goggins Gregory & Don Howard in the Stanford Social Innovation Review called, “The Nonprofit Starvation Cycle.” In our view, it is relatively rare to find an organization that over-invests in administrative expenses since these expenses usually help support a nonprofit’s mission and goals.

Fundraising expenses, while also crucial to most nonprofit organizations, are more complicated. While there is no doubt that it takes money to raise money, there may be times in which the fundraising costs per dollar raised reach proportions that are beyond a donor’s comfort range.

4. Without the overhead ratio, how can you tell if an organization is wasting money or acting fraudulently? 

There are a number of steps that you can take to minimize the chance of waste and fraud. Here are some information items that can help:

  • Review the organization’s website, which will generally include information typically found in an annual report, such as information about program activities, a governing board roster with professional affiliations identified, and a financial summary.
  • If not already posted on its website, ask the organization to provide information on results reporting (i.e., what impact the organization has on its mission) and other available information on its goals, strategies, and accomplishments.
  • In addition to completing the IRS Form 990, larger organizations also will likely have an audited financial statement completed by an independent CPA firm. Both of these are generally made available on the organization’s website.
  • Don’t hesitate to start a dialogue with the organization. Responsible nonprofits are transparent about their operations and are happy to provide additional information to help donors make informed giving decisions.
5. There are nonprofit executives that get paid way too much. Are you saying that GuideStar, BBB Wise Giving Alliance, and Charity Navigator support these excessive sums?

This question gets at the heart of one of the most common misconceptions about overhead: that employee and executive salaries are considered “overhead” expenses. In reality, compensated staff members carry out all of the organization’s functions. Specifically, the applicable portion of employee and executive salary expense are recognized or “allocated” to three functional expense categories based on the estimated time staff members devote to carrying out each of these functions: program service activities, administration, and fundraising. While there are some paid staff (such as accounting and human resource personnel) that usually devote all their time to overhead responsibilities, the vast majority of paid staff members cumulatively devote most of their time to carrying out program service activities.

As for the question of extreme salaries, our data indicate that these circumstances are relatively rare. Rather, it is far more of a problem that mid- and lower-paid direct service nonprofit employees are underpaid than overpaid. As a matter of law, tax-exempt organizations are required to ensure that the salaries and benefits they pay their executives meet the IRS’s definition of “fair and reasonable.” That definition varies from nonprofit to nonprofit; to determine what is “fair and reasonable” for a position at a specific organization, you must research what people in comparable jobs earn at nonprofits that are of similar size and that have similar missions and programs. There are instances in which nonprofits do not act in good faith and pay their executives at levels beyond what the market would dictate. Regardless, the overhead ratio tells one next to nothing about compensation rates: the vast majority of salary expenses are counted as programmatic rather than as administrative or fundraising.

6. Should concerned donors restrict the use of their gifts? 

It is possible to make a restricted gift that ensures your donation goes to a specific program. Unrestricted gifts, however, often do the most good (once you have come to know and trust the track record and operations of a charity); the organization itself usually knows best where those funds are truly most needed and will be best utilized. For example, after a natural disaster, we see nonprofits with their hands tied behind their backs. Because they had to immediately jump to the aid of survivors and recovery-related items, they pulled resources from other areas to cover the costs. Once restricted funds start coming in, the nonprofit isn’t able to refill the coffers where they pulled the disaster recovery money from.

The bottom line of the Overhead Myth campaign is to correct the belief that indirect expenses such as salaries and office space are any less critical to a nonprofit’s mission than the direct costs of hot meals for the homeless or pencils for an after-school program. These administrative expenses, though classified as “overhead,” allow the organization to achieve its mission and improve its performance and sustainability. We urge the public to stop thinking in terms of “good” and “bad” expenses, and start understanding that investments in infrastructure can be just as critical and mission driven as funds devoted to programming.

7. How can a nonprofit help the Overhead Myth campaign?

We intentionally designed both the 2014 and 2013 Overhead Myth letters to have a Creative Commons license that enables sharing—we want you to spread the message far and wide!

Use the 2014 letter: The Overhead Myth—Working Toward an Overhead Solution an Overhead Solution

Our latest letter is written to the nonprofits of America and is intended to urge organizations to take specific action steps that we believe will move us toward a solution to the Overhead Myth problem.

Consider ways to strengthen and demonstrate your accountability by including more information on your website about goals, strategies, governance, and accomplishments. Review recommended good governance and ethical practices as referenced on the “back page” of the letter.

Manage towards results. Organizations that have a better understanding of the true costs of achieving their missions are better prepared to accomplish their goals. Employing effective performance management systems can also help nonprofits focus on impact.

Help educate donors about the real costs of results. This potential audience includes not only individuals but also foundations, corporations, and government funders. As part of this outreach, it would be particularly helpful to share the 2014 Overhead Myth letter with staff members who prepare copy for an organization’s website, written materials, and appeals so that they can make adjustments to content that appears to emphasize overhead cost ratios. Also consider distributing the letter to board members as well as affiliated nonprofit organizations.

Use the 2013 letter: The Overhead Myth

Nonprofit organizations can consider including the 2013 Overhead Myth letter (written to the donors of America) on their websites, or send it along to the next potential donor who asks about overhead ratios. If that donor is interested, give him or her the address to overheadmyth.com. One donor at a time, we will erode the Overhead Myth and thereby facilitate smarter philanthropic capital and more sustainable nonprofit choices. We’d also love you to spread the word—start with our Outreach Toolkit and spread the word to everyone you know.

In addition to spreading the word about this important initiative, we also ask that you make a public pledge to end the Overhead Myth. You can do that by signing up here: overheadmyth.com/pledge.

8. Is the Overhead Myth Campaign new? Did the three campaign partners previously focus on overhead ratios?  

The Overhead Myth campaign is a new movement, begun in 2013 and building momentum until today. The entire campaign is the first time we’ve had a coordinated effort to end the focus on overhead. Never before have BBB Wise Giving Alliance, Charity Navigator, and GuideStar joined forces. And never before have we asked you to pledge your commitment to eradicating the myth about overhead.

Both BBB Wise Giving Alliance and GuideStar have always urged donors not to rely solely on financial ratios to evaluate charities. Charity Navigator has also recommended going beyond the financial ratios and in recent years, Charity Navigator has expanded the scope of its evaluations to incorporate accountability, transparency and results reporting in addition to financial measures.

9. If I shouldn’t judge a nonprofit by its overhead ratio, what should I judge it by? 

We recommend that you pay attention to a broader set of factors about nonprofit performance: transparency, governance, leadership, and results, as well as finances. GuideStar’s Money for Good II research tells us that these five subjects are what donors care about most, and impact-oriented donors are no exception.

Each of the Overhead Myth campaign partners offers additional information on a charity’s transparency and/or accountability.  For more information, visit their respective websites at: 

See www.give.org for information on BBB Wise Giving Alliance’s standards-based charity accreditation activities that address charity governance, finances, results reporting, transparency, and appeal accuracy among other issues.

See www.guidestar.org/update to learn about the free GuideStar Nonprofit Profiles, which enable nonprofit transparency, and empower nonprofits with Gold, Silver, and Bronze participation levels. The Gold level focuses on qualitative impact and is particularly helpful to nonprofits seeking to report meaningful results.

See www.charitynavigator.org to find out more about their star-rating charity evaluations that address charity transparency, accountability, and impact.

10. I don’t have a lot of time to make this decision. I’m looking for a simple, easy-to-digest statistic that tells me about a nonprofit’s performance. Are you telling me there isn’t one?  

That’s what we’re telling you. Much as it would be nice to be able to look to one simple number to determine how to give our charitable dollars, it simply doesn’t exist—and probably never will. You can’t judge a company or a university or a person by one statistic, and the same is true for nonprofits. But if you focus your attention on performance, you’re heading in the right direction. Philanthropic giving and priorities are both personal and complex, yet there are many tools to help you identify top-performing nonprofits and ensure accountability and results.

BBB Wise Giving Alliance, Charity Navigator, and GuideStar all attempt to cull through this information for you to help reduce the time it takes to gather the critical information you need:

BBB Wise Giving Alliance (BBB WGA) is a standards-based charity evaluator that seeks to verify the trustworthiness of nationally soliciting charities by completing rigorous evaluations based on 20 holistic standards that address charity governance, effectiveness reporting, finances, fundraising, appeal accuracy, and other issues. Learn more about the 20 BBB Charity Standards and about local charity review at local Better Business Bureaus at Give.org.

Charity Navigator works to guide intelligent giving. By guiding intelligent giving, we aim to advance a more efficient and responsive philanthropic marketplace, in which givers and the charities they support work in tandem to overcome our nation’s and the world’s most persistent challenges. Find out where we are headed (2013 and beyond).

GuideStar collects and disseminates information about every single IRS-registered nonprofit organization. We provide as much information as we can about each nonprofit’s mission, legitimacy, impact, reputation, finances, programs, transparency, governance, and more, so you can make the best decisions possible. Check out our five tips for choosing a charity wisely here: http://npo.gs/chooseacharity. Learn about our impact and results in 2013 and our plans for 2014 and beyond.

11. Who else supports this idea? 

Experts across the sector—from the Stanford Social Innovation Review to the Bridgespan Group to the Urban Institute Center of Philanthropy and many others—have reviewed the evidence and have firmly taken the stance that donor aversion to overhead expenses is crippling the nonprofit sector. See the back of the 2014 Overhead Myth letter for more information about ethical practice, managing towards results, and educating donors on the real costs of results. See the back of the 2013 letter for sources and citations about overhead issues.

12. I am a donor and I want to help out with the campaign. What can I do?  

We need your help! The goal is to spread the message to as many potential donors as possible. Please start with our Outreach Toolkit and spread the word to everyone you know. If you know anyone who gives money to nonprofit causes, tell them about the letter and the movement. Maybe even print it out and give it to them yourself. And next time you find yourself evaluating a charity to support, remember to support their infrastructure as much as their more marketable expenses.

In addition to spreading the word about this important initiative, we also ask that you make a public pledge to end the Overhead Myth. You can do that by signing up here: overheadmyth.com/pledge.

 13. I work for a nonprofit, and we’ve been trying to keep our overhead ratio low for years. Our donors have come to believe in our efficiency based on our low overhead. How can we change the message on them now? 

Only your organization can determine the level of administrative and fundraising expenses that are ideal for you. Talk about your programmatic performance. It’s up to you to offer donors an alternative! Before rushing to change anything, we recommend that you take the time to do a full financial review. Ask the tough questions internally—are we spending our money most effectively for the long term? If we shifted some programmatic expenses toward infrastructure expenses, would we be more sustainable and better able to serve our mission over time? Or are we already sufficiently investing in administration and should retain the level of overhead we have? Every organization has different needs and different ideal overhead ratios.

14. I work for a nonprofit, but donors want to know about cost. How can we communicate our real cost?

Make it clear that a nonprofit’s real costs are legitimate expenses that need to be reimbursed for the organization to be sustainable, effective, and have impact. Explain if your nonprofit wants to change the world, you need these costs to build the infrastructure of your goal. State you are careful with the costs, but without them there may be more harm than benefit to your organization. And show them the Overhead Myth letters too!

6 thoughts on “FAQs

  1. Thank you for calling attention to a myth that has long plagued nonprofits. IRS doesn’t make it easy for nonprofits to properly assess their programs and services to the public. Our purpose for being is to provide counseling, education and support services to the public and families dealing with Alzheimer’s and related dementias in NC, while providing research funding for a cause and cure. Our collaborative works with universities, state and community agencies also cannot be adequately assessed or explained on the 990. Without an office, staff salaries, staff training and collaborative efforts, services would not be available to families in need, yet our performance is continually measured by administrative/fundraising ratios.

  2. Oh my goodness! Impressive article dude! Many thanks, However I am going through problems
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  3. At the same time that the nonprofit sector is being subjected to this rhetoric of austerity, there are cases where those who stand in judgment have actually told the equally not-for-profit public sector (specifically City College of San Francisco) that they were not spending *enough* on administrative overhead. You read that right: not that the nation’s largest community college wasn’t spending enough on teaching, computer and science labs or film archives. No; they were criticized, essentially, for being too lean and mean: http://aaup.org/news/aaup-issues-statement-accreditation-city-college-san-francisco.

    Where is the criticism of all the “private” industries, from banking to Big Ag, from prisons to Big Oil, whose “overhead,” funded by taxpayers (via a myriad of means: subsidies, tax breaks, incentives, policies to criminalize and imprison the poor and people of color, etc.) ends up in private pockets as shareholder profits, executive bonuses, and excessive salaries? There is no comparison of scale. Where is the reality that private healthcare runs at roughly 1/3 overhead, while Medicare is about 3% (1/10th the private overhead)? Who’s looking at the overhead of the National Basketball Association — they’re a nonprofit!

    Sure; there are lax organizations in every sector. But focusing criticism on the scrappy nonprofit sector, particularly smaller social service and social change nonprofits, without comparison to the excesses and indulgences of other sectors, is both hypocritical, and distorts the real problems in our economy.

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