From Overhead to Impact: Attitudes about Nonprofit Spending are Changing

It came as a welcome surprise to many in the nonprofit community when, in 2013, three of the largest charity watchdog groups — GuideStar, Charity Navigator and the Better Business Bureau’s Wise Giving Alliance — publicly addressed the “overhead myth.” Urging donors to “pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results,” the open letter went one step further, stating that “many charities should spend more on overhead.”

This last statement isn’t news to nonprofits struggling to pay administrative and fundraising costs while trying to maintain their reputations for fiscal responsibility. But it may mark the beginning of an attitude shift among watchdogs, donors, grantmakers and the media.

Spend money to make money

In the past, watchdog groups were notorious for giving overhead ratios significant weightings in their rankings of charities. While such a practice can help potential donors weed out spendthrift organizations, it also tends to unfairly penalize nonprofits making reasonable expenditures for current needs and strategic investments in their future. As the saying goes, you have to spend money to make money.

Recognizing this reality, the White House Office of Management and Budget recently issued guidance stating that at least 10% of federal dollars awarded to nonprofit grantees should pay for indirect (overhead) costs. Calling this move a “once in a generation” overhaul of federal grants policies, the National Council of Nonprofits explained, “New guidance means that nonprofits should be able to focus more on their missions and should be under less pressure to raise additional funds to essentially subsidize governments.” The response from nonprofits receiving federal funds has been overwhelmingly positive.

Measuring performance

How then should supporters evaluate the performance of charities, if not with overhead ratios? For many, “impact” is the new buzzword, generally defined as the long-term or indirect effects of more measureable outcomes (such as the number or percentage of individuals served). Impact typically refers to broader societal change and can be much less predictable than outcomes.

Already your donors may be using such impact-based yardsticks as “What difference does this organization make in our community?” Such a shift of perspective is good news, but it may mean that your nonprofit needs to make some cultural changes — including at the board level. For example, you might have to convince your board that spending more on such items as executive salaries and marketing programs will produce better outcomes and broader reach over time.

Publicly communicating impact is another challenge. One practical solution is to revise such publications as your annual report. Although compliance with Generally Accepted Accounting Principles requires nonprofits to report costs in one of three categories — program, fundraising, and general and administrative — no one is stopping you from breaking out administrative items and telling the story about how they were used to enhance programs and ultimately affect lives.

Advice for change

If you’re still unsure about how much your nonprofit should spend on overhead and how it can best deploy resources for meaningful impact, talk to your financial advisors. Times are changing — for the better — and your organization needs to change with them.