Nonprofit Quarterly calls attention to a YouGov poll that indicates a high percentage of donors would like to know how nonprofit organizations spend money on overhead. As the article notes, interest in overhead spending has its pros and cons. On the one hand, recent scandals involving nonprofit mismanagement point to a need for transparency about where money is going. On the other hand, how little an organization spends on overhead is not necessarily a reliable measure of its effectiveness.
Unfortunately, many of us have been trained to see a tension between overhead spending and program spending—the more we spend on overhead, the less is spent on actually getting stuff done, and so on. As a result, organizations that happen to have high overhead spending (and this can happen for a variety of reasons, including the nature of their mission) appear to be less effective. Meanwhile, those that are good at playing around with the numbers can often find a way to look extremely efficient.
This is especially true when it comes to fundraising. Many organizations like to boast low spending on fundraising and high spending on programs. A lot of the time, this is false advertising. Nonprofits often perform elaborate dances to present their spending and budget breakdowns the right way, such as cooking fundraising expenses into other categories.
It is understandable that nonprofits should want to present their budgets in the best light and anticipate donor concerns about responsible fiscal management. But accounting tricks shouldn’t be the solution. Rather, nonprofits should seek to turn the conversation around and challenge assumptions about overhead spending.
The expectation that organizations should only spend a small fraction of their budget on fundraising does not line up with reality. Raising money requires investing money in good fundraising infrastructure. Direct mail, which continues to be the most efficient and cost-effective way to acquire new donors, costs a lot. Just a few direct mail campaigns per year can cost nonprofits tens of thousands of dollars. Going out on the road to meet with donors can also result in a lot of travel expenses. But it is the best way to build relationships and increase donor giving over time. Applying to foundation grants eats up staff hours, but it can pay off in large gifts.
Investing in fundraising is the best way to grow the budget, and growing the budget is often the best way to have a bigger impact. The solution to “overhead anxiety” shouldn’t be to create a culture of dishonesty, in which nonprofits just “play the game” and present their numbers euphemistically. Rather, nonprofits need to focus on two truths: groups will be effective in proportion to the investment they make in their operations, and the most important thing is not a short-sighted measure of effectiveness, but the mission they are accomplishing. Effectiveness will come in time, once the internal pieces are all running smoothly.
In the meantime, nonprofits can have honest conversations with their donors about these facts; and perhaps even some large, well-regarded foundation could carry out a study showing how organizational success depends on key investments in internal operations.
Bob, I’d love to learn more about your initiative budgeting if you’d be willing to share!
We solved this challenge for our clients through comprehensive program or as we call them initiative budgeting. As a result every cost is assigned to programs. It is not an easy process, but has been highly successful