Stop Judging Nonprofits By Their Overhead

For decades, nonprofits have been judged by what percentage of their budget goes to “programs.” Programs means actively pursuing their mission. Feeding the hungry, housing the homeless, rescuing those in trafficking, cleaning up rivers…Whatever that specific nonprofit’s mission is.

One metric often cited is that 90% of funding should go to the organization’s mission.

This sounds great! $0.90 of every $1 donated goes to the mission! That means that most of the money coming into the organization goes to help the hungry, homeless, trafficked, or the earth.

But is that measure a reasonable number to judge an organization by?

Not really…

1. Outdated Technology: Watching this number keeps nonprofits from getting the best people and technologies to pursue their mission. By scrimping and saving to remain under this “artificial cap” of 10% overhead, many nonprofits pass on great technology that would help their organization. For example, I have heard from numerous nonprofits that don’t buy a Donor Relation Management (DRM) system or haven’t updated their computers in years. Both of these purchases would greatly improve their ability to provide the outcomes they pursue.
2. Low Wages: Due to the challenge of keeping overhead low, many nonprofits pay their employees uncompetitive wages. Because so many pay low wages, the IRS then sets artificial caps on compensation that perpetuates low salaries in this industry. This level of pay is especially ironic considering that many nonprofits advocate for a higher quality of living and greater pay levels. So almost inevitably, nonprofits hire the cheapest employees, consultants, and contractors even when spending a little more money would yield huge returns!
3. Watch your Numbers: For-profit businesses strategically invest (spend) money to get more money. When I was in college, I heard that my college had a box at the Baltimore Orioles baseball field. And it cost $300k/year!  How dare they spend that much money to just show the “elite” a good time! The reality is that investing that money to get people in the “giving mood” probably resulted in significantly higher donations than the cost. Assuming they watched their numbers, that was strategic investing.
4. More Transparency, Please: Many nonprofits are less than transparent to boost their numbers. In an attempt to maximize the “amount of each $ going to programming,” some nonprofits get big donors to cover overhead and then say “100% of every $ donated goes to the mission!” This gives the mistaken impression that 100% of every $ that comes into the organization goes to programming which is simply not true. Simply being transparent will help here. If you get sponsors to cover the cost of your event, make that statement. Not only do you acknowledge your supporters, but you also ensure transparency related to your costs of doing business.
5. You Can’t Afford to Be Invisible:  Many nonprofits don’t spend on advertising because they don’t want to spend the money. Far too often, they are then left in obscurity, unable to recruit volunteers or raise funds, and don’t help their population to the extent they always envisioned.
6. A False Dilemma: Recently, I spoke to a business leader. He told me that if he could invest $2M to make $4M he would do it all day, every day! When I talk to nonprofit leaders, they often see a false dilemma. They think (in this example) that this marketing amounts to taking 2M meals from hungry mouths!  They insist that they want the money for 4M meals instead of wasting the 2M. But that is NOT an option! Without investing the $2M they DON’T HAVE the $4M.  The real choice is $2M or $0. Far too many nonprofit leaders act in ways to ensure they end up with the $0.

It’s time for a new mindset from nonprofits, the public, granting agencies, and the IRS. It is time to STOP judging nonprofits by their ability to avoid spending money. Instead, measure them based on the IMPACT they make. There are strides in that direction that need to be coupled with getting rid of this archaic and overly simplistic metric.