The Nonprofit Overhead Myth – Devil Is In the Details?

By: Eugene Fram

Do nonprofits have to consistently report low overhead percentages for administration and marketing to satisfy donors? Do these modest overhead percentages do more long-term damage to the nonprofit’s ability to fulfill it mission than short-term good? *

These are two major questions currently being discussed in the blogosphere. If business organizations can increase their overhead percentages to grow and prosper, why isn’t this approach appropriate for nonprofits? However, none of these discussions address several devils in the details.

• Calculating overhead percentages is partly an accounting art: While there are accepted accounting guidelines for developing yearly overhead expenditures, the judgment of the accounting firm may come into play. For example, they may recommend either accelerating or decelerating the value of the nonprofit’s real estate, which can impact the comparisons of overhead percentage with previous years.

• Some donors require a single percentage: Large donors, with professional advice, can arrive at complex decisions relating to overhead percentages. But a vast number of small donors need a single guideline before making a donation. Typically an unusually high or low overhead percentage can be a red flag for many small donors, but some nonprofits may need to justify a 30% overhead as being reasonable for what is being accomplished. However, dropping low single standards that have been culturally developed over decades will be difficult. Many small donors have been well educated to using a single guideline. How many donors will give to a charity, if they know only 10% of their gift directly benefits the charity’s clients, and 90% is devoted to administration and marketing?

• Evaluating qualitative impact objectives: Both nonprofit and business organizations are looking to evaluate qualitative impacts that are important to the success of their organizations, but are not directly reflected in the accounting statements. For nonprofits this is a significant challenge when having to measure such items as “community impact.” This issue has not been a part of discussion of the overhead myth.

Examples: the nonprofit sector has found that using
imperfect qualitative data can be useful in driving progress and tracking change. For business organizations, an article in the Wall Street Journal reports, “Companies are increasingly augmenting their financial reports with nontraditional performance benchmarks that aren’t defined by U.S. accounting standards, forcing securities regulators to set up efforts to ensure that investors don’t get suspect or misleading information.” ** Brian Mittendorf, an accountant, warns, “It is this issue of sacrificing reliability that nonprofit leaders must grapple with if they wasn’t to fully embrace impact measures.” However, he also concedes “accounting-based measures are (only) relatively reliable.” ***
Having a low overhead percentage has been the key to nonprofit development success for decades. However it can lead to some long-term constraints. A discussion of the nonprofit overhead myth has opened a path for 21st century creative discussions. Some the devils are in the details, like those cited above, and they need to be addressed. Others will surface as some nonprofits move away from the low overhead myths and become high performing nonprofits.

*Art Taylor, Jacob Harold, & Ken Berger (2013) “The Overhead Myth,” The Huffington Post June 19th.
**Eugene Fram & Jerry Talley (2010), “Using Imperfect Metrics Well: Tracking Progress & Driving Change,” Leader-to-Leader, winter, pp. 52-58. Emily Chasan (2012) “New Benchmarks Crop Up in Companies’ Financial Reports,” The Wall Street Journal, CFO Journal, November 13th.
*** Brian Mittendorf (2013), “Want Charities to be Evaluated Based on Impact? Be Careful What You Wish For,” NPQ Newswire, June 5th.