Actually, nonprofits don’t spend enough money on overhead

This originally appeared on LinkedIn. You can follow Greg Baldwinhere.

62% of Americans (pdf) think nonprofits spend too much money on overhead.

Here is why they are wrong.

Yes, I know it sounds crazy. The nonprofit sector is a $2.1 trillion segment of the US economy, employs one in 10 Americans and it doesn’t spend enough on overheads? Huh?

Disagreeing with 62% of Americans, and a whole lot of funders to defend what sounds like an administrative beer belly is not a task I take lightly, but it is true so let me explain.

If you have ever looked at a nonprofit tax return “Form 990,” you will know that the government requires 501(c)3s to fill out a Statement of Functional Expenses (pdf) that breaks out costs into four columns: a) Total expenses, b) Program service expenses, c) Management and general expenses, and d) Fundraising. And if you’ve ever worked at a nonprofit you know that any costs in column C and D—read: overhead—are considered an unflattering sign of waste and inefficiency. Sure, people understand there are going to be some overhead costs, but to the sector the 990 has become the equivalent of asking, “Does this form make my butt look fat?”

The Bridgespan Group believes this unhealthy bias against overhead has led to what they described in a Stanford Social Innovation Review article as the Nonprofit Starvation Cycle.

A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries. The cycle starts with funders’ unrealistic expectations about how much running a nonprofit costs, and results in nonprofits’ misrepresenting their costs while skimping on vital systems…

Successful organizations require financial systems, information technology, volunteer management and sustainable revenue streams. Part of the myth of the nonprofit world is that somehow righteousness will ultimately triumph over limited planning, crappy systems and a general scarcity of resources. But that is not the way the world works.

Even a three-year-old knows that if you cut corners and build your house out of straw… you’ll be sorry. The same is true here for nonprofits: spend the money, build a solid infrastructure, go with the bricks.

Changing attitudes and expectations is a shared problem and fortunately this one has leadership. Earlier this year Guidestar, Charity Navigator and BBB Wise Giving Alliance penned an open letter denouncing the “overhead ratio” as a valid measure of a nonprofit’s performance.

They have also created a campaign-style website on The Overhead Myth to educate donors, organize support and invite further discussion on better ways to evaluate a nonprofit’s performance and impact.

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