A False Perception

With little guidance about what constitutes “overhead,” it’s not surprising that nonprofits try to minimize the amount they claim for it. Advertising that more money goes to programs appeals to donors who want to see their money go where it will have the most good. However, in reality, organizations need overhead to exist. To compete for donors though, nonprofits find themselves drawn into a dangerous vortex of competition for the lowest overhead ratios.

Charity rating organizations and directories that institutionalize this practice foster the sense that worthiness of a charity is based on how little they spend on overhead, but completely ignore whether the organization is accomplishing its mission. Financial information gleaned from 990 tax forms does not relate to an organization’s effectiveness and guides that base their ratings solely on financials do a disservice to donors as well as to the entire nonprofit sector by perpetuating the notion that nonprofits are better if they spend less on overhead.

A Wrong Approach

While no is arguing that nonprofits shouldn’t be efficient with their money, financials alone do not indicate the type of problem the organization is attempting to solve and their effectiveness in doing so. Many organizations spend little on fundraising (they rely on diminishing government grants – not a great strategy) and have no clue how to eliminate the cause of the social problem that they are addressing, and indeed will never actually do so. They have simply institutionalized a method of serving a specific population.

The Vicious Cycle Must End

Furthermore, studies have shown that with no standard method for reporting various administrative and fundraising expenses, nonprofits consistently misreport them. In fact, rankings based on fundraising expense ratios actively encourage the underreporting of expenses so that nonprofits look good in comparison to other groups. This perpetuates a cycle of under-reporting of actual expenses that undermines the integrity of individual nonprofits and the reputation of the sector as a whole. This vicious cycle must end.

In a time when we need more transparency and education about what it actually costs to operate a nonprofit to successfully address social problems, and at a time when nonprofits face more competition and threats to their funding than ever, we need to support novel ideas for addressing the root cause of problems in a realistic way.

In response, I have developed a list of criteria for evaluating the worthiness of a nonprofit. read Attributes of a Successful Nonprofit.

Related Articles

• Times Up: A Radical Proposal for Nonprofits
• Don’t Start a Nonprofit
• Measuring New Criteria for Nonprofit Effectiveness

Howard Adam Levy, is Principal of Red Rooster Group, a New York based graphic design firm that creates effective brands, websites and marketing campaigns for nonprofits to increase their visibility, fundraising and communications effectiveness. Contact us at info@redroostergroup.com.

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