Do funders favor charitable efficiencies over effectiveness?
Re-examining charitable ratios
“What percentage of your budget goes to administrative costs?” While Revenue Canada’s guidelines use 35% as a benchmark, external charity monitoring agencies like the US-based Charity Navigator note charities that keep overhead costs between 5 and 12.5% will receive top marks for efficiencies.
Are organizations' efforts to minimize overhead also minimizing impact?
While it may seem counterintuitive, charities that invest more in people, training, facilities, and IT are apt to be more successful. Investing in infrastructure and expertise ensures charities can operate best and positively impact the community. Funders have the opportunity to contribute wisely to those organizations that pay staff a living wage, invest in their personal and professional development, and can best deliver their mission effectively.
So how much should an organization set aside for overhead and expenses?
A study by Hala Altamimi and Qiaozhen Liu entitled "The Nonprofit Starvation Cycle: Does Overhead Spending Really Impact Program Outcomes?" determined that roughly thirty-five percent of the budget is the sweet spot for spending on overhead. This view is not a one-size-fits-all but a general guideline for most non-profits.
Of course, every organization is different, and there is no magic number regarding how much each one should spend on overhead. Some charities may have little overhead expenses, while others may have higher costs due to the nature of their work. Some non-profit experts argue that the focus should not be on the percentage of the budget spent on overhead but on how effectively the organization uses its resources.
What is our opportunity as charitable leaders? We can inform our funders about the importance of fairly compensating employees, allocating resources for fundraising, and having IT systems and equipment that meet organizational needs. Perhaps most importantly, we can discuss the impact with funders.
Read More:
The Conversation: Charities that Don’t Embrace Common Financial Norms Tend to Outperform Their Peers August 2022
The Conversation: Nonprofits may need to spend about one-third of their budget on overhead to thrive – contradicting a rule of thumb for donors in September 2022
