Donors want their giving to make a difference. They want “their money” to have as much impact as possible, which is why they care about nonprofit overhead. Caring too much about overhead, however, has led donors to conclude that less spent on nonprofit operations means more spent on those being served.
This line of thinking led donors to assume, falsely, that minimal overhead costs always mean greater efficiency and effectiveness in nonprofit organizations. It also led donors to believe that there is an ideal ratio between overhead and direct program support.
In 2003, donor beliefs influenced the BBB Wise Giving Alliance to set a financial standard of spending no more than 35% on overhead.
As a result, nonprofits yielded to the power of donor opinion, collectively reducing overhead to the point of “starving” themselves and eventually reducing their capacity to deliver on mission. Instead of less becoming more, less became less.
Do Donors Still Believe the Overhead Myth?
Within ten years, nonprofits and charity watchdogs acknowledged the fallacy that a low overhead ratio is the single most important measure of nonprofit performance, and they set out to debunk the “overhead myth.”
Even so, overhead still matters to donors. Recent donor surveys by Cygnus Research and Grey Matter Research substantiate this mindset, although overhead matters less to younger donors than to older donors. Its importance is receding as donors want to know more about mission-related results, programs, and impact.
Communicating your Impact to Donors
Nonprofits should take care not to perpetuate the debunked overhead myth and should focus instead in knowing the true costs for every program and service and accurately relating these expenditures to impact. This will help donors understand that administration, fundraising, and programs are complementary functions that together deliver mission-driven results. Under-investing in one adversely effects the other two, and maintaining a proper equilibrium drives overall performance.
Nonprofits can refocus donors’ attention to organizational effectiveness and impact by effectively and frequently communicating answers to the following seven questions:
- Are we truly constituent centered?
- How are we focusing on long-term, mutually beneficial relationships with our various stakeholders in order to maximize mission-driven results?
- Are we successfully delivering what we promise in our mission and vision statements?
- Are we solving the problems and/or delivering the results our stakeholders expect?
- Are we making lasting change in the communities we serve?
- Do we know the true costs associated with achieving this change?
- Do we know what we must invest in the future to ensure that this impact is sustainable?
Knowing answers to these questions, you can communicate how your organization’s prudent and strategic investments generate results and lasting impact.