National Philanthropy Day is November 15. Giving Tuesday falls on November 29. Let’s start the month of November by myth busting around nonprofits and “the overhead myth.”
On Thursday October 27, 2022, the Williamsburg Health Foundation (WHF) hosted its annual awards breakfast about “Doing Good Better: Nonprofit Capacity Building.” WHF describes capacity building for a nonprofit as “strengthening internal structures, systems and processes, management, leadership, governance” and more.
As part of the event, WHF produced a video about the Overhead Myth. As the video explains, there is a cultural assumption that nonprofits should not spend money on sustaining and growing the organization. Watch the video:
Here’s another take on the Overhead Myth from Candid, the largest provider of information on nonprofits. The content that follows is quoted directly from the blog linked to here.
The overhead myth is a pervasive challenge for nonprofits, often leading to organizations that are under-funded, unable to make an impact that aligns with their potential, and rapidly losing high-performing employees.
The overhead myth can lead to supporters who are hesitant to give, whether one-time donors, monthly givers, or grant funders. It can make organizations feel the need to limit their operating expenses to a detrimental degree.
To define the overhead myth, we need to define the term “overhead ratio.” Overhead ratio essentially refers to the amount of a nonprofit’s budget that’s dedicated to overhead costs (i.e. rent, employee salaries, software licensing, energy bills) compared to the amount dedicated to mission-specific spending (i.e. the amount of money that’s spent on direct services and programming). Donors and grant funders are able to see a high-level overview of this information in an organization’s IRS Form 990, which shows how much the organization has made and how much it has dedicated to various costs both overhead-related and programmatic.
With that in mind, the overhead myth refers to a pervasive understanding across organizations’ support bases, through which donors and funders use the overhead ratio to measure an organization’s effectiveness.
Essentially, organizations that spend the least on overhead are seen as the most effective. Those that spend more on overhead are seen as less effective (and, as a result, may receive less support). In fact, NPOInfo’s charitable giving statistics state that a whopping 61% of donors claim to choose which nonprofits to support based on how “well” the organization utilizes its funding.
The overhead myth is exactly that— a myth— as overhead spending is not inherently bad. Nonprofits need to invest in overhead for myriad reasons, including the ability to hire and compensate staff adequately, fund basic operating costs (i.e. “keeping the lights on”), and invest in fundraising innovations that can result in raising more funding toward the mission.
As you think about your end of the year giving, remember that overhead leads to stronger organizations. Give generously to nonprofit organizations that are taking care of business as well as taking care of the problems in our world.
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