The Overhead Myth

Date: June 13, 2013 Author: aque Categories: Latest News

As a grantor Aqueduct Foundation is often asked to comment on the overhead of charities. Understanding the efficiency of charities is an important question, but, in our view, fundraising and administrative costs are not the primary factors that grantors/donors should consider. We were delighted to see a short statement on the “overhead myth” by the heads of the three largest charity evaluation organizations in the U.S.A that was released recently.

Below is the heart of the letter: [Read the full letter]

“The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance. We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results…. That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.

In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems— as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

The paradox of more online data is charities have become easier to judge and perhaps more difficult to understand. At Aqueduct we strive to support our donors to be smart, caring and engaged philanthropists through their donor advised funds. Effectiveness is the most important measure of a charity.

Malcolm D. Burrows

Rosaline Chan
Vancouver 1-888-723-1122