In this edition of our Intentional Giving series, we look at one commonly discussed factor that donors often consider when analyzing a nonprofit’s financial stewardship. Some companies advise that an overhead percentage is an inherently negative indication of financial responsibility—or lack thereof. However, we suggest an alternative view that an organization’s effectiveness is not properly measured merely by how little it spends on staff, systems, and structure.
A common misconception in the world of philanthropy is that the “best” organizations have the lowest overhead, or administrative costs. While such costs may be one indicator to inform a donor’s assessment of an organization, it does not necessarily tell the whole story of their financial stewardship or efficiency. Responsible organizations invest in the infrastructure necessary to carry out their mission, which will likely look different from one organization to another. Administrative expenses could be used to support things like:
Employing qualified staff
Financial management
Technology
Program evaluation
Compliance
Cyber or physical security
Volunteer coordination
Fundraising campaigns
Professional development for staff
These investments can be essential to organizations delivering high-quality programs and services. Without appropriate financial support, an organization may struggle to hire and retain qualified experts, protect sensitive data, or evaluate the efficiency and impact of their initiatives.
At Amplified, we always recommend supporters take time to thoroughly research and understand an organization — from their financial decisions to their programmatic outcomes. This background work includes reviewing an organization’s annual report and impact reports (if available) to learn more about their financial investments, expenditures, liabilities, and assets. This information can be helpful in understanding how an organization manages its finances, including how much of their budget is dedicated to administrative costs — and for what purpose (e.g., competitive pay for professional staff).
Instead looking for an organization with the lowest overhead cost, think about whether they are using resources responsibly to generate meaningful outcomes.
While it is essential for an organization to be responsible stewards of their financial resources, there are many ways an organization may uphold this responsibility that also results in higher administrative expenses. For example, perhaps it wouldn’t be a responsible approach for a legal aid clinic to prioritize spending the least amount possible on salaries for support staff. Insufficient investment in staff could lead to under-qualified hires, high burnout, frequent turnover, or inadequate resources to perform the role well. Instead, a clinic that invests appropriately to employ highly-qualified professionals with the requisite skillset, resources, and bandwidth to responsibly represent their clients would likely generate greater impact and, ultimately, save the organization time and money.
Responsible financial stewardship is about effectiveness, not merely spending as little as possible.