When the topic of overhead costs comes up when I talk with groups of nonprofits, there is always a shared sentiment that we need to work together to change the emphasis on this single ratio and focus on quality, results, and impact. Everyone applauds when I share The Overhead Myth letter from the CEOs of Guidestar, Charity Navigator, and Wise Giving Alliance. On the outset of the letter, the message is clear:
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.
So, here’s my question. Why do so many nonprofits perpetuate the very myth that we claim we want to dismantle?
Do you read many annual reports? I love the photos and stories about clients, amazing programs, and steadfast supporters. Then I flip to the back of the report to look at the financial information. The most common format for displaying information about expenses is the tried and true pie chart. Yes, there it is. Three slices of pie: Program, Fundraising, and General & Administrative.
When a nonprofit includes this same pie chart of functional expenses, we communicate that what is the MOST IMPORTANT about how we use our financial resources is the allocation between program and overhead. No wonder our donors, board members, and the public believe it. We keep telling them – every year. If we in the nonprofit sector want to bust the overhead myth and bring attention to the things that really matter, then it’s our responsibility to take the lead by communicating differently and better.
Just because the IRS and audit standards require nonprofits to report functional expenses in these categories doesn’t mean that we’re limited to these categories. Ask yourself: What’s most important about how financial resources are used at your organization? How can you communicate that? If nothing else, stop using those same old three slices on the pie chart. Replace them with more meaningful information about how resources were used to deliver each of those great programs that you share in the first part of the annual report. Pie charts are a simple way to communicate financial information, but please, get a new recipe.