The Overhead Myth

 

There has been a myth circulating around the likes of philanthropy circles for decades about how to properly judge whether or not a nonprofit is worthy of your charitable dollars. The good news is that this myth has lost considerable steam in recent years and with a little more work, it should be forever vanquished.  

This myth is called The Overhead Myth. It stands to say that the size of a nonprofit’s overhead expenses alone can determine if the nonprofit is a good steward of its funds. If overhead makes up more than a certain percentage of a nonprofit's annual budget, that nonprofit is no good.  

I get that sentiment and recognize that it probably came from a good natured and thrifty philanthropic heart. And it's true that some nonprofit organizations have overpaid their CEOs in lieu of helping the people it purports to help or mismanaged funds to the point of rending the nonprofit ineffective.

The truth is that the bulk of nonprofit leadership and their employees make considerably less money than they would had they pursued a more traditional job in the for-profit sector.

The Overhead Myth would have you believe that only an 85-15 split from mission to overhead is solid. Once an organization sneaks up to 75-25 or — wait for it — 70-30 —  it's now wasteful, and we should blow it up. These sorts of numbers might work for many of organizations, but let’s look at why it doesn’t work across the full spectrum of nonprofits.

Let’s take a look at two examples. One with a claim of zero overhead and another with a very high overhead. Example A is going to be charity: water who touts the 100% to the cause model. Example B is going to be a church (ie: your average, run-of-the-mill Evangelical Church), which is technically a nonprofit.

 
Example A - charity: water: charity: water claims that 100% of your donations go directly to fund clean water projects and not to overhead costs like employee salaries or office space or cell phone bills or anything like that. They do this by having a big gala every year that funds the cost of their overhead. This way, all of their online campaigning over the course of the year can claim 100% towards projects. This is a great idea, and it certainly encourages donors to pull the trigger, but the average donor would not understand. Let’s say a donor gives $5,000 to do a hand-pumped well in India. Does it cost exactly $5,000 to pay for the parts and labor to get that well up and running? charity: water doesn’t have much (if any) of it’s own drilling equipment or staff on the ground who are actually doing these projects. They're hiring other nonprofits to get the job done on the ground.

These other nonprofits have their own sets of overhead that they are paying for in order to get these jobs done. So charity:water, while it might not be spending your dollars on it’s own overhead, IS spending your dollars on the overhead of other organizations. I’m not faulting charity:water for this as they are doing amazing work, and Scott Harrison is a great guy (and marketing genius). I’m just saying that overhead exists and it has to get paid for in order for any good work to happen.

 

Example B - A church: We’re talking about the average run-of-the-mill evangelical church. Most of our readership is of the Christian persuasion and believe that sharing the good news of Jesus is of utmost importance to a lost world. Even if you don’t see it that way, I would ask you to let my argument rest on this point. If you were to crack open the finances of your average church, you would see that somewhere between 80% to 100% is spent on rent/mortgage, salaries, benefits and other overhead-like bills. Some churches give 10% or even more of their budget away to other missions and charities, which is very cool of them.

The bulk of church spending, however, would get dumped into what most accountants would call overhead. This of course is not a problem because the business of the church is making Disciples. If that’s the case, then the salaries, benefits, the building, and even heating and air is crucial to that mission! Due to the nature of the work, they're missional expenses. So even though the church may not be spending a high percentage of its revenue on tangible projects that benefit the poor, they are indeed spending towards their bottom-line, the “making-of disciples,” which is a very priceless thing. This doesn’t even stand to mention how many justice advocates are out there thanks to the inspiration they received from God in the context of their local church.

 

So whether you’re using the 100% charity: water model or you’re a church that’s operating the inverse equation, you can both be making the desired and appropriate impact in your own right.

Think of it one other way. Let's say that by investing in the right building, talented staff and targeted marketing an organization is able to go from serving 1,000 people to 10,000 people. Wouldn't you say the impact of the nonprofit is more important than its percent of overhead?

We here at SuNica are just kicking off a Campaign called the The List. It’s our Christmas wish list and it’s made up of several very important pieces of our overhead dollars for 2016.

We’re taking a risk by coming out and telling you upfront that overhead is what we're fundraising for. It's simply not what the average donor gets excited about, but we’re asking you to dig a little bit deeper. We want you to understand that taking care of our most fundamental needs actually makes you a stakeholder in the big picture. It’s like you're sponsoring a little piece of every precious child that we sponsor for Education & Discipleship.  

We hope you’ll check out this campaign and donate at sunica.org/the-list

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