Friday, July 31, 2009

Nonprofit "Overhead"--Much ado about nothing or a legitimate measure of efficiency? – Use of Funds standard

The following post was written by Rich Cowles, Executive Director of the Charities Review Council.

For a long time the Charities Review Council has been known for its Use of Funds standard - that 70% of expenses should go toward program and no more than 30% should be expended on administration and fundraising combined. Aware of the limitations of this measure, the Council has tried to discourage donors from ranking or rating charities based on just their overhead ratios. But we are a society that likes quick, measurable answers, and the standard has taken a life of its own.

As the Council approached revising this standard, with the assistance of a number of sector experts, there were a few core beliefs that we took into account:
  1. Well-managed nonprofits strengthen their ability to further their missions over the long term by investing in their infrastructure;
  2. There's no uniformity in how organizations categorize expenses, and;
  3. There’s no ideal program expense ratio for all organizations in all situations.

For these reasons, we shifted the Use of Funds standard slightly to reflect these realities and to help foster a better understanding of how effective nonprofits operate. We developed a range, starting at 60% program expenses, and asked charities on the low and high ends of the range to provide information to donors to help them decide if they want to support the charity.

Despite the short-comings of overhead ratios and a growing interest in WHAT a nonprofit accomplishes (including a recent blog by Kate Barr at the Nonprofits Assistance Fund), this ratio does provide some insight about HOW the nonprofit gets there.

We invite people’s comments about this standard. Do you think that the public and the media have put too much emphasis on overhead ratios? Or given that there’s a finite amount of money to be donated, if two nonprofits achieved similar results, but one required twice as many contributions to do so, is it important for a donor to know?

Next post: Whistleblower Policy & Document Retention Policy standards


Sara Leiste said...

This one is complicated. Yes, there is too much emphasis on it. At the same time, if the programming percentage is really low or really high, then an explanation is clearly in order--there should probably be an acknowledgement/discussion of it in the annual report or wherever the financials are presented. I think this standard needs to be one of the standards, but it tends to be thought of as the primary standard, and that's not good for nonprofits or donors. I also worry somewhat that the standard encourages fudging of the numbers, especially for a charity that is on the cusp--at 69%, I would be tempted to recalculate a few things and see if it might get closer to 70%.

I do think that having the ranges set up like this is a good idea and will (I hope) lead to a more thoughtful use of the standard. I might have set the lowest range even lower (like %55 would be "Meets standard, provides explanation") but I don't have a good reason for that particular cut off.

Unknown said...

Thanks for your thoughtful comment, Sara, especially from someone who's spent a lot of time looking at such ratios and listening to donor concerns. We are clearly on the same page.

mwera said...

Thanks, Margaret, appreciate your visiting the blog and please feel free to let us know what you think.